U.S. Industrial Outlook: Growth Will Be Moderate but Accelerate Through 2018

Summary of Findings and Forecasts

Manufacturing industrial production rose at a 3.3% annual rate in the third quarter of 2015—a meager recovery from the essentially flat first half of the year. On a month-to-month basis, all the growth in the quarter occurred in July. The strong growth in July was relatively widespread among industries, but clearly led by motor vehicles and parts production with an 11% increase. Manufacturing production grew 1.0% in July, fell 0.2% in August, dropped 0.1% in September, and then rebounded 0.4% in October.

There was an expectation that production would come roaring back in the spring and summer of 2015, as it did in 2014. That did not happen; as a result, inventories built up and are excessive. We expect an inventory runoff in November and December that will depress manufacturing production. Manufacturing production should be flat in the fourth quarter of 2015 before accelerating to a 3.3% annual rate in the first half of 2016.

The growth driver for the outlook is continued strong employment growth, which creates new income growth and a solid base of consumer spending. Another impetus is easy credit availability, which propels big-ticket spending for motor vehicles, residential housing, and nonresidential construction.

The 2016 outlook is helped by the absorption of the negative shocks in 2015. It is unlikely that there will be another very severe winter that disrupts transportation and shuts down plants. There will not be another West Coast port strike. Oil and natural gas prices are not going to fall by half again next year. On the contrary, the consensus view is that energy prices will rise. And while the dollar may appreciate somewhat in 2016, it will not surge 15% again. The absence of these negative shocks is positive momentum for 2016.

Manufacturing production grew 1.8% in 2015. We predict manufacturing production will increase 2.6% in 2016, 3.0% in 2017, and 2.8% in 2018. At that point, any output gap from the 2008-2009 recession will have closed and manufacturing growth will slow down to potential. The forecast is for growth of 2.6% in 2019 and 2.0% in 2020.

High-tech production (computer and electronic products) posted 1.4% growth in 2015. We expect a rebound in tech production to 4.3% growth in 2016, 5.7% in 2017, and 5.5% in 2018. Like traditional manufacturing, high-tech manufacturing will slow at the end of the decade. We project growth of 3.3% in 2019 and 2.6% in 2020.

Manufacturing Recovery

Manufacturing is still in the recovery phase of the economic cycle. Manufacturing industrial production has to grow another 3% in order to reach the pre-recession production level achieved in the fourth quarter of 2007—that’s another year of growth. Non-high-tech manufacturing production is 4.8% below the prerecession level and will not be fully recovered until the end of 2017.

Summary of Findings

Among the highlights of this report’s cyclical analysis of 27 industries are these findings and the MAPI Foundation forecasts shown in Table 2:

  • New housing starts will grow at a very rapid pace in the next three years because they are at a very low level relative to the pace of expected household formations; after 2018, the growth rate slows dramatically. The 2016-2018 growth rates will favor single-family starts, as multi-family starts will grow at a slower pace after many years of leading the housing recovery. The housing supply chain (wood products, nonmetallic mineral products, HVAC, household appliances, furniture, and construction machinery) will continue to ramp up for three more years.
  • Motor vehicles and parts production benefits from low gas prices that encourage the purchase of large, expensive vehicles; this favors the domestic industry. Motor vehicle sales are at record levels and the industry’s growth streak will continue only a couple of more years. We expect production growth to remain strong in 2016 and slow in 2017 before declining through 2020.
  • Commercial, recreational, medical, communications, and transportation private industry construction will show strong growth in the next five years. Industrial construction will post strong growth in 2016 but then decline (from an exceptionally high level). Public works and public utility construction will grow at a slow rate through 2020. Mining and drilling construction will decline again in 2016 and then post strong growth through 2020.
  • Medical care is a growth business. An aging population and the ACA will drive demand. Pharmaceutical production is growing again in the United States owing to new blockbuster patent-protected products. Medical equipment and supplies production is above average but held down by the consolidation of hospitals, insurance companies, and physician practices.
  • Mining and drilling equipment production declined 15% in 2015 and will fall 21% in 2016. The consensus view is that energy prices will rise over the next five years. If so, mining and drilling equipment will see a strong rebound.
  • Total machinery production will decline 1% in 2016 and then post moderate growth rates through the rest of the decade. Agricultural, construction, and drilling equipment will decline again in 2016. Engines and turbines and metalworking machinery production will also fall next year. These industries will start recovering in 2017, post strong growth in 2018, and then decelerate. Commercial and service industry machinery and HVAC equipment should consistently post moderate growth in the next five years.
  • A moderate pace of manufacturing growth, the strong dollar, excess capacity in China’s manufacturing sector, and relatively low commodity prices will significantly hurt the metals industries. Steel, alumina and aluminum, and fabricated metal products production should post no growth in 2016 and show only modest growth during 2017 to 2020.
  • Two underperforming industries will break out and continue to accelerate through 2020—aerospace and basic chemicals. The normal aircraft replacement cycle will quicken, driven by new aerospace products that are substantially more efficient than older models. In the basic chemicals industry, our competitive advantage in low natural gas prices, which is a feedstock for many chemicals, has attracted significant domestic and foreign investment in new facilities.

