IHS ECONOMICS & COUNTRY RISK Global Economics & Country Risk Conference US Economic Outlook How long will the ride last? November 2014 ihs.com Douglas Handler, IHS Chief US Economist, +1 781 301 9283, doug.handler@ihs.com 2014 IHS
US Outlook/ November 2014 Executive Summary - economic growth accelerates a notch from 2.2% in 2014 to 2.6% in 2015 Adverse demographics drive labor force supply and household formation Energy and gasoline prices create a consumer dividend, but somewhat eroded by high food prices and adverse international trade conditions International trade will determine whether future US growth is merely average or better or worse than average Productivity and capital spending drive next year s gains Risks to the forecast: Slower non-us growth affect exports Faster domestic growth and a rising dollar promote import substitution Demographic impacts prove to be deeper than originally thought Productivity growth remains recession-like Adverse reactions to prospective Fed tightening in 2015 damage consumer and business sentiment 2014 IHS 2
Excluding the trade and government sectors, economic growth isn t looking too bad Real GDP growth measures (annualized percent change) US Outlook/ November 2014 6 4 2 0-2 -4-6 -8-10 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: IHS Real GDP 2014 IHS 2014 IHS 3
Fourth quarter real GDP growth will be dragged down by exports and defense spending surges from q3 Contributions to real GDP growth US Outlook/ November 2014 Annualized percentage change 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 4.6 3.5 2.0 2.3 2.2-2.1 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 Real GDP Consumer spending Fixed investment Housing Inventories Exports Imports Government Source: IHS 2014 IHS 2014 IHS 4
Looking forward, we will still be counting on consumer spending to drive the bulk of economic growth Contributions to real GDP growth US Outlook/ November 2014 Annualized percentage change 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 1.6 2.8 2.6 2.3 2.2 2.2 2011 2012 2013 2014 2015 2016 Real GDP Consumer spending Fixed investment Housing Inventories Exports Imports Government Source: IHS 2014 IHS 2014 IHS 5
US Outlook/ November 2014 Employment, Inflation, and Interest Rates 2014 IHS 6
Is the labor market getting tight enough to drive wage pressures? Job creation and the unemployment rate US Outlook/ November 2014 Number of new jobs (000s) 600 500 400 300 200 100 0-100 -200 2010 2011 2012 2013 2014 11 10 9 8 7 6 5 4 3 Unemployment rate (%) Employment growth Unemployment rate Source: IHS 2014 IHS 2014 IHS 7
US Outlook/ November 2014 Where did the labor force growth go? Absolute labor force growth (12-month change, 16+ 000s) 5,000 4,000 3,000 2,000 1,000 0-1,000-2,000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: IHS 2014 IHS 2014 IHS 8
US Outlook/ November 2014 Is the labor market tight or loose? This determination will drive the timing and magnitude of Fed actions Cyclical Issues (Loose) Resolved with improved economic growth Inadequate wages High incidence of parttime employment High long-term unemployment Structural Issues (Tight) Mismatches between labor supply and demand that will not change in the immediate future Aging labor force Skills gaps Poor mobility Lower participation rates 2014 IHS 9
US Outlook/ November 2014 There are two distinct problems with the labor force: its growth has slowed and fewer people are participating Employment and labor 160 Before the recession: 1.5 million / year pace After the recession: 0.35 million / year pace 68 Labor force (Millions) 155 150 145 140 67 66 65 64 Percent of labor force 135 1 percentage point = 1.6 million workers 63 130 2000 2002 2004 2006 2008 2010 2012 2014 62 Source: IHS Labor force (Left) Participation rate (Right) 2014 IHS 2014 IHS 10
We re aging, and entering cohorts with lower participation rates US Outlook/ November 2014 Labor force size (millions) 20 18 16 14 12 10 8 6 4 2 0 16-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+ 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Participation Rate (2013, % of labor force) Age cohort 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Particip. % 2014 IHS 11
