CREDIT BUBBLE WILL HAVE LASTING EFFECT ON ECONOMY

The National Tooling and Machining Association's recent Business Projections Report states that the bursting of the credit bubble will likely have a lasting effect on the economy this year. But, foreign trade will continue to be an important support for U.S. growth in 2008. Substantial growth in exports during 2007 offset the negative effect of falling residential construction and slowing consumer spending on overall growth. It is estimated that foreign trade could add one half to three quarters of a percentage point to real GDP.

This has shifted the economy from one that has been dominated by consumer spending toward one that relies more on rapidly expanding exports. Businesses appear likely to continue to expand their outlays and payrolls, since they appear to not be overextended with debt, excess production capacity, or inventories. The housing market is expected to struggle throughout the year. Housing starts are at an annualized rate of 1.2 million per year, which is barely half of the peak (2.3 million) a couple of years ago. Finally, it is important to note that 2008 is an election year, and the Standard & Poor's 500 stock index has risen in the last seven months of every election year but one since 1950.

Institute of Supply Management Survey

The most up-to-date benchmark data for forecasting future market trends in U.S. manufacturing is the information developed monthly by the Institute of Supply Management (ISM). Since 1913, this association of 400 member companies has conducted monthly surveys of market conditions, and their findings are published on the first day after the close of the month.

Purchasing Managers' Index (PMI)

The manufacturing sector gained momentum in January as the PMI rose 2.3 percentage points, signaling stronger performance in January when compared to the seasonally adjusted 48.4 percent recorded in December. This represents a return to the recent trend of slow growth in manufacturing, as the PMI has averaged 50.2 percent for the past six months. The PMI was driven by the Production Index, which made a rebound of 6.6 percentage points during the month, while the New Orders Index reflected a slight decline at 49.5 percent. The PMI for January (50.7) corresponds to a 3 percent increase in real gross domestic product (GDP) on an annual basis.
The following industries of interest reported growth in January: Petroleum & Coal Products; Appliances & Components; Miscellaneous Manufacturing; and Machinery. The industries reporting contraction in January are: Fabricated Metal Products; Computer & Electronic Products; and Transportation Equipment.

New Orders

ISM's New Orders Index registered 49.5 percent in January. The index is 2.6 percentage points higher than the seasonally adjusted 46.9 percent reported in December. Miscellaneous Manufacturing and Machinery reported increases in January, while Computer & Electronic Products; Fabricated Metal Products; and Electrical Equipment, Appliances & Components reported declines.

Production

ISM's Production Index rose to 55.2 percent in January; an increase of 6.6 percentage points when compared to December's seasonally adjusted reading of 48.6 percent. Industries reporting increases in January included: Petroleum & Coal Products; Miscellaneous Manufacturing Machinery; and Fabricated Metal Products. The industries reporting contraction in January included: Computer & Electronic Products; and Transportation Equipment.

Employment

ISM's Employment Index registered 47.1 percent in January, which is a decrease of 1.6 percentage points when compared to December's seasonally adjusted reading of 48.7 percent. An Employment Index above 49.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The Electrical Equipment and Appliances & Components sectors reported increases in January. The industries reporting contraction in employment in January included: Machinery and Fabricated Metal Products.

Inventories

Manufacturers' inventories contracted in January as the Inventories Index registered 49.1 percent, which is 3.7 percentage points higher than December's seasonally adjusted reading of 45.4 percent. This is the 21st consecutive month of inventory liquidation. The industries reporting higher inventories in January included: Petroleum & Coal Products; Machinery; and Transportation Equipment. The industries reporting lower inventories in January included: Fabricated Metal Products; and Miscellaneous Manufacturing.

Prices

The ISM Prices Index registered 76 percent in January, indicating manufacturers are paying significantly higher prices on average when compared to December. A Prices Index above 47.4 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. In January, 15 industries reported paying higher prices.Those of interest to this report include: Electrical Equipment, Appliances & Components; Machinery; Fabricated Metal Products; Computer & Electronic Products; Miscellaneous Manufacturing; and Transportation Equipment. Petroleum & Coal Products is the only industry reporting paying lower prices in January.