Industries in the Current Business Cycle

The pairs of figures for each of the 27 industries analyzed in this report show annual levels of activity and monthly rates of change. Forecasts of physical production are shown through 2020. The rate of change shown in Figures 2 through 28 is 3/12 (the year-over-year percentage change in a three-month moving average); this measure illustrates the cyclical position of each industrial sector.

Individual Analysis for 27 Industrial Sectors

Highlights of inflation-adjusted business activity in selected manufacturing, drilling, and construction markets are discussed below.

Housing starts (Figures 2a and 2b)

  • Housing starts increased 10% to 1,114,000 units in 2015. The forecast is for gains of 15% to 1,276,000 units in 2016, 12% to 1,433,000 units in 2017, and 5% to 1,502,000 units in 2018. Housing starts will average 1,568,000 in 2019 and 2020. Single-family units will lead the growth.
  • The Case-Shiller housing price index was up 4% in the three months ending in September compared with the previous three months and was 5% above the previous year.
  • Home sales weaken in the fall. In the three months ending October 2015, new home sales were 5% above year-ago levels but down 7% at an annual rate from the previous three months.
  • The inventory of new homes was 5.5 months of supply in October 2015, indicating moderately tight supply, and was up from 5.3 months in October 2014.
  • The Federal Reserve stopped adding mortgage-backed securities to its balance sheet but continues to replace those that mature. The first interest rate increase is expected in December 2015. The withdrawal of Fed purchases and upward interest rate talk do not seem to be having an adverse effect on mortgage rates. In mid-November, mortgage rates were 4.0%, only a little above the 3.9% at the beginning of this year.
  • In the third quarter of 2015, the combined percentage of all mortgage loans in foreclosure or delinquent was 6.9%; the rate is down to first quarter 2007 levels.

Motor vehicles and parts production (Figures 3a and 3b)

  • Motor vehicles and parts production increased 9% in 2015. Industry production is forecast to grow 7% in 2016 and 3% in 2017, fall 1% in 2018, and decline 2% on average in 2019 and 2020. Auto and light truck sales were 17.4 million units in 2015 and are forecast to be 17.7 million units in 2016, 18.2 million units in 2017, 18.0 million units in 2018, and average 17.3 million units in 2019 and 2020.
  • Overall production was up 10% in the three months ending October 2015 compared with the same period one year ago. Production was flat for automobiles and up 14% for light trucks and utility vehicles. Auto parts production increased 9% over year-ago levels.
  • Heavy-duty truck production increased 17% in the three months ending October 2015 over the same period one year ago; truck trailer production rose 9%.
  • Heavy-duty truck production should see growth of 18% in 2015 and 2% in 2016 before declining 5% in 2017 and falling 3% in 2018. Production is forecast to rise at a 1.3% annual rate in 2019 and 2020.
  • The production of campers and travel trailers rose 9% in the three months ending October 2015 over the same period one year earlier; big-ticket motor home production rose 2%.
  • Motor vehicles and parts imports were up 7% while exports fell 4%. The industry’s import to export ratio is 2.5, so the sizable trade deficit was $6.5 billion more negative in the third quarter of 2015 compared with one year earlier.

Household appliance production (Figures 4a and 4b)

  • Household appliance production grew 6% in 2015. The forecast is for growth of 4% in 2016 and 2017 and 2% in 2018, before averaging 1% growth in 2019 and 2020.
  • Production grew 4% in the three months ending October 2015 compared with the same period one year ago; production of small appliances was up 7% and large appliances increased 3% (the production value of major appliances is three times as large as that of small appliances). The momentum indicator, relating production from August to October 2015 to that of the previous three months, shows production fell at a 4% annual rate.
  • Existing home sales rose 6% in the three months ending in October 2015 from one year earlier. Both new and existing housing activity is growing versus one year ago.
  • Household appliances’ import to export ratio is 6.9—one of the highest adverse trade ratios in manufacturing. Household appliance imports increased 9% and exports fell 7%, and thus the trade deficit was $632 million more negative in the third quarter of 2015 compared with one year ago.