Only the services areas are materially adding jobs Employment before and after the recession (millions) US Outlook/ November 2014 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0-2.5 Goods Services Government Change during recession * Change since end of recession * *=Recession period: December 2007 through June 2009 Source: IHS Losses from recession: 7.4 million Changes since recession end: 8.7 million 2014 IHS 2014 IHS 12
US Outlook/ November 2014 Recent job creation is skewed toward the lower-income occupations Recent job growth and average weekly earnings Number of jobs (000s) 800 700 600 500 400 300 200 100 0 Overall average weekly earnings $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Average weekly earnings # of new jobs over past 12 months (bars, 000s, left axis) Average weekly earnings (squares, right axis) 2014 IHS 13
US Outlook/ November 2014 No discernible inflation pressures here Average hourly earnings (% change versus year-ago) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 2011 2012 2013 2014 Source: IHS Why are wages not rising? Sector mix new jobs created in lower-paying fields Experience displacement more experienced employees being replaced by less experienced ones Pent up wage deflation sticky wages prevented full wage adjustments from occurring during the recession 2014 IHS 2014 IHS 14
but maybe a little bit of new inflation here? It s probably too soon to say for sure Employment cost indexes (% change versus year-ago) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 US Outlook/ November 2014 0.0 2007 2008 2009 2010 2011 2012 2013 2014 Total Compensation Wages and Salaries Benefits 2014 IHS 15
US Outlook/ November 2014 Here s what the Fed is looking at to identify inflation Personal consumption price deflators (% change versus year-ago) 5.0 4.0 Fed 2% threshold 3.0 2.0 1.0 0.0-1.0-2.0 2007 2008 2009 2010 2011 2012 2013 2014 All goods and services Excluding food and energy Source: IHS 2014 IHS 2014 IHS 16
Monetary policy status quo maintained through mid-2015, although long-term rates will rise as expansion gathers steam Interest rate outlook (percent) 6 US Outlook/ November 2014 5 4 Fed tapering 3 2 1 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Near zero rates end June 2015 Source: IHS Fed funds rate 10-year treasury 2014 IHS 2014 IHS 17
US Outlook/ November 2014 The IHS federal funds forecast has lower rates for 2015-16 than the FOMC s dot plot results Target 2014 2015 2016 2017 Longer run 4.375, 4.500 * 4.125, 4.250 ** ** 3.875, 4.000 **** **** ***** 3.625, 3.750 *** ****** 3.375, 3.500 * ** *** 3.125, 3.250 * *** * 2.875, 3.000 * *** 2.625, 2.750 * * 2.375, 2.500 ** 2.125, 2.250 ** 1.875, 2.000 **** * 1.625, 1.750 * * 1.375, 1.500 *** 1.125, 1.250 ** * 0.875, 1.000 * *** 0.625, 0.750 0.375, 0.500 * * 0.000, 0.250 ******** ******** ** FOMC median (annual endpoint) IHS Forecast Number of FOMC participants 2014 IHS 18
US Outlook/ November 2014 Household formation 2014 IHS 19
US Outlook/ November 2014 Household formation has surprisingly downshifted Household formation q1-to-q1 change 2.5 2.0 Why are households not forming? 1.5 Poor wage growth Slower immigration 1.0 Lower marriage rates 0.5 Limited access to credit Degraded mobility 0.0 Student loan burdens -0.5 Measurement issues 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2014 IHS 20
Non-US citizen household formation is a significant contributor to the total Household formation q1-to-q1 change US Outlook/ November 2014 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0-500,000 2008 2009 2010 2011 2012 2013 2014 Total Non-US citizens 2014 IHS 21
US Outlook/ November 2014 Consumer, business and government spending 2014 IHS 22
Overall mortgage debt has come down, but financial obligations will increase as interest rates increase Debt and debt payments (share of disposable income, %) US Outlook/ November 2014 120 100 80 60 40 20 0 20 18 16 14 12 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Outstanding Nonmortgage Consumer Debt Outstanding Mortgage Debt Monthly Financial Obligations* Interest payments, rent, auto lease payments, homeowners insurance and property tax Source: IHS 2014 IHS 2014 IHS 23