Backlog of Orders

ISM's Backlog of Orders Index registered 44 percent in January, 1 percentage point higher than the 43 percent reported in December. This is the fourth consecutive month of contraction in the Backlog of Orders Index. Electrical Equipment, and Appliances & Components reported increases, while Machinery; Fabricated Metal Products; Transportation Equipment; and Miscellaneous Manufacturing reported decreases.

New Export Orders

ISM's New Export Orders Index registered 58.5 percent in January, an increase of 6 percentage points when compared to December's index of 52.5 percent. This is the 62nd consecutive month of growth in export orders. The industries reporting growth in new export orders in January are: Electrical Equipment, Appliances & Components; Fabricated Metal Products; Transportation Equipment; Miscellaneous Manufacturing; Machinery; and Computer & Electronic Products. As noted in this report, increasing exports are creating, either directly or indirectly, export opportunities for several NTMA firms.

Imports

Imports of materials by manufacturers expanded during January as the Imports Index registered 52.5 percent, 4.5 percentage points higher than the 48 percent reported in December by ISM. The industries reporting growth in import activity for January are: Transportation Equipment and Machinery. The industries reporting contraction in import activity in January were: Fabricated Metal Products; Miscellaneous Manufacturing; and Computer & Electronic Products.

Other Major Economic Indicators

Real gross domestic product – the output of goods and services produced by labor and property located in the United States – increased at an annual rate of 0.6 percent in the fourth quarter of 2007, according to advanced estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.9 percent.

Final sales of computers contributed 0.18 percentage point to the fourth quarter growth in real GDP after contributing 0.28 percentage point to the third-quarter growth. Motor vehicle output subtracted 0.90 percentage points from the fourth-quarter growth in real GDP after contributing 0.36 percentage points to the third-quarter growth. A survey of by the Business Roundtable released in December, showed that most executives expect sales, capital investment and hiring to remain at current levels, or even improve in the coming months. While the economy's problems may have caused consumer confidence to decline, the Business Roundtable's survey results suggest that corporate executives' believe the business climate remains generally healthy.

Dollar Valuation

According to the Cleveland Branch of the Federal Reserve, the dollar has depreciated 24 percent on a broad trade-weighted basis since its peak in February 2002, posting its biggest losses against currencies of the major developed countries. Since late January 2002, for example, the dollar has lost 41 percent of its value against the Euro. A more realistically valued dollar immensely improves the competitiveness of U.S. manufactured goods in the world markets. It directly increases the dollar price of U.S. imports. Likewise, it directly lowers the foreign-currency prices of U.S. exports. This will increase foreign demand for our exported goods and, thereby, potentially increase their dollar prices overtime.

These price effects are important; they foster the adjustment in our international trade and financial accounts. U.S. exports have risen 9.3 percent annually over the past two years. A narrowing of the U.S. trade deficit has added, on average, 0.5 percentage point per quarter to economic growth over that period. Trade is being counted upon heavily to provide support through this year's economic weakness. The strong U.S. dollar policy was implemented by then U.S. Treasury Secretary Robert Rubin, in the late 1990s. In 2002, the Bush administration began reversing the policy and devaluing the dollar in response to demands by U.S. manufacturers. In some applications, NTMA maybe be a second or third tier supplier, unaware the final customer is located off-shore. Overall, since 2002, U.S. exports have doubled.

New Orders

Data collected by the U. S. Census Bureau showed new orders for manufactured goods in December increased $10.1 billion, or 2.3 percent, to $441.6 billion, and is generally consistent with the ISM data. That marks the sixth of the last seven months it has been up. It is also the highest level since the series was first stated on NAICS basis in 1992 and followed a1.7 percent November increase.