Pharmaceutical and medicine production (Figures 5a and 5b)

  • Pharmaceutical and medicine production increased 3% in 2015. The forecast calls for production to grow 2% in 2016, 4% in 2017, 4% in 2018, and an average of 2% in 2019 and 2020.
  • Production rose 3% in the three months ending October 2015 compared with the same period one year ago and the recent quarter-to-quarter momentum rose at a 4% annual rate.
  • Growth drivers include new product launches and new spending for innovative treatments; further, fewer patents are expiring than in the past few years.
  • IMS Institute forecasts that the increased number and quality of new drugs for cancer, hepatitis C, autoimmune disorders, heart disease, and rare diseases will transform treatments in 2020. During the next five years, 75 new orphan drugs are expected for diseases that are currently untreatable.
  • Employment in pharmaceuticals and medicine was up 2% in the third quarter of 2015 compared with the same period one year earlier. There was a 2% gain in pharmaceuticals and in miscellaneous medicinal and biologicals employment.
  • Pharmaceutical imports rose 16% while exports expanded 3%. The import to export ratio is 2.1, so the already large trade deficit was $3.5 billion more negative in the third quarter of 2015 compared with one year earlier.

Iron and steel products production (Figures 6a and 6b)

  • Iron and steel production declined 10% in 2015. The steel industry is predicted to post no growth in 2016 and 2017, then increase 1% in 2018, and average 1% growth in 2019 and 2020.
  • Output fell 12% in the three months ending October 2015 versus the same period one year ago. Compared with May to July, the production momentum fell at a 9% annual rate.
  • Capacity utilization in the U.S. steel industry was 65% in the week of November 21, 2015 (much lower than the 77% in the same week one year earlier). The steel industry has a much lower factory utilization rate than overall manufacturing.
  • U.S. durable goods manufacturing industries’ production momentum accelerated 1% during August to October 2015 compared with May to July; these are predominantly steel-intensive industries.
  • The large difference between demand and supply suggests that trade, prices, and inventory explain the decline in steel production.
  • World steel production fell 3% in the three months ending in October compared with one year ago. Steel production was down 3% in Europe (28 countries), was flat in Russia, and fell 1% in Korea in the three months ending October 2015 compared with year-ago levels. China’s steel production was down 2% and Taiwan’s was down 14%. Steel production in Brazil fell 7%.
  • Steel product imports fell 32% while exports fell 25%. Steel’s import to export ratio is 2.5, so the trade deficit was $2.7 billion less negative in the third quarter of 2015 compared with one year ago. A 15% decline in steel mill product prices accounts for a large portion of the decline in dollar trade in steel.

Alumina and aluminum production and processing (Figures 7a and 7b)

  • Alumina and aluminum production fell 1% in 2015. Industry production is expected to be flat in 2016, then increase 3% in 2017 and 4% in 2018. Production growth is forecast to average 3% a year in 2019 and 2020.
  • Production fell 6% in the three months ending October 2015 compared with the same period one year ago and the quarter-to-quarter momentum was very negative. Primary aluminum production fell 5% from year-ago levels. Unfortunately, production of aluminum sheet, plate, and foil and extruded products, which accounts for 89% of the industry, fell abruptly in August and has not recovered; it is down 7% in the last three months from a year ago.
  • Production in aluminum-using industries was positive: truck trailer production rose 9%, light truck and utility vehicle production rose 14%, and aerospace production grew 1% from August to October 2015 compared with year-ago levels.
  • The Metals Service Center Institute reported that aluminum product shipments from U.S. metals services centers fell 8% in October 2015 versus the same month one year ago.
  • Alumina and aluminum production and processing imports fell 5% while exports fell 8%. Alumina and aluminum’s import to export ratio is 1.7, so the trade deficit was $276 million more negative in the third quarter of 2015 compared with one year earlier.

Fabricated metal products production (Figures 8a and 8b)

  • Fabricated metals production posted no growth in 2015 and none is forecast in 2016. We expect 3% production growth in 2017 and 2018, followed by growth averaging 2% in 2019 and 2020.
  • Production fell 1% in the three months ending October 2015 relative to the same period one year ago and the quarter-to-quarter momentum was negative 6%.
  • The subindustries within fabricated metal products saw mixed production activity relative to one year ago. Forging and stamping was up 5%, architectural and structural metals rose 1%, and coating, engraving, and heat treating rose 4% in the three months ending October 2015 relative to the same period one year ago. Machine shop turned products and fasteners fell 6%, however.
  • Fabricated metal products imports were unchanged and exports fell 4%. Fabricated metal products’ import to export ratio is 1.6, so the trade deficit was $524 million more negative in the third quarter of 2015 compared with one year earlier.