It s time to save for retirement US Outlook/ November 2014 Savings rate (share of disposable income, %) 14 12 10 8 6 4 2 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 2014 IHS 24
US Outlook/ November 2014 The federal budget deficit is now unproblematic Federal budget balance sheet (percent of GDP) 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 2.8% of GDP 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Revenues Expenditures Deficit 2014 IHS 25
Productivity will increase in 2015 16, but still remain sub-par Productivity growth (output / hour, year-over-year change) 5.0 US Outlook/ November 2014 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 What happened to productivity growth? Recent job growth skewed to services that are labor intensive General investment levels still low; long lags involved with technology investments Innovation and risk taking limited 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2014 IHS 26
US Outlook/ November 2014 Energy 2014 IHS 27
Imports will supply only 12% of US energy requirements by 2024, down from 20% in 2014 US Energy Trade Balance 140 120 US Outlook/ November 2014 Quadrillion BTUs 100 80 60 40 20 0 2006 2009 2012 2015 2018 2021 2024 Oil & Natural Gas Nuclear, Hydro & Other Energy Imports Energy Demand Source: IHS 2014 IHS 2014 IHS 28
Every $10/barrel decline in oil prices creates a $23bn gasoline dividend for consumers 450 400 350 300 250 200 150 100 50 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Cents / gallon Nominal consumer spending on gasoline ($ billions) Real consumer spending on gasoline ($ billions) US Outlook/ November 2014 2014 IHS 29
US Outlook/ November 2014 Impact of a drop in oil prices from $112 / barrel in June to $83 today Adds 0.4% to real GDP over 2014 and 2015 Most from redeployed consumer spending, particularly to lower- and middle-income households Additional effects from improved consumer sentiment and reduced business costs Timing about evenly divided between 2014 and 2015 Includes offsetting impact of reduced drilling investment and increased imports Economic benefits not linear as additional declines in prices will trigger disproportionate production impact 2014 IHS 30
US Outlook/ November 2014 Contributions from unconventional energy sources will continue to add to US GDP US Imports of Petroleum Products (billions of 2009 dollars) 350 300 250 200 150 100 50 0 1995 2000 2005 2010 2015 2020 US Mining and Petroleum Structures (billions of 2009 dollars) 180 160 140 120 100 80 60 40 20 0 1995 2000 2005 2010 2015 2020 2014 IHS 31
US Outlook/ November 2014 International Economic Growth and US Trade 2014 IHS 32
Stronger interest rates and relative economic growth point to an increase in the dollar Major trading partner exchange rate (inflation adjusted, 2009=1.0) 1.5 1.4 1.3 1.2 1.1 1.0 0.9 US Outlook/ November 2014 0.8 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: IHS 2014 IHS 2014 IHS 33
Modest increases in the trade deficit are expected beginning in the second half of 2015 Contribution to real GDP growth (percentage points) 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 US Outlook/ November 2014-2.0 2013 2014 2015 2016 Exports Imports 2014 IHS 34
US Outlook/ November 2014 Economic growth will not be a factor to drive exports Country / Region Share of Exports Export growth (2014 vs. 2013 thru Aug YTD) 2014/2013 q4/q4 real GDP growth 2015/2014 q4/q4 real GDP growth World 100.0% 3.2% 2.6% 3.3% Canada 19.2% 3.6% 2.3% 2.6% EU 17.3% 8.0% 0.8% 1.6% Mexico 14.8% 6.6% 3.6% 3.5% China 7.2% 6.2% 7.2% 7.1% Japan 4.2% 4.7% 1.1% 0.4% S. Korea 2.8% 10.6% 2.8% 3.8% Brazil 2.7% -3.4% -1.0% 3.1% Hong Kong 2.4% -7.1% 2.8% 3.3% Singapore 1.9% -0.6% 4.0% 3.8% Australia 1.7% 2.8% 2.5% 3.4% 2014 IHS 35
