MAPI report: Expect muted growth through 2011

Alliance predicts GDP to grow 2.8% in 2010, then 3% in 2011.

A number of positive trends are emerging as the United States digs itself out of the “Great Recession,” but there remain cautionary signals that growth will be muted and the rebound restrained, according to a new report.

The Manufacturers Alliance/MAPI Quarterly Economic Forecast predicts that inflation-adjusted gross domestic product (GDP) will experience 2.8 percent growth in 2010, followed by 3 percent growth in 2011.

A number of factors are in play during the recovery: the consumer, though still burdened by feeble income and job growth, will receive some relief via transfer payments and tax cuts that in turn will boost spending; parts of investment—most notably in transportation equipment, information technology, and residential housing—will increasingly provide the demand surge needed to sustain production growth; the swing in business inventories will provide growth momentum as firms reduce destocking and eventually rebuild inventories; and federally funded stimulus outlays will contribute to the government spending stream through 2011.

“The overall economy grew in the third and fourth quarters of 2009 and high frequency data point to moderate economic performance in the first quarter of 2010,” said Daniel J. Meckstroth, Manufacturers Alliance/MAPI chief economist. “Similarly, manufacturing production hits its trough in June 2009 and has increased over 5 percent through January 2010. A moderate recovery is undoubtedly under way, but it is the pace of future near-term growth that is questionable. We believe that consumers will continue to deleverage and that the previous growth model based on credit availability to marginally creditworthy borrowers is not repeatable. Government tax cuts have replaced lost income for the moment, but eventually spending has to be grounded on wage increases and employment growth. A jobless recovery is not an option in this cycle.”

Manufacturing production growth declined 11.2 percent in 2009 and is expected to rebound to 5.4 percent growth in 2010, and to an additional 5.3 percent growth in 2011.

Production in non-high-tech industries is expected to increase by 3.3 percent in 2010 and by 4.8 percent in 2011. High-tech manufacturing production is anticipated to improve significantly, with solid 14.6 percent growth in 2010 followed by robust 17.8 percent growth in 2011.

The forecast for inflation-adjusted investment in equipment and software is for 9.4 percent growth in 2010 and for 12.1 percent growth in 2011. Capital equipment spending in high-tech sectors will continue the improving trend. Inflation-adjusted expenditures for information processing equipment are anticipated to rise by 8.1 percent in 2010 and to increase by 6.7 percent in 2011.

MAPI expects industrial equipment expenditures to improve by 6 percent in 2010 and by 17 percent in 2011. The outlook for spending on transportation equipment is for a healthy 50.1 percent increase in 2010 and a 33.6 percent advance in 2011. These figures should help compensate for a 48.7 decline in 2009.

Spending on non-residential structures is the lone GDP expenditure category expected to retrench in each of the next two years, declining by 14.6 percent in 2010 before decreasing further, by 6.2 percent, in 2011.

Exports and imports will both be trending upwards. Inflation-adjusted exports are anticipated to improve by 9.2 percent in 2010 and by 7.6 percent in 2011. Imports are expected to grow by 9.6 percent in 2010 and by 6.8 percent in 2011. The employment outlook, unfortunately, will continue to pose a challenge. MAPI forecasts unemployment to average 10 percent in 2010, and 9.4 percent in 2011.

The price per barrel of imported crude oil is expected to average $72.60 in 2010 before heading even higher, to $77.50 per barrel, in 2011. While expensive by historical standards, this still compares favorably to the average $92.30 price per barrel in 2008.