What about a Double-Dip?

U.S. economic growth in the first quarter was stronger than most forecasters expected, and the second quarter has also been pretty decent. But for many manufacturers, and the moldmakers who supply them, there is this nagging feeling that business activity may slow down in the second half of 2010. The question in the back of everybody’s mind is, “Is this current recovery sustainable, or are we headed for a second dip?”

Now business cycles tend to progress in waves, which means that the rate of expansion is not always smooth and constant. And it is prudent to expect that some segments of the manufacturing sector will perform better than others. For the record, I will state that I am not forecasting a double-dip. I do expect the growth rate in the overall economy to decelerate a bit from the level registered in the first half of this year. But U.S. economic growth will sustain a moderate pace for the rest of 2010, and it will gradually accelerate in 2011.

This forecast is based on several trends that have emerged in the first half of this year. First, demand for manufactured goods is improving even as all of the aforementioned fiscal supports and government programs are waning. This is demonstrated in the recent uptrend in the data on durable goods orders, and it is supported by the recent strong gains in leading indicators such as the Purchasing Managers’ Index and the Conference Board’s Index of Leading Indicators.

Second, profit levels for U.S. companies are rising, and this is resulting in rising asset values, stock prices, and plans for investment and hiring. One of the astounding developments of the past recession is that overall corporate profits for domestic manufacturers remained in positive territory through the entire downturn. The one major exception to this was the motor vehicle sector, but now even the auto makers are threatening to make some money. Profits are the life-blood of any economy, and as long as profit levels remain healthy, the economy will continue to recover.

And third, inventory levels are still lean. The strength of the demand from both consumers and manufacturers in the first few months of 2010 surprised most folks, and as a result, overall inventories are still below the actual level of sales. Thus, we remain in the early stages of the inventory cycle. This means that the need to restock will boost production levels in the coming months even if the overall pace of growth moderates.

Now make no mistake about it, this forecast is far from guaranteed. There are plenty of impediments to economic growth in the short- and long-term. These include, in the short-term: tight credit conditions, low home values, a high unemployment rate, rising materials costs and excess capacity. Solutions for the long-term issues are more complicated: need to resolve the two Ds (debt and deficits), and the four Es (energy, education, environment and entitlements).

The good news is that we still have time to identify and adopt the necessary solutions, as the economic recovery will continue for the rest of this year and beyond. North American manufacturers, including moldmakers, should be able to spend a little less time worrying about business in the immediate future and a little more time promoting long-term solutions.