Few of us will miss 2008. It was one of the most tumultuous of economic years. Let's instead focus on the prospects for 2009 and the possible reversal of economic fortune. The key to forecasting for an economist is to plant as many caveats as possible, so that when the prediction doesn't quite pan out there are plenty of extenuating circumstances ready to be referenced.
There are two sets of questions to consider when looking ahead to 2009. The first is: When is this recession likely to be over? This is a complex question as there is hardly any consensus as to when a recession really begins, much less when it really ends. If the classic definition of a recession is two consecutive quarters of negative growth, the U.S. will have hit one at the end of the fourth quarter of 2008.
It is likely that the first quarter of 2009 will be in negative territory, and some are predicting that this will mark the depths of the current recession between -1 and -3 percent. The second quarter is something of a tossup, with some asserting it will still be negative but starting to gain strength at the end. If it is in the range of -1 to -2 percent, the second quarter might gain enough ground in its last month or so to recover. If the first quarter really tanks, the second quarter may start out too low to overcome in three months.
The good news is that there is currently a consensus that the third quarter will show some significant improvement and might even sport growth between 1.5 and 2.5 percent. The fourth quarter of next year also will likely end up positive, and in the same range as the third quarter.
The second set of questions is specifically relevant to the manufacturing community. What is going to have to take place to push the economy toward some growth and the end of the recession? In other words, what should business owners and their employees be looking for?
Many factors come into play when predicting what must take place to spur growth, and one could go slightly balmy evaluating them all. But four areas do stand out as the best barometers: developments in the financial sector, consumer confidence, exports and commodity prices.
1. Financial sector needs to stabilize. This has been the goal of the Federal Reserve and Treasury for months, but there has been scant progress. These efforts are based on monetary policy, so they do take awhile to bear fruit. We should start to see marked improvement by end of the first quarter, including in the banking sector, such as some dramatic reduction in the London Interbank rates, more movement in the money markets and banks more willing to do business with one another. It appears that most of the sub-prime damage has been done, and banks should be ready to start to rebuild as the year goes on. Lower interest rates and extra liquidity should begin to make a difference in the first half of 2009.
2. Recovery of consumer confidence. The recovery of consumer confidence is difficult to predict. The most important factors in developing that confidence are those that affect jobs and prices. For the moment, the price situation is very positive as commodity prices have tumbled to record lows. This should continue in the short term, with even food prices beginning to decline. The bad news is on the employment front. It is likely that the unemployment rate will be near 8 percent before the recession crests — almost double what it was only a year ago. The fact that major layoffs have been announced almost daily has made the consumer nervous, and that convinces them to hold their money tight until conditions change. With 2008 behind us, we should see the end of the major job loss announcements, as most companies will have made this decision in the final days of 2008. If major job losses are behind us, people can catch their breath and assess. Then, if job prospects begin to improve, the consumer mood will quickly shift.
3. Regain lost luster of export market. The third factor to watch is the export performance of the U.S. economy. The surging U.S. export market in 2008 faded as the dollar gained against an even weaker Euro, and the rest of the world experiences a down economy. In order for the U.S. to break out of its slump, that export market will need to regain some of its lost luster. The dollar's current strength is likely to be short lived — especially as the U.S. sinks deeper into decline. That will help promote U.S. trade, but what also will be required is more demand. China and India are working to stimulate their economies, but thus far there has been limited response. If the Asian states are able to untrack, the U.S. will be ready to get engaged again.
4. Commodity prices remain low. This is currently the best news available for the manufacturing community as prices for every industrial input have fallen for the past few months. Oil is down below $50 a barrel, and few see it recovering much in the next several months. Steel is down, and so are the other metals — everything from copper to nickel to aluminum.
Although, in general, it is likely that the first quarter of 2009 will be in negative territory, and the second quarter is something of a tossup, there is a light at the end of the tunnel. There is a consensus that the third quarter will show some significant improvement with the fourth quarter also likely to end up in positive territory.
Contact: Fabricators & Manufacturers Association, Int'l, 833 Featherstone Rd., Rockford, IL 61107 815-399-8775 fax: 815-484-7700 E-mail: firstname.lastname@example.org Web: http://www.fmanet.org
Note: Dr. Chris Kuehl is economic analyst for the Fabricators & Manufacturers Association, International (FMA) and managing partner of Armada Corporate Intelligence. Dr. Kuehl is the author of Fabrinomics, a biweekly economic analysis e-newsletter for members of the FMA. For more information go to fmanet.org/fabrinomics.
FMA is a professional organization with more than 2,300 members working together to improve the metal forming and fabricating industry. Founded in 1970, FMA brings metal fabricators and fabricating equipment manufacturers together through technology councils, educational programs, networking events, and the FABTECH International & AWS Welding Show. FMA also has a technology affiliate, the Tube & Pipe Association, International (TPA), which focuses on the unique needs of companies engaged in tube and pipe producing and fabricating.