Forecasting The U.S. Economy

We are not looking for a general economic recession to begin until early 2009, or perhaps late 2008.

By Alan Beaulieu

The economic news has been anything but dull over the last several months. Former Federal Reserve Chair Alan Greenspan used the “recession” word out loud in February and scared a lot of people, the Chinese stock market had a meltdown of sorts, our own stock market experienced two sharp declines, and the secondary mortgage market is making the business news on a regular basis. Oh, and let's not forget the unrelenting pummeling of home builders. We are also hearing from a lot of companies that the last several months have been somewhat off compared to the strong figures posted for 2006.

It would be perfectly understandable if you were depressed by all this bad news, and perhaps we should be. Most of you will be glad to know that we are not looking for a general economic recession to begin in the U.S. until early 2009, or perhaps late 2008. The U.S. economy will be slowing in its rate of growth as measured by U.S. Industrial Production through 2008. Look for the growth rate to slow to 2.7 percent from today's 4.0 percent. A 2.4 percent growth rate is projected for 2008. The next two to three months will be critical in evaluating the strength of the economy in the second half of 2008 as we wait to see what happens in some important leading indicators (the U.S. Leading Indicator, Corporate Bond Prices, Purchasing Managers Index and the Institute for Trend Research's EcoTrends Leading Indicator).

Positive Indicators
Some reality might help temper the bad news presented in the first paragraph. First, the Money Supply is expanding at a healthy 3.4 percent clip, which is the highest in three years. The money supply is controlled by the Federal Reserve Board and is important in that we Americans can be counted on to do one thing when we get a dollar—spend it! The Federal Reserve Board is providing those dollars, and hopefully we the people will keep spending. Remember that Retail Sales account for about two-thirds of the U.S. economy.

Another piece of good news is that Retail Sales are growing at an annualized rate of 4.3 percent, which is conducive to ongoing macroeconomic growth. The underlying trends clearly depict slower growth, but they are a long way from signaling an imminent recession.

There is also positive input coming from the Purchasing Managers Index. While still tentative at this point, the underlying trends portend good news for readers selling into the industrial markets in 2008.

One of my favorite leading indicators is Corporate Bond Prices. The data just started throwing off positive signals in March, and while it is too early to be dogmatic about the sustainability of a one-month rise, I am excited by the prospects of continued good news in this important leading indicator, as it will mean good news for the U.S. economy heading into 2008.

Forecasting 2007 and 2008
The underlying trend for Industrial Machinery New Orders (NAICS 3332) has shifted to negative, with overt decline occurring in the rates-of-change and in the data trends. New Orders for the last three months are a disappointing 4.8 percent below the year-ago level. Internal and external indicators suggest that more troubles await this industry segment. Freeze hiring and expansion initiatives, and look to maximize existing sales leads, as they will be harder to come by later this year.

The business cycle trend for Metalworking Machinery New Orders (NAICS 3335) is positive, though a slower rate of growth is definitely the order of the day. While the early 2007 Metalworking Machinery New Orders number wasn't good, it was appreciably better than the latest New Orders data for Construction Machinery, General Industrial Machinery and Mining Equipment. Stay cautious in your plans for the remainder of 2007; expect the year as a whole to come in about even with 2006. Reduce overtime spending and rethink capital spending improvements unless they can help you with some interim rise in 2008.

Overall, I would suggest that you take a deep breath, recognize that this economy is so big and so diverse that there are still lots of opportunities out there despite the headlines, and make your own trend outperform the macroeconomic numbers.