Another slow year ahead before things start to improve in 2010

Diesel Progress North American Edition, Sept, 2008 by Frank Manfredi

It's time to read the tea leaves again. How time flies! When I reviewed what was predicted in this space last year, it was accurate about the direction of the economy. Food commodity inflation went up. Mineral commodity inflation was up too--both as expected. I also predicted that the Fed would pursue a stimulative interest rate policy. To say the least it has followed a very, very accommodative monetary policy by continually reducing rates and providing credit to financial firms that succeeded in stabilizing worldwide markets and restoring some confidence to the financial world.

The subprime "problem" has proven to be much greater than anyone imagined. It turns out the whole world went to U.S. MBA schools and learned to evaluate risk exactly the same way. Bonds backed with subprime mortgages were bought without question by financial institutions all over the world. I predicted that central banks around the world would spend 2008 regaining investor confidence. Regaining that confidence has been more difficult than anyone imagined it would be.

The debate is destined to go on endlessly about whether the Fed actions were too little, too late. And, it remains to be seen if the Fed "fixes" will stick. The situation is still very tenuous. All I can say is let's hope it works.

At this time last year I predicted that U.S. machinery markets would remain at about the same level as in 2006. By year end it was obvious that U.S. markets would go considerably lower than 2006. In fact, I estimate that overall the markets were down about 15%, with some product categories in freefall. Articulated truck sales, for example, were down about 32% and telehandler sales slumped about 25%.

Equipment manufacturers that have a global footprint are doing very well right now. The downturn in their North American revenues is being more than offset by good returns from their overseas businesses. Business in the BRIC countries--Brazil, Russia, India and China--is phenomenal. I usually include the Commonwealth of Independent States (CIS) in with Russia when I speak of this group.

Those four developing regions have nearly half the world population. As they attempt to increase their standard of living, which includes improving their diet by consuming more protein, they are stretching the world's resources to the limit. Because of the growth efforts of this group of countries I believe it is likely we will have high commodity prices for the foreseeable future. During 2009 there will continue to be tremendous upward pressure on metals and energy prices.

Forecasting the U.S. market, however, is always difficult and it's been made more so this year by the election rhetoric and the constant emphasis on negative news we hear every day, all day. We've talked ourselves into recessions before and it's likely that we'll do it again. Watch and listen carefully for a change to positive media rhetoric after the November election (especially if a Democrat is elected).

U.S. machinery markets slumped again in 2008 by another 10% compared with 2007. I forecast that they will fall again slightly in 2009 compared with 2008. The markets will decline the most in the first half of 2009 and then improve in the second half. The quarterly comparisons will become easier because most of the 2008 decline was in the first half. I now believe that there will not be real year-over-year growth comparisons until 2010.

As the U.S. market reaches bottom, I expect the European and Japanese markets to trend downward too. Forecasters in both regions are busy cutting their 2008 outlooks. It is likely Europe will move in the same direction as the U.S., only one year later. Japan will do the same thing.

The wild card for global manufacturers is China. The main question is, will (or can) the Chinese government continue to spend huge sums on infrastructure after the Olympics are over?

In the final analysis, everyone should realize that the industry we have chosen to live in is cyclical and always will be. During this current cycle, I think we will reach a worldwide peak in 2009. In the U.S., things won't really start improving much until 2010.

Frank Manfredi is president of Manfredi & Associates, a marketing research firm that publishes the machinery Outlook newsletter.

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