US Outlook/ November 2014 Several key US industries could be impacted if a steep economic downturn occurs in Europe Key merchandise exports to Europe ($bn) 2010 2013 % change Aircraft and parts (civilian) 24.9 32.8 31.7 Pharmaceutical preparations 23.0 22.9-0.5 Medicinal equipment 10.0 10.0 0.8 Passenger cars 6.6 9.9 50.4 Fuel oil 2.4 9.4 290.6 Chemicals - organic 8.5 7.8-8.3 Industrial machines 5.8 6.4 11.5 Chemicals - other 5.7 6.0 5.8 Apparel, household goods non-textile 5.1 5.9 15.2 2014 IHS 36
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HOUSING OUTLOOK IHS David Crowe Chief Economist
Primary Points Recent activity Employment & housing First time buyers Forecasts
Recent Activity
Recent Housing Activity Housing starts 985 1,024 1,100 900 700 (000s) 554 587 609 781 245 925 307 897 314 925 928 950 339 315 1,063 414 984 350 909 316 1,098 446 957 318 1,017 371 500 109 116 178 300 445 471 431 535 618 583 589 635 649 634 593 652 639 646 100 (100) 2009 2010 2011 2012 2013 Jan Feb Mar Apr May Jun Jul Aug Sep Single-family Multifamily Source: Census
Recent Housing Activity Home sales 4,969 6,000 5,000 4,000 5,167 4,147 4,244 4,029 4,092 4,496 4,914 4,507 4,474 4,472 4,443 4,483 4,700 4,778 4,839 4,944 4,936 5,027 3,000 2,000 4,398 3,665 3,870 3,708 3,786 4,128 4,484 4,050 4,040 4,040 4,070 4,320 4,430 4,540 4,470 4,560 1,000 0 769 482 374 321 306 368 430 457 432 403 413 458 409 404 466 467 2007 2008 2009 2010 2011 2012 2013 Jan Feb Mar Apr May Jun Jul Aug Sep New Single-family Existing Single-family Source: Census and NAR
New Homes Share of All Sales 0.2 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 Average = 16% 9.2% 7.5% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014YTD Source: Census and NAR
Employment & Housing
Employment vs Single-family Permits 2009-2013 25% ND 20% Change in Employment 15% 10% 5% 0% -50% 0% 50% 100% 150% 200% 250% -5% Change in Single-family Permits
Unemployment Rates Falling, but young people are more likely to be unemployed than their older peers. 15% 15% 20-24 years old 12% 9% 6% 10% 9% 8% 25-34 years old All 35-44 years old 11% 7% 6% 5% 3% 0% Q2.11 Q3.11 Q4.11 Q1.12 Q2.12 Q3.12 Q4.12 Q1.13 Q2.13 Q3.13 Q4.13 Q1.14 Q2.14
First Time Buyer
Trend in Home Sales Shrinking market especially new 6,500,000 6,247,978 5,500,000 5,265,441 5,517,492 5,324,690 4,500,000 4,214,734 4,081,213 3,500,000 3,253,301 2,500,000 1,500,000 500,000-500,000 2001 2003 2005 2007 2009 2011 2013 1st Time New 1st Time Existing Repeat New Repeat Existing Source: AHS
Shift in Total Home Sales New share went from 20% to 10% 1st Time New 6% 1st Time New Repeat 3% New 7% Repeat New 15% Repeat Existing 46% 47% Repeat Existing 54% 20% 1st Time Existing 36% 1st Time Existing 33% 2001-2007 average 5.6 million sales/yr Source: AHS 2013 4.1 million sales
Homeownership Rates Falling for age groups but rising as households age 70 65 60 55 50 45 40 35 53.5 39.8 40.0 55.8 48.1 30 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2Q 2014 25-29 30-34 35-39 Source: HVS
Real Income Changes by Age Group 15% 10% 11% 12% 5% 0% -5% -10% -15% -4% -8% 1% 1% -7% -9% 0% -11% 15 to 24 years 25 to 34 years 35 to 44 years 45 to 54 years 55 to 64 years 65 years and over % change: 2007-2013 % change: 2012-2013 -3% 4%
4. Head Winds Land Labor Capital Materials
Housing Starts (Area) and Low/Very Low Lot Supply (Bars) Starts (000s) Low Supply 60% 2,000 50% 1,500 1,000 500 40% 30% 20% 10% 0 0% 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
Housing Starts (area) and % Reporting Labor Shortage Starts (000s) Shortage 2,000 60% 50% 1,500 40% 1,000 30% 20% 500 10% 0 0% 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Share of Builders Who Lost Sale Because Buyer Could Not Qualify 60% 57% 50% 44% 40% 30% 20% 10% 0% Jan-13 Jan-14
Developers and Builders Seeking Credit 80 70 60 50 40 30 20 10 0 2009 2010 2011 2012 2013 2014 Acquisition Development Construction
Builders Experiencing Price Increases in Last 6 Months Gypsum wall board Ready-Mix Cement Framing lumber Trusses Plywood OSB Windows & Doors Cabinets Roofing materials Millwork Insulation material Steel Beams HVAC eqpt Concrete brick&block Copper wiring Hardwood flrg Plumbing fixtures & fittings Vinyl siding Clay brick Steel (Lgtwgt) Ceramic Tiles SIPs 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Forecasts
