Quarterly Economic Forecast sees consistent, though decelerating growth through 2007

News Manufactures Alliance/MAPI Inc. November 30, 2005
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The Manufacturers Alliance/MAPI Quarterly Economic Forecast predicts inflation-adjusted gross domestic product (GDP) growth will be 3.3% in 2006 and 2.9% in 2007. By supplying major assumptions for the economy and running simulations through the Global Insight Macroeconomic Model, the Alliance generates unique macroeconomic and industry forecasts.

“The economic expansion will continue for several more years; however, the pace of growth will decelerate,” said Daniel Meckstroth, Manufacturers Alliance/MAPI chief economist.

Real investment in equipment and software should increase 9.3% in 2006 and 6.4% in 2007, growing several times faster than the general economy. The largest percentage gains in spending will come in the high-tech sectors. Inflation-adjusted expenditures for information processing equipment are expected to rise 13% in 2006 and 10.5% in 2007. Spending for transportation equipment is predicted to grow 7.9% in 2006, but only 0.2% in 2007, while the forecast calls for industrial equipment spending to increase 4.1% and 3.0% in 2007 due to a large decline in mining and petroleum construction.

Inflation-adjusted exports should rise 5.8% next year and 8.1% in 2007, while imports are expected to increase 5% in 2006 before decelerating to 4.1% growth in 2007.

Growth in manufacturing activity will likely trail the general economy over the next two years. The Alliance expects manufacturing industrial production to increase to 2.5% in 2006 (down from 3.4% in 2005) and 2.2% in 2007. Computers and electronic products spending is forecasted to rise 13% in 2006 and 10.7% in 2007. Production in non-high-tech industries will grow a moderate 2.3% next year and 1.6% in 2007.

“Industries that depend on big-ticket purchases by consumers will decline over the next couple of years. The expected flattening out of home prices and rising interest rates will depress housing, automotive and related industries,” Meckstroth said. “In addition, the U.S. dollar has not declined enough to stop the current account (trade) deficit from widening significantly next year. Equipment industries are expected to lead industrial growth over the next couple of years. Aerospace equipment production is rebounding from a long down-cycle, mining and petroleum equipment benefit from high commodity prices and record business profits in many industries suggest that firms will invest in new equipment.”

The forecast for the unemployment rate is 4.9% in 2006 and 5.0% in 2007. Included in the November report is an inaugural five-year forecast, which will be issued annually. Average annual GDP growth from 2005 to 2010 is expected to be 3.2%. A brief period of declining GDP is expected in early 2009.

Meckstroth said the moderate long-term GDP forecast is attributable to four potential risk factors, or “imbalances:” the end an era of low-cost energy; a deflating housing bubble; an unsustainable current account deficit in the U.S.; and the excessive dependency in the U.S. on foreign savings.

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