Basic chemicals production (Figures 9a and 9b)

  • Basic chemicals production increased 3% in 2015. We expect 3% production gains in 2016, 5% in 2017, 7% in 2018, and an average of 6% annual growth in 2019 and 2020.
  • Overall production was up 3% in the three months ending October 2015 compared with the same period one year ago but the quarter-to-quarter momentum was negative 1%.
  • Petrochemical and other organic chemicals production was up 3% in the three months ending October 2015 versus one year ago. Petrochemical manufacturing includes ethylene, propylene, butylene, toluene, styrene, xylene, ethyl benzene, and cumene made from petroleum and natural gas.
  • Inorganic chemicals production rose 3% in the three months ending October 2015 compared with the same period one year ago. The growth was across the board—alkalies, chlorine, acids, dyes, pigment, industrial gases, etc.
  • A report from U.S. freight railroads indicates that chemical car loadings were up 1% in the first 46 weeks of 2015 versus year-ago levels.
  • Basic chemicals imports were down 22% while exports declined 10%. Basic chemicals’ import to export ratio is 0.9, so the trade surplus grew $1.8 billion more positive in the third quarter of 2015 relative to one year earlier.

Paper production (Figures 10a and 10b)

  • Paper production fell 1% in 2015. Production should fall another 1% in 2016 and then be unchanged in 2017 and 2018. Paper production is expected to average 1% growth a year in 2019 and 2020.
  • Production fell 1% in the three months ending October 2015 compared with the same period one year ago. A more short-term (quarter-to-quarter) analysis reveals negative 2% production momentum.
  • In a related end market, industrial production of food products was up 4% in the three months ending October 2015 compared with year-ago levels.
  • A report from the American Trucking Association indicated that truck tonnage increased 2% in October 2015 from one year ago.
  • Paper imports fell 5% while exports declined 4%. Since the import to export ratio is 0.9 in the paper industry, the trade surplus was $84 million more positive in the third quarter of 2015 compared with one year earlier.

Construction machinery production (Figures 11a and 11b)

  • Construction machinery production rose 7% in 2015. We forecast a 3% decline in 2016 before growth of 2% in 2017 and 6% in 2018. Growth should average 2% a year in 2019 and 2020.
  • Production rose 4% during August to October 2015 versus the same period one year earlier. The quarter-to-quarter momentum, however, turned strongly negative.
  • Private nonresidential construction activity expanded 13% and public works construction grew 7% in the three months ending September 2015 compared with the same period one year ago.
  • Logging production increased 9% from August to October 2015 versus one year ago.
  • Mining and quarrying production fell 5% in the three months ending October 2015 compared with the same period one year ago. There was growth in quarrying and precious metals but declines in coal, iron ore, and nonferrous metal mining.
  • Construction equipment’s import to export ratio was 1.5 in the three months ending September 2015. Imports fell 6% but exports declined 19%; the small trade deficit became $422 million more negative in the third quarter of 2015.
  • Caterpillar reports that their worldwide machine deliveries to users for retail sales, adjusted for inflation, were down 16% in the three months ending October 2015 versus the same period one year earlier. Construction industries’ sales were down 14% and resources industries’ equipment fell 25%.

Mining and oil and gas field machinery production (Figures 12a and 12b)

  • Mining and oil and gas field machinery production declined 15% in 2015. Production should fall 21% in 2016 and then grow 14% in 2017 and 17% in 2018. Growth averaging 12% is forecast for 2019 and 2020.
  • Production fell 23% in the three months ending October 2015 compared with one year earlier and the quarter-to-quarter momentum was very negative.
  • WTI oil prices were $40 in mid-November, down from $60 in mid-June. A price of $50 is thought to be the approximate breakeven point for new shale oil drilling, so oil U.S. production is starting to decline.
  • The Energy Information Administration says coal production fell 9% in 2015 and is forecast to decline 3% in 2016.
  • Gold and silver mining in the United States increased 5% in the three months ending October 2015 compared with the same period one year earlier.
  • Oil and gas well drilling production fell 56% in the three months ending October 2015 compared with one year earlier. Recent momentum in the drilling market is negative.
  • Mining and oil and gas field machinery production is very export-oriented—the import to export ratio is only 0.3. Imports fell 32% while exports fell 29%; the trade surplus was $540 million less positive in the third quarter of 2015 compared with one year earlier.