Remodeling Market Index (RMI) At or above 50 for most of last two years 60 57 55 50 45 40 35 30 25 20 22
Residential Remodeling 180 Billions 2009 $, SAAR 160 140 YR 4Q/4Q Chg 2011 4.5% 2012 2.8% 2013 3.1% 2014-3.4% 2015 2.7% 2016 1.3% Actual Adjusted 120 100 80 60 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Multifamily Production Index 2+ years at or above 50 70 60 58 50 40 30 NAHB MMI (L) 20 10 16
Multifamily Housing Starts Healthy Response from Growth in Renters 550 500 450 400 350 Thousands Avg=339,000 1995-2003 331,000 Normal 2011 178,000 2012 247,000 39% 2013 309,000 25% 2014 356,000 15% 2015 356,000 0% 2016 364,000 2% 2016Q4: 109% 300 250 200 76% fall 2014Q3: 114% of Normal 150 100 50 0 Trough to Current: 4 th Q 09 = 82,000 3 rd Q 14 = 378,000 +361% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
80 NAHB/Wells Fargo Housing Market Index Builder sentiment recovers from recession s depth, recent winter 70 60 50 54 40 30 20 HMI 10 0 8 14
2,000 1,800 1,600 1,400 1,200 Single-Family Starts Continuing to recover Thousands of units, SAAR 2000-2003 1,343,000 Normal 2011 434,000 2012 537,000 24% 2013 621,000 16% 2014 637,000 2% 2015 802,000 26% 2016 1,101,000 37% 2016Q4: 90% 1,000 800 600 80% fall 2014Q3: 48% of Normal 400 200 0 Trough to Current: Mar 09 = 353,000 Sep 14 = 646,000 +83% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Questions? Answers: www.housingeconomics.com eyeonhousing.org dcrowe@nahb.org
U.S. Manufacturing Outlook Presented by: Dan Meckstroth, Ph.D. Vice President and Chief Economist dmeckstroth@mapi.net
Manufacturing Job Growth Slower, But Unemployment Is Lower Manufacturing Job Growth Percent Change in a 12-Month Moving Average(Year/Year) 2 1 0-1 -2-3 -4-5 -6-7 -8-9 -10-11 -12 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Unemployment Rate Percent 14 13 12 11 10 9 8 7 6 5 4 3 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Total Manufacturing Total Manufacturing Source(s): U.S. Bureau of Labor Statistics and MAPI
Manufacturing Capacity Utilization Close to Previous Peak Manufacturing Capacity Utilization 85 Capacity Utilization By Industry Percent Percent of Capacity 80 75 70 65 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Industry Sep. 2014 Dec. 2007 Peak to Aug. Manufacturing 77 79-2 Motor vehicle, pts. 81 71 10 Food 82 80 2 Plastics, rubber 79 77 2 Communication eq. 76 75 1 Wood product 71 71 0 Chemical 77 77 0 Petroleum 85 85 0 Machinery 81 83-2 Paper 83 86-3 Primary metal 80 84-4 Electrical eq. 85 90-5 Fabricated metal 81 86-5 Semiconductors 70 78-8 Aerospace 79 91-12 Source(s): Federal Reserve Board and MAPI
A Cyclical Recovery in Manufacturing Share of GDP; Number of Plants Starting to Level Out U.S. Manufacturing Plants and Share of Economic Output 380 17 Thousands of Manufacturing Plants 370 360 350 340 330 320 310 16 15 14 13 12 11 10 Percent of GDP 300 9 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Manufacturing's Share of GDP Number of Manufacturing Plants Source(s): U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics and MAPI
Corporations Have the Cash to Make Investments Non-Financial Corporate Profits 1100 1000 Billions of Dollars 900 800 700 600 500 400 300 200 100 2008 Q1 2008 Q3 2009 Q1 2009 Q3 2010 Q1 2010 Q3 2011 Q1 2011 Q3 2012 Q1 2012 Q3 2013 Q1 2013 Q3 2014 Q1 2014 Q3 Non-Manufacturing* Manufacturing* Income From Foreign Affiliates *Domestic profits only. Source(s): U.S. Bureau of Economic Analysis and MAPI
Consumers Spending Provides the Base, Acceleration From Investment and Materials Manufacturing Production by Demand Sector 20 15 10 Percent Change 5 0-5 -10-15 -20 2009 2010 2011 2012 2013 2014 2015 2016 Consumer-Driven Investment-Driven Material-Driven Source(s): MAPI
U.S. Manufacturing Is Recovered Manufacturing Industrial Production 105 100 Index 2007=100 95 90 85 80 75 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Total Manufacturing Non-High Tech Manufacturing Source(s): Federal Reserve Board and MAPI
Slow Business Productivity Growth, Manufacturing Somewhat Faster Productivity Growth Percent Change (Year/Year) 9 8 7 6 5 4 3 2 1 0-1 -2-3 -4-5 -6 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 Manufacturing Non farm business Sector Source(s): U.S. Bureau of Labor Statistics
