Latest Manufacturing Outlook

Here is the latest manufacturing outlook from Global Insight, Inc.

Despite persistent sluggishness over the past few years, manufacturing output finally rebounded this past summer and should continue to expand through the end of 2003. Consumers have been the stalwarts of this recovery and their free-spending habits, especially for big-ticket and housing-related items, should continue. Exports, which declined in 2001 and 2002, should begin to improve as the already weakening U.S. dollar declines further. Finally, government spending for defense and security will remain a strong economic stimulus.

All these economic drivers have generated optimism within the U.S. economy. Global Insight expects the industrial sector to strengthen through year-end, setting the stage for an even stronger performance in 2004. Some troubling issues still linger, however. Job losses continue to plague the economy and business uncertainty remains high. Furthermore, volatile energy prices and problems in Iraq have created a cautionary environment.

Nevertheless, energy prices have eased from their prewar peaks, which should continue next year, while business confidence has slowly strengthened since early summer. We expect both business and consumer optimism to build through the end of 2003. By early next year, businesses should start investing in traditional equipment again, building toward a robust recovery during the second half. The following key sectors will dominate next year’s expansion.

High-tech industries will lead the way, with the computer and electronic component markets experiencing the strongest growth. Moreover, some other investment sectors that have not made it into our top growth rankings, such as railroad equipment and other forms of transportation equipment like medium and heavy trucks (which experienced major contractions over the last few years), will also enjoy rapidly improving business conditions.

The military ordnance industry should continue to thrive over the next several years, as the United States pursues its war against terrorism. Indeed, real defense spending is expected to increase 5-10% in 2004—the third consecutive year that it will approach or exceed double-digit growth rates.

The pharmaceutical industry will also benefit from healthy consumer spending, as well as an aging population. (Although categorized under the general chemical industry, pharmaceuticals should properly be classified as “high tech.”) Over the past ten years, this industry has consistently outperformed general manufacturing, even in a weak economy. With expected real output growth of 6.0% next year, the pharmaceutical industry ranks fourth.

Corporate profits have improved and interest rates have increased very little. As a result, the financial sector is poised to do quite well next year and has easily made it into our top performers’ list. A rising number of mergers and acquisitions will also help this sector.

Health care, another service industry, is expected to round out our growth leaders in 2004. Like pharmaceuticals, demographics and aging baby boomers will help sustain its long-term growth.

U.S. Industry Growth Leaders for 2004
(Change in constant-dollar revenues)

1) Computer & Office Machinery 15.0%
2) Electronic Components & Accessories 11.6%
3) Ordnance & Accessories 7.9%
4) Pharmaceuticals, Soaps, & Toiletries 6.0%
5) Finance 5.1%
6) Health Services 4.8%

Source: Global Insight, Inc.