Industrial machinery production (Figures 13a and 13b)

  • Industrial machinery is capital equipment for specific nonmetallic manufacturing industries such as woodworking, plastics, paper, textiles, printing, food products, and semiconductors.
  • Industrial machinery production grew 5% in 2015. Production should increase 2% in 2016, 6% in 2017, and 3% in 2018, and then average 3% growth in 2019 and 2020.
  • Production increased 11% in the three months ending October 2015 compared with the same period one year earlier and the momentum indicator was very positive.
  • In related sectors, wood products production fell 1%, paper production fell 1%, textile mill production rose 3%, food production increased 4%, and plastic products production expanded 4% from August to October 2015 compared with the previous year.
  • The Semiconductor Equipment Association reported that equipment bookings in the three months ending October 2015 were 20% higher than in the same period one year earlier.
  • Construction of new manufacturing plants increased 46% (in inflation-adjusted dollars) in the three months ending September 2015 from one year ago.
  • Industrial machinery imports were up 2% while exports increased 25% in the third quarter of 2015 compared with one year ago. The industrial machinery industry is export-oriented, with a 0.7 import to export ratio. The trade surplus increased $793 million in the third quarter of 2015 relative to the same period last year.

Ventilation, heating, air conditioning, and commercial refrigeration equipment production (HVAC) (Figures 14a and 14b)

  • HVAC production grew 2% in 2015. The forecast is for 4% growth in 2016, 5% in 2017, and 3% in 2018. Growth should average 1% a year in 2019 and 2020.
  • Production rose 3% in the period of August to October 2015 on a year-over-year basis and the quarter-to-quarter momentum was very positive.
  • In related sectors, construction spending for home improvement was up 19% and inflation-adjusted private nonresidential construction rose 13% in the three months ending September 2015 versus one year ago.
  • Construction related to refrigeration is declining. Inflation-adjusted food and beverage manufacturing construction fell 11% and inflation-adjusted food and beverage store construction declined 11% in the three months ending October 2015 versus one year ago.
  • HVAC has an import to export ratio of 1.7. Imports increased 4% while exports fell 1% and thus the trade deficit was $142 million more negative in the third quarter of 2015 compared with one year earlier.

Metalworking machinery production (Figures 15a and 15b)

  • Metalworking machinery consists of industrial molds; metal cutting and forming machine tools; special tools, dies, jigs, and fixtures; and miscellaneous metalworking machinery (cutting tools and rolling mill machinery).
  • Metalworking machinery production declined 1% in 2015. Production will fall another 2% in 2016, then rise 4% in 2017 and 3% in 2018. A 3% average annual growth rate is predicted for 2019 and 2020.
  • Production fell 4% in the three months ending October 2015 over year-ago levels and the quarter-to-quarter momentum was negative 8%.
  • The U.S. Census Bureau reported that metalworking machinery orders (in dollars) grew 16% in the three months ending September 2015 on a year-over-year basis.
  • Metalworking machinery imports fell 17% and exports declined 4% in the third quarter of 2015 compared with one year earlier. The import to export ratio is 2.6, so the trade deficit was $733 million less negative in the third quarter of this year versus one year ago.

Engine, turbine, and power transmission equipment production (Figures 16a and 16b)

  • Engine, turbine, and power transmission equipment is used for freight, natural gas transmission, marine engines, and electric power.
  • Engine, turbine, and power transmission equipment production increased 2% in 2015. Our forecast calls for a 3% decline in 2016, then growth of 4% in 2017 and 5% in 2018. Production should increase at a 2% annual rate in 2019 and 2020.
  • Production fell 3% in the three months ending October 2015 compared with the same period one year earlier and the quarter-to-quarter momentum was negative.
  • Heavy-duty truck production was up 17% but the production of ships and boats fell 3% in the three months ending October 2015 over year-ago levels. The decline in marine construction, however, is not confirmed by employment in the industries: shipbuilding/repairing employment grew 1% and boatbuilding employment gained 4% in the three months ending September 2015 compared with one year ago. Ship and boat production is predicted to decline 1% to 2% a year through 2020.
  • Excess capacity, tough greenhouse gas emission regulations, and regulatory preference for renewal supplies restrain investment. Electric power construction spending fell 18% in the three months ending September 2015 versus the same period one year ago.
  • Turbines compress gas in pipelines and power oil and gas well drilling. Pipeline and storage construction increased 19% in the three months ending September 2015 versus the same period one year ago. Oil and gas well drilling in the United States, however, fell 56% in the three months ending in October 2015.
  • The American Wind Energy Association reported that during the third quarter of 2015, 1,602 megawatts of wind turbines were installed—a huge gain from the 419 megawatts installed one year earlier. A wind tax credit was available for projects that started in 2013; as a result, 13,250 megawatts are under construction to be completed over the next several years.
  • Engine, turbine, and power transmission equipment imports declined 5% but exports fell 17%. The industry has a 1.0 import to export ratio and thus the trade surplus was $992 million less positive in the third quarter of 2015 relative to a year ago.