Trade Deficit in Goods More Negative Manufacturing Trade Deficit 0-100 -200-300 -400-500 -600-700 -800 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Cumulative Billions of Dollars 2013 2014 Source(s): U.S. International Trade Commission and MAPI
Porter Finds U.S. Very Competitive, Weaknesses Are Policy Driven United States National Competitiveness Factor Conditions Strengths: Workforce: very large, well-educated, skills-diverse. Finance Capital: high risk capital availability; highly-developed capital markets Infrastructure: extensive physical infrastructure systems including transport, water & sewer, energy, information & communications. Weaknesses: Infrastructure: aging systems losing reliability; D+ grade by ASCE Administration: highly-fractured governance; highly complex permitting and regulatory inconsistency Source(s): Michael Porter, Harvard Context for Strategy and Rivalry Strengths: Inter-firm competition: huge, highly-productive private sector; home to most MNCs; intense entrepreneurship culture; ranked 4 th by World Bank for Doing Business ; 7 th in GCI Openness: most sectors highly exposed to foreign competition; ranked 10 th in economic freedom IP Protection: highly-developed, well enforced IP institutions and laws Flexible labor markets: ranked 6 th in GCI Weaknesses: Taxation: comparatively high levels of corporate taxation Political Leadership: Partisan gridlock weakens economic policy development and coordination. Related and Supporting Industries Strengths: Clusters: multi-sector, multi-regional traded cluster development Innovation and R&D: high-levels of public and private R&D investment; high patent activity Export sector: suppliers compete globally Weaknesses: Focused on policy lobbying rather than industrial cooperation Demand Conditions Strengths: Market Size: world s largest consumer market; low savings rate; extensive commercial infrastructure; ranked 1 st in GCI Government Demand; high levels of government procurement activity Sophisticated demand: high quality, safety, and environmental standards; extensive consumer protections Weaknesses: GDP: long-term real GDP growth decline Consumer confidence: economic pessimism driving increase in savings
U.S. Operating Costs Fall Relative to Advanced Countries Manufacturing Unit Labor Costs in Selected Countries (percent change 2002-2012) -50 0 50 100 150 200 Australia Canada Italy France Netherlands Germany U.K. Japan U.S. Taiwan Source(s): The Conference Board
Economics Is Moving In Favor of U.S. Production Economic Reasons For More Local Sourcing Versus Offshoring o Value of the dollar-down 17% against broad currencies since 2002 o U.S. manufacturing unit labor costs fell over the last 10 years o Cost of shipping-air, truck, ocean long distances o Very low natural gas price in the U.S. o Rapid increase in labor costs in China (developing countries) o Customer demand for just-in-time delivery and collaboration o Natural disaster supply disruption-tsunami, earthquake, volcano, flood
The Other Costs of Offshoring Vendor Costs o The cost of adding a new supplier o The travel costs to visit suppliers or vice versa o Can low cost country suppliers keep you ahead of your competition o The difficulty in managing an extended supply chain o High turnover? The time/money training low cost country suppliers o Legal cost and intellectual property protection in low cost countries Usage Costs o Additional inventory in the supply chain o Quality or delivery issues could shutdown your plant o The cost of rework or warranty costs o Speed to market o R&D capabilities o Tooling Transaction Costs o Need for expediting o Freight cost, tariffs, insurance o Inspection costs
More Domestic Sourcing and/or Rising Export Share Is the Key to A Manufacturing Revival Manufacturing Import Share of Intermediate Purchases of Manufactured Goods 25 Percent That Are Imports 20 15 10 5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source(s): U.S. Bureau of Economic Analysis and MAPI