Stronger World Propelling U.S. Manufacturing

by: Cliff Waldman, Chief Economist

Overview

The upswing in the global economy that began in the winter of 2016 continues apace.

Encouraging signs:

  • The U.S. labor market is improving,
  • Canadian GDP growth is the most stable since 2014,
  • Mexico sees strong export growth above 10%,
  • The prolonged China slowdown reached a likely trough, and
  • For the first time since 2006, Japan had five consecutive quarters of positive GDP growth.

Current uncertainties:

  • Escalating U.S. political and policy uncertainties,
  • Risks in China’s financial system, and
  • Brexit’s early impacts on the Eurozone.

All told, the MAPI Foundation’s forecast remains relatively unchanged from the February 2017 report. Between 2017-2020, we expect annual U.S. GDP growth to be an average 2.2% and U.S. manufacturing growth to average 1.6% across the three-year period.

However, today’s global uncertainties and turmoil can quickly present head- or tail-winds to future U.S. growth. In addition to our quarterly scenario for U.S. manufacturing growth, this report also explores the boundaries of plausible factory sector growth through 2020.

Our alternative global growth scenarios suggest a relatively narrow range for average manufacturing growth through 2020 of between 1.4% and 1.9%. Therefore, while U.S. manufacturing growth is accelerating from the significant weakness of the 2013-2016 period, a return to the growth rates of the 1990s or even the early 2000s is unlikely.

Forecast of U.S. Economic and Manufacturing Growth

MAPI Foundation’s current projections for growth in U.S. GDP, as well as key components of GDP through 2020, are based on the low likelihood of recession before 2020. Relatively low interest rates and the nonzero probability of growth-enhancing fiscal stimulus contribute to this prediction.

U.S. economic growth should remain moderate. We anticipate constraint in the short term due to a range of uncertainties, including globally slow labor productivity growth. Conversely, there may be limitations over the long-term by demographic and labor supply challenges.

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F=Forecast

Consumer spending continues to be the principle driver of overall U.S. economic growth in the forecast, while capital spending remains something of a drag, with little evidence that it will soon significantly accelerate from its post-2000 malaise. The average equipment spending growth forecast for 2017-2020 slowed from 4.4% in the February MAPI Foundation simulation to 4% for the current simulation.

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F=Forecast

F=Forecast

F=Forecast

In spite of impediments from the still elevated dollar and long-term weakness in capital spending, the improvement in global economic growth has a positive impact on the U.S. manufacturing outlook. The current forecast reflects a moderate improvement in the export outlook relative to our last forecast. Total U.S. export growth is expected to average 3.7% between 2017 and 2020, an improvement over the 2% average that we forecasted in February.

Capital spending and export demand are the principal drivers of U.S. manufacturing growth. Thus, with a modestly weaker equipment growth forecast and a modestly stronger export growth forecast, the changes almost cancel each other out and result in little change in our baseline manufacturing growth outlook this quarter. U.S. manufacturing growth will remain weak this year at 1.3%, and average annual U.S. manufacturing output growth will be 1.6% between 2017 and 2020.

Beginning with this report, the MAPI Foundation is incorporating a new feature into our U.S. manufacturing growth forecast. In addition to a baseline forecast, the Foundation will now offer both a pessimistic and an optimistic alternative scenario. For the current report, we are generating these alternative predictions by examining the manufacturing growth implications of a range of assumptions on global economic growth. Learn more about our forecast methodology.

Exploring Possible Future Headwinds and Tailwinds

History remains a poor guide to the coming years for the U.S. manufacturing sector as it struggles to put the crisis of 2008 and 2009 behind it. Understanding the range of economic possibilities can help businesses establish their assumptions for near-term performance.

A pessimistic scenario suffers the headwinds of the drag from escalating U.S. political and policy risk, geopolitical risk on the Korean Peninsula, and the possibility that the Chinese economy will scrape along the bottom of its slowdown without showing even modest acceleration in growth. In this scenario, non-U.S. advanced country GDP growth and developed country GDP growth are slightly lower at 1.5% and 2.9% respectively between 2017 and 2020. These headwinds lead to a less optimistic U.S. manufacturing growth of 1.4%, compared to 1.6% in the baseline forecast. Although pessimistic, this is more than twice the average rate of growth between 2013 and 2016. 

An optimistic scenario gets a boost from the possibility that forecasters are missing the tailwinds of economic improvements in one region reinforcing improvements in others. In this scenario, non-U.S. advanced country GDP growth and developing country GDP growth is slightly higher at 2% and 3.4% respectively from 2017-2020. These tailwinds produce a forecast of 1.9% U.S. manufacturing growth on average between 2017 and 2020. Although optimistic, this forecast does not hint at the growth rate seen in prior periods of manufacturing recovery and expansion. 

Alternative forecast scenarios show that a plausible range for 2017-2020 average manufacturing growth is from 1.4-1.9%. While the lower bound is more than twice the average rate of manufacturing growth between 2013 and 2016, the upper bound does not suggest a return to the factory sector growth rates of prior periods of manufacturing recovery and expansion.

Summary

In spite of impediments from the still elevated dollar and long-term weakness in capital spending, the improvement in global economic growth is having a positive impact on the U.S. manufacturing outlook. Each of our forecasts suggests an improving picture, but also a possibly of a new normal for U.S. manufacturing growth. Full details about the Foundation’s forecast of U.S. growth of GDP and its components follow.