Shipments, down following three consecutive monthly increases, decreased $1.2 billion or 0.3 percent to$427.5 billion. This followed a 1.3 percent November increase. Unfilled orders, up 31 of the last 32 months, increased $20.0 billion or 2.5 percent to $808.7 billion. The unfilled orders-to-shipments ratio was 5.43, up from 5.31 in November. Inventories, up 10 of the last 11 months, increased $4.0 billion or 0.8 percent to $528.1 billion. This was also at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 0.7 percent November increase. The inventories-to-shipments ratio was 1.24, up from 1.22 in November.

Unfilled Orders

Unfilled orders for manufactured durable goods in December, up 31 of the last 32 months, increased $20.0 billion, or 2.5 percent, to $808.7 billion.

Consumer Confidence

The Conference Board Consumer Confidence Index, which had improved moderately in December, gave back the gain in January. The Index for January was 87.9 (1985=100), down from 90.6 in December. The Expectations Index declined to 69.6 from 75.8. The Present Situation Index, however, increased to 115.3 from 112.9 in December. According to the conference board, Consumers' appraisal of current business conditions is becoming more negative and their assessment of the job market, while slightly less negative than in December, is more negative than a year ago.

Furthermore, they said consumers are quite downbeat about the short-term future and a greater proportion expect business conditions and employment to deteriorate further in the months ahead. According to the other key consumer sentiment measure, the Reuters/University of Michigan Surveys of Consumers, U.S. consumers' mood brightened in early January, but was still significantly less optimistic than a year earlier. The Surveys of Consumers index of confidence rose to 80.5 from December's 75.5.According to the report, the data were consistent with personal spending growth of 2 percent in 2008, starting with about a 1 percent growth rate in the first quarter and rising through the rest of the year, the survey reported.

Corporate Profits

Profits from current production remain strong. Although some slight softening is expected, corporate businesses will still be adequate for solid spending in the current year.

Factory Capacity Usage and Industrial Production

Factory capacity utilization continues to be fairly good, although computer and electronic products and motor vehicles and parts did show some signs of weakness.

Semiconductors

A report by iSupply, a California-based research firm, projects global semiconductor sales to rise to $291.36 billion in 2008 from an estimated $270.93 in 2007. The firm expects the first half of 2008 to be extremely weak. According to Semiconductor Equipment and Materials International (SEMI), global semiconductor manufacturing capacity is projected to grow by about 11 percent in 2008, which is consistent with the numbers reported in the October 2007 edition of the report. Memory still retains the largest share of total fabrication capacity and is expected to increase this year to 41 percent from 38 percent in 2007.

Aerospace

The Aerospace Industry Association forecasts that U.S. Aerospace sector will grow 6 percent, or $12 billion, to a record $210.6 billion in 2008.The increase will be driven primarily by increased delivery of civil aircraft, engines and related parts and components. Deliveries of civil transports will likely top 480 aircraft for a value of $33.5 billion, and general aviation-particularly business jets-will add another $12.8 billion. Looking beyond 2008, the current backlog of commercial aircraft orders indicates the civil aircraft sector will continue on an upward trajectory for at least an additional three or four years.

Equipment Manufacturers

The Association of Equipment Manufacturers data reflect the sharp increase in sales for farm tractors (3,664 units) and a 15 percent increase in combines, some of which is attributable to the increasing growth of new ethanol operations.

Manufacturing Technology

December U.S. manufacturing technology consumption totaled $400.31 million, according to the Association for Manufacturing Technology and the American Machine Tool Distributors' Association. This total, as reported by companies participating in the U.S. Machine Tool Consumption program, was up 7.5% from November, and up 20.9% from the total of $331.23 million reported for December 2006. With a year-end total of $4,261.47 million, 2007 was up 8.0% compared with 2006.

National Tooling and Machining Association, 9300 Livingston Road, Ft. Washington, MD 20744, 800-248-6862, Fax: 301-248-7104,www.ntma.org.