Material handling equipment new orders (Figures 17a and 17b)

  • Material handling equipment consists of elevators, escalators, conveyors, overhead traveling cranes, hoists, industrial trucks, tractors, and trailers.
  • In the three months ending September 2015, inflation-adjusted material handling orders were up 9% compared with one year earlier.
  • The construction of buildings where elevators and escalators could be used is growing again. Inflation-adjusted construction of private and public buildings was up 14% in the three months ending September 2015 versus the same period one year ago.
  • Warehousing and storage employment was up 6% in the three months ending October 2015 versus the same period one year earlier.
  • Material handling equipment imports increased 3% while exports fell 4%. The industry’s import to export ratio is 1.3, so the trade deficit turned $100 million more negative in the third quarter of 2015 from one year earlier.

Shipments of electronic computer equipment (Figures 18a and 18b)

  • The MAPI Foundation does not forecast electronic computer equipment shipments.
  • Computer shipments rose 4% in the three months ending September 2015 compared with one year earlier. Electronic computer prices declined 4%.
  • Electronic computer imports rose 2% while exports dropped 5%. With a large import to export ratio of 5.4, the huge trade deficit was $721 million more negative in the third quarter of 2015 compared with one year earlier.

Communications equipment production and business activity (Figures 19a and 19b)

  • Communications equipment encompasses telephone apparatus and broadcast and wireless communications equipment. The category also includes alarms, signaling equipment, and safety detectors.
  • Communications equipment is measured by an industrial production index that adjusts activity upward to account for quality features.
  • Communications equipment production declined 2% in 2015. We project 5% growth in 2016 and 2017, while 4% growth is likely in 2018. The average annual growth rate should be 3% in 2019 and 2020.
  • Production fell 2% in the period of August to October 2015 compared with one year ago.
  • Construction spending for communications infrastructure (in current dollars) rose 12% in the three months ending September 2015 versus one year ago.
  • Defense communications are about one-tenth of the communications equipment market; new orders (in current dollars) in this area fell 9% in July to September 2015 from one year ago. Civilian communications equipment orders were unchanged.
  • Employment indicators show that the production of alarms, signaling equipment, and safety detectors declined sharply in the third quarter of 2015 from one year earlier.
  • The communications equipment industry is very dependent on imports from contract manufacturing plants in Asia. With an import to export ratio of 6.7, domestic production accounts for only a small proportion of domestic consumption. Imports rose 8% while exports fell 8% in the third quarter versus one year ago. The very large trade deficit was $2.4 billion more negative in the third quarter of 2015 compared with one year ago.

Semiconductors (Figures 20a and 20b)

  • World semiconductor revenues, as calculated by World Semiconductor Trade Statistics—an association of semiconductor companies—was flat in 2015. WSTS predicts 1% growth in 2016 and 3% growth in 2017.
  • Shipments fell 2% in the three months ending September 2015 compared with one year ago and prices fell 3%.
  • Automotive and wireless communications are projected to grow at a stronger pace than the total market; however, consumer and computer markets for semiconductors are predicted to remain almost flat, according to WSTS.
  • With an import to export ratio of 2.1, the U.S. is a net importer of semiconductors. Imports were flat and exports fell 3% in the third quarter of 2015; the sizable trade deficit was $218 million more negative than one year earlier.

Navigational, measuring, electromedical, and control instruments production (Figures 21a and 21b)

  • Instrument industry production grew 3% in 2015. The outlook is for 4% growth in 2016 and 2017, then 3% growth in 2018. In 2019 and 2020, growth will average 2% a year.
  • Instrument production was up 2% in the three months ending October 2015 compared with one year ago.
  • Search and navigation shipments (in current dollars) rose 6% in the three months ending September 2015 compared with one year ago; defense search and navigation shipments gained 3% and nondefense shipments rose 12%.
  • The electromedical industry’s output rose in the third quarter of 2015 as indicated by 2% growth in employment versus one year ago. An aging population, more medical tests, and the expansion in health insurance coverage are driving this growth. Electromedical apparatus include scopes, defibrillators, EKGs, MRIs, pacemakers, ultrasounds, and many other medical testing instruments. Irradiation apparatus include CT scanners, x-ray machines, and medical radiation therapy machines.
  • Industrial process instruments measure, control, or display industrial process activities such as temperature, pressure, vacuum, and viscosity. In the third quarter of 2015, industry employment fell 2% compared with one year earlier. Overall manufacturing production is growing at a modest pace year over year and there is moderate growth in factory machinery investment. Manufacturing plant construction is exceptionally strong.
  • Instruments for measuring and testing electricity and electrical signals include circuit and continuity testers, volt meters, ohm meters, watt meters, multimeters, and semiconductor test equipment. In the third quarter of 2015, industry employment fell 1% compared with one year earlier.
  • Navigational, measuring, electromedical, and control instruments have an import to export ratio of 1.4. Imports declined 1% while exports fell 3%; the trade deficit was $522 million more negative in the third quarter of 2015 compared with one year earlier.

