The 2008 Economy: Finding BalanceBy Eli Lustgarten
Article Date: 01-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
The tug-of-war between housing-related risks and the rest of the economy continues.
Recent U.S. economic data has brought into question the trajectory and timing of a recovery in both the domestic economy. This has created significant volatility in the stock market, despite anticipation of further Fed rate cuts. This is particularly true with oil hovering at or above $90 barrel, gold and other commodities soaring toward or at new highs, and a dollar falling toward record lows against major currencies (trade-weighted dollar is down 24 percent since its peak in 2002.)
Most economists have tended to discard the recent strong economic results of the second (3.8 percent) and third quarter (4.9 percent, up from 3.9 percent driven by higher exports and inventory building) of 2007. Rather, the focus is on the spreading subprime financial crisis and tightening credit markets, worries about the sustainability of consumer spending, and fears of a slowdown of international markets increasing the odds of recession.
As we move through the fourth quarter of 2007 (at the time of this writing) and into 2008, we need to prepare ourselves for an instant replay of last year. The domestic economy is likely to have a "soft-patch" over the next few quarters. The higher inventories of Q3:07 suggest an involuntary build, implying that the current 1.7 percent Q4 GDP projection will likely be reduced perhaps to about 1.2 percent. Close to 2 percent GDP growth is still expected in 1Q:08, but a weak quarter in industrial production is baked into the forecast.
We still believe we are headed toward a two-tier economic recovery with most industrial markets being a key bright spot of the economy driven by continuing strong global demand offsetting sluggish though improving domestic markets. There may not be much hope in the first half of 2008 for housing, auto, trucks and construction/material handling equipment, with the key question being whether we've seen the worst levels of activity in each sector:
Housing continues to weigh on the market. New-home sales continue to fall, prices remain weak, and unsold homes remain at record levels of over 10.8 months at current selling rates, signaling the housing sector will remain a drag on the U.S. economy likely well into next year.
The short-lived UAW strike underscores the volatility in automotive-related markets in the face of waning consumer demand. Although there was likely little real impact, Q4 auto production is likely to show negative comparisons with last year and Q1:08 production even weaker. NAFTA 2007 production is probably below 15 million units (forecast is 14.8 million), compared to about 15.25 million last year and near 15.8 million in the prior two years. We still look for modest production improvement in 2008 to about 15 million units on the strength of increased NA transplant capacity.
U.S. trucks continue to move less freight in 2007. The American Truck Association (ATA) does not expect that truck freight "will consistently grow at its historical average growth over the last 10 years of 2.5 percent until the second half of 2008." We continue to believe the recovery of demand in the truck sector has been pushed out into 2008.
Overall, construction spending is holding its own in 2007. A spillover affect from the sub-prime financial crisis into nonresidential construction is likely to occur, reducing spending growth in the non-residential sector to 0 to 5 percent in 2008 from what is likely to be 10 to 12 percent in 2007.
Construction equipment demand, which will be down 10 to 15 percent or more in 2007, will likely fall an additional 2 to 5 percent next year, though production may be closer to flat to up modestly because of the significant inventory reduction underway this year. Material handling types of equipment (AWP, Lift Trucks, Cranes) will likely see softening demand over the next
12 months and perhaps double-digit negative comparisons for 2008.
Most other industrial markets should show reasonable growth led by aerospace and export oriented industries. International market demand should remain strong into 2008, but there is concern for slowing of European markets toward trend-line growth by the second half of next year, and perhaps a "period of digestion" in China's economic activity after the Beijing Olympics.
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