Credit Crunch Impacts Most SectorsBy Eli Lustgarten
Article Date: 01-01-2009
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Earliest hope for modest growth appears to be second half of 2009, depending on many variables.
The economic outlook for the U.S. economy has deteriorated dramatically as 2008 draws to a close under the pressure of a global credit crunch and the volatility of commodity prices and currencies. It’s no longer whether there will be a recession, but the magnitude and length of the downturn. Moreover, the downturn is affecting virtually every region of the world.
The cancer of subprime and other types of difficult-to-value financial instruments and the failure of numerous financial institutions required a massive capital infusion into the global financial markets. This need for capital is being met by the U.S. Federal Reserve and Treasury, as well as the Central Banks around the world. The refinancing of the banking system, the guaranty of financial paper and debt of all types, and the coordinated global move to cut interest rates are all focused to free the financial sector from the current spasm that threatens global growth.
The key issue is whether this massive undertaking will eventually stabilize and begin to free up the financial markets over the next two to four quarters to allow the normal seeds of recovery to take hold. Economic recovery is born in a combination of government policy efforts, such as stimulus packages being debated, and the economy’s built-in recuperative powers from, for example, the stimulus of now-$50-per-barrel oil (down from a $147 peak) with gasoline prices falling toward $1.50 or less from $4-plus.
The bottom line is that the next four quarters will be very dicey for Industrial America. Domestic economic growth will be weak to negative at least through the first half of 2009, most European economies will be in recession, and economic growth in developing regions such as Asia (China) will slow. Corporate profits will be under significant pressure from falling demand and negative foreign currency impact, partially offset by plummeting commodity prices, which will ultimately reduce manufacturing input costs.
If our perception that the financial markets will stabilize is correct, we can look forward to some modest economic growth beginning in the second half of 2009 and/or in 2010.
Even sectors that were expected to hold up now find themselves under pressure from the credit crisis:
- Housing, which fell another 30 percent to about 935,000 starts in 2008, faces another 15 to 20 percent decline in 2009 to about 775,000, with hopefully some stabilization becoming visible next year.
- The auto outlook remains ugly, with 2008 production now about 12.7 million at best, with further declines likely given the need for bankruptcy/bailout of the Detroit three. Production in 2009 may hold in the 11- to 12-million range, but lower levels are possible.
- Construction equipment sales and production in 2008 are likely down 20 to 25 percent, plus 2009 now will be down at least another 10 to 15 percent as export sales wane and nonresidential construction spending falls about 5 to 15 percent – and likely a similar amount in 2010. Markets to worry about are those related to the rental sector and material handling.
- The heavy truck sector now faces a modest 4.5 percent decline in production to about 205,000 in 2008 compared to 212,000 NAFTA shipments in 2007, while the decline for medium trucks is now estimated at 25 percent to 155,000 units. The lack of credit and favorable fuel economy reviews for the 2010 engines have all but eliminated the need for any emissions-related prebuy, with 2009 heavy truck production now likely to fall another 15 percent to about 175,000. Perhaps another 10 percent production decline in medium trucks is expected.
In sum, the next several quarters will be difficult for most industrial manufacturing companies. The lynch pin of how much pain will be endured by Industrial America rests on the success of unfreezing and stabilizing the credit markets over the next several quarters.
- Farm machinery sales should have ended at a 20 percent or greater rise in 2008, driven by larger equipment demand. However, the collapse of commodity prices and the credit crunch mean a flat-to-down outlook at best for 2009 farm equipment sales in every global region except for North American large equipment.
- Mining and oilfield machinery demand should hold up near-term, but several 2009 mining and energy projects are been postponed.
- The electrical equipment market shows signs of weakening, impacted by the credit crunch and the double-digit decline underway in new nonresidential construction starts.
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