A leading economist predicts that when 2010 ends, most will look at the year as one in which progress was made, but “it will not be champagne-cork-popping time -- more like wine-box-opening time.”
“Throughout the past year or so, there has been a steady assertion from most analysts that 2010 will be a time of economic recovery, but it will be a slow rebound,” says Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, International (FMA). “Many regions of the country will not see much progress until late in the year and some industries will do better than others.”
In the current FMA economic update newsletter Fabrinomics, Kuehl outlines four pieces of good news and three notes of caution. Positive trends include:
- Growth in both service sector and manufacturing. Kuehl cites an upward trend from the Credit Managers’ Index (CMI) prepared by the National Association of Credit Managers and Purchasing Managers’ Index (PMI) from The Institute of Supply Management. “The PMI and CMI measure both manufacturing and service sectors and both of these key sectors are growing,” he says.
- Employment numbers have started to stabilize. According to Kuehl, job losses peaked in the early part of 2009 and the rate of unemployment shrank a bit in the latter part of the year -- falling from 10.2 percent to 10 percent. “Layoffs have declined and within a couple of months there should be enough new hires to offset any new layoffs,” he says.
- Access to credit from banking sector improving. Access to credit remains the lifeblood of the economy. “The really important news for the manufacturing industry is that community banks and regional banks have become a bit more aggressive,” says Kuehl. “This will not help big business very much, but these are the banks that loan to and service mid-sized and smaller businesses.”
- Next economic threat still seems pretty distant. According to Kuehl, two main fears -- massive inflation and a second recession -- will likely be avoided. “Because banks have been hurting, they have not pushed much money into the economy, limiting inflation,” he says. “Once the economy begins to grow on its own, the Fed can raise interest rates to fight inflation without triggering another recession.”
Kuehl balances the optimism with three points of caution:
- Recovery depends on right sequence of events. “If the inflation threat manifests itself sooner than expected, the Fed will need to yank in the reins sooner than it wants to and the economy will start to stutter,” says Kuehl. “The wild card in all this is that the U.S. is in the grips of an election year and there will be many politically charged decisions that will affect business.”
- Demand growth brings potential for more expensive inputs. According to Kuehl, manufacturers had but one little bright spot in the past year -- lower fuel prices than expected -- but the price is likely to head up. “If the summer driving season is close to respectable, gas prices could climb an additional $1.00 to $1.50 per gallon over current prices,” he says. “There will be other commodity hikes as well that may have an impact on inflation concerns -- everything from metals to farm commodities.”
- Conservative shift of the financial system. “There are many provisions in Congress that will require more reserves, limit loans, and demand far more clarification when loaning,” says Kuehl. “Banks will be reluctant to engage until these issues are settled and that slows business dramatically.”
Kuehl asserts that most manufacturers will view 2010 as transitioning out of a recession as opposed to sliding into one.
“But the challenges are even greater at this point,” he says. “Businesses are weak and need the recovery to come soon. To the manufacturer this will be a time of opportunity as some of the traditional industries will get healthier again. The sectors that were doing relatively well in 2009 should keep growing in 2010: energy, health care, and some high tech.
“The construction sector will be in the doldrums for most of the year and that is a problem. The economy needs to see an end to this crisis and so does the manufacturing sector as it undergirds everything from building materials to the production of kitchen appliances.”