Electric lighting equipment production (Figures 22a and 22b)

  • Electric lighting equipment includes electric lamp bulbs and residential, commercial, and industrial lighting fixtures.
  • Electric lighting equipment production fell 3% in 2015. Production should be flat in 2016, grow 3% in 2017, and increase 6% in 2018. The average annual growth rate for 2019 and 2020 should be 2%.
  • Production fell 6% in the three months ending October 2015 compared with one year ago; the quarter-to-quarter momentum was also negative.
  • In related sectors, inflation-adjusted residential construction spending rose 13% in the three months ending September 2015 from year-ago levels while nonresidential construction of buildings was up 14%.
  • At 7.9, electric lighting equipment’s import to export ratio is one of the most adverse in manufacturing. Imports increased 8% while exports were unchanged in the third quarter of 2015 compared with one year earlier. The trade deficit was $307 million more negative than one year ago.

Electrical equipment production (Figures 23a and 23b)

  • This sector consists of transformers, motors and generators, switchgear, relays, and industrial controls.
  • Electrical equipment production grew 4% in 2015. The forecast calls for growth of 3% in 2016, 2% in 2017, and 3% in 2018. Annual growth is expected to average 2% during 2019 and 2020.
  • Production was up 5% in the three months ending October 2015 compared with one year ago, with positive momentum.
  • The factory operating rate was 76.4% in October 2015, up from 75.2% one year ago, but below the long-term average of 78.5%.
  • Relay and industrial controls production appears to be growing at a moderate pace. Employment in the industry, which has had large productivity gains, was up 0.9% in the third quarter of 2015 relative to one year earlier. Manufacturing construction activity is booming.
  • Electric motors and generators provide power for many machinery and transportation applications, while generators convert motion into electricity for residential, utility, and industrial uses. Third quarter employment in the industry was up 2%.
  • Transformers and power distribution equipment tend to follow electric utility construction, the creation of new communities, and a replacement cycle; housing starts were up 10% in the three months ending October 2015. Electric power construction, however, declined sharply. Nevertheless, employment in the transformer industry was up a strong 4% in the third quarter of 2015 compared with one year earlier.
  • Switchgear and switchboard apparatus production is declining. Industry employment fell 4% in the third quarter.
  • Electrical equipment imports were unchanged while exports fell 5%. The industry’s import to export ratio is 2.0, so the weakness of exports pushed the trade deficit $217 million more negative in the third quarter of 2015 compared with one year ago.

Medical equipment and supplies production (Figures 24a and 24b)

  • This category encompasses surgical and medical instruments, surgical appliances and supplies, and dental laboratories.
  • Medical equipment production increased 2% in 2015. We forecast growth of 3% in 2016, 2017, and 2018. Annual production is expected to average 4% in 2019 and 2020.
  • Production increased 2% in the three months ending October 2015 compared with year-ago levels.
  • Surgical and medical instruments employment increased 1% in the third quarter but surgical appliances and supplies employment increased a strong 3%.
  • Safety equipment and supplies and the “all other” group that includes lab equipment and hospital furniture, dental equipment and supplies, and vision care goods saw 3% growth in employment in the third quarter. This suggests a burst of production growth.
  • Dental laboratories industry employment had a very strong showing, rising 7% in the three months ending September 2015.
  • Medical equipment and supplies imports increased 4% while exports were unchanged. With an import to export ratio of 1.2, the strong growth in imports pushed the trade deficit $291 million more negative in the third quarter of 2015 compared with one year earlier.

