Outlook 2008: Recovery or Recession?

Dec. 13, 2007
Will the new year bring new stability from 2007s economic rollercoaster? Metalcasting executives share with us their views of the future.
Housing, or more specifically, the downturn in the housing market, has been the big story of 2007. Slow growth in the domestic housing market is largely responsible for overall economic growth rising just 2.4%, the lowest increase in the past five years. Unfortunately, most experts expect this year’s downturn — the result of a slowing rate of new home sales and the more sudden, midyear reversal of the home loan market — to continue into 2008, which will certainly keep economic growth at a crawl.

The slowdown in housing, along with a drop in consumer spending and sluggish business investment, has had a negative impact overall on manufacturing. In fact, manufacturing production is up only 1.7%. Interestingly, however, eight manufacturing sectors—including primary metals—are considered to be in a recovery stage, which is defined as a period when growth has been negative over the preceding year, but increased production has occurred over the recent few months.

Despite that spot of good news, manufacturers in general are expected to see only modest growth next year, averaging 2.5% in 2008, a number that is significantly lower than the near 4% growth experienced from 2004-2006.

Another economic variable is the effect of imports. China continues to be a real threat to U.S. industry. Not only is China a rapidly growing economy, its industries are not required to meet the same standards as U.S. manufacturers: The almost continuous reports of Chinese product recalls during the past six months is evidence of that. Obviously, though, Chinese manufacturers have other advantages over U.S. companies, particularly in the area of health-care coverage (they don’t provide it for their workers), environmental regulation (it’s irregular, if it exists at all), and workforce development: At some Chinese companies, workers must commit to a 20-year stint before receiving training, certainly creative twist on developing company loyalty.

All these problems—the slow housing market, lack of consumer spending and business investment, or the booming economy in China—have weakened confidence in the U.S. economy, but are we headed for a recession?

Not necessarily. The standard definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. Using that test, many analysts believe that the U.S. economy will be able to avoid a true recession.

What the numbers reveal
With all these factors as background, Foundry Management & Technology turned again to executives and managers among our readers to get a sense of how metalcasters feel about the economic situation. Looking ahead to 2008, our respondents do not expect a significant economic rebound: in fact, most (38%) expect a decline and nearly as many (37%) predict things will remain the same.

Considering that most segments of the metalcasting market saw an increase in shipments over the course of 2007, staying the same would not be bad news, necessarily. Somewhat surprisingly, brass/bronze foundries saw the largest increase in shipments, with a net improvement of 9.1%, although many in that market segment explain that the market really could only go up at this point!

One respondent stated, “The decline in brass and bronze castings in this country is close to bottom, if not there already.”

Steel foundries took second place, with a net change of 4.1%. Aluminum casters also posted a slight increase of 2.8%. Both ductile iron and gray iron foundries saw shipments fall off compared to 2006, dropping 0.3% and 0.9% respectively.

Looking at the responses according to the size of operations, the smallest foundries fared the best. Those employing less than 20 people increased their shipments by 5.3%. None of the other employment categories saw increases over 2.5%, and the two largest segments — those employing 100-249, as well as over 250 —saw shipments improve by only 1.2%.

Surprisingly, the big boys are the most optimistic about the coming year, with those employing more than 250 looking to increase shipments in 2008 by 6.8%, while the smallest companies only expect to see an improvement of 2.2%. However, no matter how small or how large, all expect to see some slight rise in shipments.

Breaking the numbers down by metals cast, however, gray iron producers expect shipments to drop another 1% in 2008. All other segments expect some improvement: aluminum at 7.8%, brass/bronze and steel foundries tied at 3.5%, and ductile iron at 1.9%.

Let’s go shopping
A majority of the survey respondents (73%), both in terms of metals cast and operation size, expect to increase their capital spending in 2008. Steel foundries on average are looking to increase spending by 12.9%, and the largest foundries will raise their capital purchasing by a whopping 27.1%. Also expecting to do some shopping are aluminum producers, looking to spend 4.9% over 2007, and middlesized foundries, planning to up capital expenditures 8.5%.

How are these operations planning to spend their money? The results show that lift truck and loaders are at the top of the wish list, with 22.5% of respondents expecting to make purchases in that area. Also at the top of their lists are grinding equipment (21.1%), melting equipment (19.9%), robots and manipulators (15.9%), and pollution-control equipment (15.7%).

In terms of what concerns our readers, the leading issue once again is higher raw material costs (it was the top concern throughout 2007) and the respondents expect it to be the biggest problem next year, too. One reader explains, “The cost of raw materials, along with the mass exodus of quality scrap going overseas, makes it hard to predict and keep the cost of doing business in the range in which both the customer and the casting supplier can live …” .

Also heading the list of concerns for the second consecutive year are medical insurance and workers’ compensation costs, labor issues (the general labor shortage, as well as the lack of trained labor), and the increasing volume of imported castings.

The missing piece
Still another factor that will influence what kind of a year 2008 will be is the presidential election. Yes, it only seems like it should already be over, but there is nearly a year for metalcasters to put their concerns to the candidates and see what answers, if any, they have for the industry’s concerns. All their concerns present opportunities to influence the presidential contest, an event that by itself will dramatically impact the domestic economy and the metalcasting industry.