Manufacturers Alliance/MAPI Economic Forecast: Rebalancing Growth With More Investment, Exports

Investment in business equipment and increased exports will be the drivers for economic growth over the next five years as the U.S. economy rebalances away from excessive reliance on
debt-based consumer spending, according to a new report.

The Manufacturers Alliance/MAPI Quarterly Economic Forecast predicts that inflation-adjusted gross
domestic product (GDP) will expand by 1.8 percent in 2011, by 2.1 percent in
2012, and by 2.4 percent in 2013. The 2011 forecast represents a slight upgrade
over the previously estimated 1.6 percent growth, while the 2012 forecast is on
par with 2.1 percent growth anticipated in the August 2011 quarterly report. MAPI’s
November report traditionally provides a five-year forecast; GDP is predicted to
average 2.9 percent annual growth from 2012 to 2016.

“Recently, the U.S. economy has performed a bit stronger than we thought, yet there is no indication of
significant improvement, so we kept the growth rates for 2011 and 2012 in the
same range,” said Daniel J. Meckstroth, Ph.D., MAPI Chief Economist. “Consumer
spending is restrained by sluggish job growth and minimal wage increases, and combined
with the impaired housing market, we do not foresee a return to debt-based
growth. Instead, drivers will be increased investment in business equipment and
trade. Also, we are seeing some modest growth in non-residential construction,
suggesting that the sector’s recession is bottoming out.”

Manufacturing production will outpace the overall economy and is expected to show growth of 4.3 percent in 2011, 3.4 percent in 2012, and 3.8 percent in 2013. The 2011 and 2012 figures have been
adjusted upward from MAPI’s August forecast of 4.1 percent and 3.2 percent,
respectively. Manufacturing is expected to see a net increase in hiring, with
the sector forecast to add 230,000 jobs in 2011, 170,000 in 2012, and 140,000
in 2013.

There remain, however, a number of red flags for the outlook.

“The risk of another recession is uncomfortably high; we put the probability at 40 percent for 2011,” Meckstroth said. “The main risk is that the European sovereign debt crisis may cascade
from European banks to the U.S. banking system and interfere with interbank
lending and, ultimately, credit availability. Another concern is that job
growth will stop. U.S. economic growth is already at a ‘stall speed’ of 2
percent or less, and if we had a major shock it could precipitate a major
crisis.

“Additionally, there is already a shift from fiscal government stimulus to austerity that we expect to last the
next five years or more, as U.S. politicians attempt to get control of our unwieldy
public debt,” he added.

Production in non-high-tech industries is expected to increase by 4.1 percent in 2011, by 3.3 percent in
2012, and by 3.2 percent in 2013. High-tech manufacturing production, which
accounts for approximately 10 percent of all manufacturing, is anticipated to
improve at a higher rate, with growth of 7.6 percent in 2011, 5.8 percent in
2012, and 10.4 percent in 2013.

The forecast for inflation-adjusted investment in equipment and software is for growth of 10.7
percent in 2011, 7.9 percent in 2012, and 7.7 percent in 2013. Capital
equipment spending in high-tech sectors will also rise. Inflation-adjusted
expenditures for information processing equipment are anticipated to increase
by 6.5 percent in 2011, by 7.8 percent in 2012, and by 6.9 percent in 2013.

MAPI expects industrial equipment expenditures to advance by 12.1 percent in 2011, by 10 percent in 2012, and by 5.2 percent in 2013. The outlook for spending on transportation equipment is
for growth of 26.1 percent in 2011, 12.7 percent in 2012, and 12.3 percent in
2013. Spending on non-residential structures will improve by 5.1 percent in
2011 before decelerating to 3.8 percent in 2012, and to 2 percent in 2013.

Exports and imports will both see gains. Inflation-adjusted exports are anticipated to improve by 6.7 percent in 2011, by 4.8 percent in 2012, and by 7.1 percent in 2013. Imports are expected
to grow by 4.8 percent in 2011, by 3 percent in 2012, and by 4.9 percent in
2013. Over the five-year horizon from 2012 to 2016, exports are expected to
average 7.1 percent growth compared to 4.1 percent growth for imports. MAPI
forecasts overall unemployment to remain high, averaging 9.1 percent in 2011, 9
percent in 2012, and 8.8 percent in 2013.

The price per barrel of imported crude oil is expected to average $100.30 per barrel in 2011, $99.10 per barrel in 2012, and $101 in 2013.