Aerospace products and parts production (Figures 25a and 25b)

  • Aerospace products and parts production increased 2% in 2015. We predict growth of 3% in 2016 and 5% in 2017 and 2018. Annual growth is expected to average 7% during 2019 and 2020.
  • In the three months ending October 2015, production was up 1% compared with one year ago, with zero momentum.
  • Boeing reported 166 net orders for new commercial airplanes in the third quarter of 2015 and delivered 199 (up 7% from a year earlier). Boeing delivered 723 commercial airplanes in 2014 and expects 758 deliveries in 2015, a 5% increase.
  • U.S. airline traffic—measured in revenue passenger miles—rose 5.4% in the three months ending August 2015 versus one year ago.
  • Defense aerospace contracts are very long term and military austerity likely longer term. Defense aerospace shipments (in current dollars)—about one-third of the total industry—were up 11% in the three months ending September 2015 versus one year ago. Civilian aircraft and parts shipments rose 8% in this time frame.
  • With an import to export ratio of 0.4, aerospace is the largest net exporter in U.S. manufacturing. Imports fell 4% while exports were unchanged in the third quarter of 2015, and the trade surplus was $585 million more positive relative to one year earlier.

Oil and gas well drilling production (Figures 26a and 26b)

  • The MAPI Foundation does not forecast drilling production; however, it is clear that drilling activity declined 45% in 2015.
  • Drilling activity declined 56% in the three months ending October 2015 relative to one year ago and has sizable negative momentum.
  • Brent oil plummeted from $111 in June 2014 to $42 per barrel in late November 2015. Henry Hub natural gas declined from $4.60 in June 2014 to $2.09 per million cubic feet in late November 2015. The EIA predicts that U.S. crude oil production will increase 7% in 2015 and fall 6% in 2016.
  • Natural gas production is forecast to increase 6% in 2015 and 2% next year. U.S. hydrocarbon production is the major reason for lower prices.
  • EIA expects non-OPEC oil production to grow in 2015 and decline in 2016, which would be the first annual decline in non-OPEC production since 2008. Lower expected growth in Canada and larger expected declines in U.S. onshore production account for the change.
  • Baker Hughes reported that the North American rig count fell 61% in August 2015 versus the same month one year ago.
  • 74% of operating U.S. rigs looked for oil in November. The U.S. rig count for oil drilling was down 64% in November 2015 versus the same four-week period one year ago. The U.S. rig count for natural gas drilling was down 45% in the same period.

Private nonresidential construction put-in-place (Figures 27a and 27b)

  • Inflation-adjusted nonresidential spending increased 13% in 2015. We predict growth of 9% in 2016 and 2% in both 2017 and 2018. The average annual growth rate in 2019 and 2020 is 3%.
  • Nonresidential construction was up 13% in the three months ending September 2015 versus year-ago levels.
  • There was very strong construction growth in lodging (hotels), office buildings, healthcare, private education, amusement and recreation, transportation, communications, and manufacturing plants in the three months ending September 2015. The industry experienced small declines in activity in commercial and religious construction and large declines in electric utility construction.
  • Construction spending for factories, adjusted for inflation, rose 46% during July to September 2015 from one year ago. The strongest growth was in chemicals, transportation equipment, nonmetallic minerals, and plastics and rubber. Computers and electronics and fabricated metal products posted large declines. Industrial construction grew 53% in 2015. We forecast 14% growth in 2016, an 11% decline in 2017, and a 14% reduction in 2018. Industrial construction will decline at a 1% average annual rate in 2019 and 2020.
  • Private electric power construction is falling at a fast pace because of overcapacity and greenhouse gas emissions regulations.
  • The architectural and engineering firm billing index—a leading indicator—cycled around the 50% no-growth level from January to April 2015 and then broke out into growth territory. The October index level was 53.1, indicating good growth. The improvement is confirmed by robust architectural and engineering employment growth, up 3% in the three months ending October 2015 versus one year ago.

Public construction put-in-place (Figures 28a and 28b)

  • Construction spending by federal, state, and local governments is primarily directed toward schools, highways, sewers, dams, waterworks, and various public buildings.
  • Inflation-adjusted public construction spending rose 5% in 2015. The forecast is for 1% annual growth from 2016 to 2020.
  • Public works construction was up 7% in the three months ending October 2015 compared with the same period one year ago and the quarter-to-quarter momentum was positive.
  • Areas of strong growth in the last three months were amusement and recreation, highway and street, sewage and waste disposal, and conservation and development. Moderate growth occurred in public education, transportation, power, and water supply.
  • Recent declines in public construction spending were in healthcare and public safety.
  • State and local government receipts from taxes and federal transfers will be up 4% in 2015 and 2016, 5% in 2017, and an average of 4% a year from 2017 to 2020. A modest pace of economic expansion will generate higher personal tax receipts and property and sales taxes. Federal grants-in-aid for Medicaid got a large boost from the Affordable Care Act in 2015 but will slow to below average growth from 2017 to 2020.
Kristin Graybill