A Severe Global Manufacturing Recession

1
A Severe Global Manufacturing Recession

• Presented by
• Dan Meckstroth
• Chief Economist
• dmeckstroth_at_mapi.net

2
The Root of the Crisis--Misguided Policy, Greed,
Poor Decisions

• Taxpayer Relief Act of 1997
• Exempted 500,000 in home equity from personal
  taxation
• 1997 Asian Currency Crisis
• Developing countries central banks manipulated
  exchange rates to build currency reserves
• Global savings glut lowered mortgage rates
  (homebuyers) and fixed investment yields
  (domestic and foreign investors)
• Public Policy (for both Parties) to Increase
  Homeownership Rates, Especially by Minorities
• Pressure on Fannie and Freddie to lower lending
  standards
• Fannie and Freddie remained severely
  undercapitalized but able to borrow at below
  market rates
• Bush Administrations Financial Market
  Deregulation Philosophy
• Federal Reserve Policy to Clean Up After Bubbles,
  Not Prevent Them
• Financial Industry Creates and Brokers Complex
  and Opaque Derivatives
• Home Equity Loans Finance a Consumer Spending
  Spree

3
Vicious Circle of Financial Deleveraging
Rising losses in subprime markets
Source McKinsey Company
4
Credit Conditions Banks Tightening Business and
Consumer Lending Standards

• Senior Loan Officer Opinion Survey

Source Federal Reserve Board
5
The Financial Crisis Has Spread Worldwide

• World Stock Prices

Index, January 2007100
Source Yahoo Finance
6
Vicious Circle From Financial Sector to Real
Economy
Rising losses in subprime markets
Source MAPI
7
A Severe Decline in Household Wealth

• Housing Prices and Common Stock Prices

Source OFHEO, SP 500, MAPI FForecast
8
Home Equity No Longer Supports Spending
Mortgage Equity Withdrawal
Source Federal Reserve Board, Calculatedrisk.com
9
Overextended Consumer Confidence Plummets

• Consumer Confidence Index

Source University of Michigan
10
Consumers Drastically Cut Big-Ticket Spending
Motor Vehicles and Housing Starts
Source U.S. Bureau of Labor Statistics, U.S.
Bureau of Economic Analysis, MAPI FForecast
11
Widespread Job Loss in the Economy
Job Loss in the Recession
Dec. 07 to Jan. 09 Dec. 07 to Jan. 09 Dec. 07 to Jan. 09 Dec. 07 to Jan. 09 Dec. 07 to Jan. 09 Dec. 07 to Jan. 09
Industry 1000Jobs chg.1 of total2 Industry 1000Jobs chg.1 of total2
Total nonfarm -3572 -2.6 100.0 Wholesale trade -222 -3.7 4.3
Government 170 0.8 16.7 Other services -44 -0.8 4.1
Professional and business services -848 -4.7 12.8 Transportation and warehousing -202 -4.4 3.2
Health care and social assistance 447 2.9 11.9 Educational services 125 4.2 2.3
Retail trade -570 -3.7 11.1 Information -105 -3.5 2.2
Leisure and hospitality -266 -2.0 9.9 Real estate and rental and leasing -87 -4.0 1.5
Manufacturing -1064 -7.7 9.4 Mining 51 7.4 0.5
Construction -781 -10.4 5.0 Utilities 9 1.6 0.4
Finance and insurance -182 -3.0 4.4
1Change in jobs as a percent of the Dec. 2007
level 2Industry employment as a percent of all
jobs in Jan. 2009
Source U.S. Bureau of Labor Statistics, MAPI
12
Widespread Job Loss in Manufacturing
Job Loss in the Recession
Dec. 07 to Jan. 09 Dec. 07 to Jan. 09 Dec. 07 to Jan. 09 Dec. 07 to Jan. 09 Dec. 07 to Jan. 09 Dec. 07 to Jan. 09
Industry 1000Jobs chg.1 of total2 Industry 1000Jobs chg.1 of total2
Manufacturing -1064 -7.7 100.0 Paper -26 -5.6 3.4
Food manufacturing -20 -1.4 11.6 Primary metals -39 -8.7 3.2
Fabricated metal -137 -8.8 11.2 Semiconductors and electronic components -30 -6.7 3.2
Machinery -58 -4.9 8.9 Electrical equipment and appliances -20 -4.5 3.2
Chemicals -23 -2.7 6.6 Wood products -93 -18.7 3.2
Motor vehicles and parts -204 -21.3 5.9 Beverage and tobacco -4 -1.9 1.5
Plastics and rubber -72 -9.6 5.3 Computer peripherals -2 -1.1 1.4
Printing and support -57 -9.2 4.4 Apparel -30 -14.5 1.4
Nonmetallic mineral -53 -10.9 3.4 Textile product mills -15 -9.8 1.1
Electronic instruments -7 -1.5 3.4 Textile mills -29 -17.7 1.1
Furniture and related -86 -16.7 3.4 Communications equip. 0 0.3 1.0
Petroleum and coal -1 -1.0 0.9
1Change in jobs as a percent of the Dec. 2007
level 2Industry employment as a percent Mfg. in
Dec. 2007
Source U.S. Bureau of Labor Statistics, MAPI
13
Consumer Industries Led Manufacturing into
Recession
Consumer-Related Manufacturing Production
Percent Change Percent Change Percent Change Percent Change Percent Change Percent Change
Industry 2008 2009 2010 Industry 2008 2009 2010
Motor Vehicles Parts -14 -24 5 HVAC Equipment -12 -15 5
Petroleum Coal 0 -2 2 Textile Products -7 -9 -2
Plastic Products -4 -10 5 Paints, Soaps -1 -8 1
Logging -1 -20 2 Food 2 -1 1
Wood Products -13 -20 10 Apparel -5 -6 -5
Furniture -11 -15 3 Pharmaceuticals 1 -2 2
Source Federal Reserve Board, Global Insight
Model, MAPI
14
Excess Capacity in the Economy Depresses Capital
Investment

• Labor Unemployment Rate and Excess Factory
  Capacity

Source U.S. Bureau of Labor Statistics , Federal
Reserve Board, MAPI FForecast
15
Falling Capacity Utilization and Tight Credit
Conditions Drive Down Business Investment Spending

• Business Investment, Inflation-Adjusted

Source U.S. Bureau of Economic Analysis ,
MAPI FForecast
16
Capital Equipment Industries Were Pulled Into
Recession
Investment-Related Manufacturing Production
Percent Change Percent Change Percent Change Percent Change Percent Change Percent Change
Industry 2008 2009 2010 Industry 2008 2009 2010
Electrical Equipment 1 -11 1 Industrial Machinery -14 -14 4
Architectural Structural Metals -2 -19 -1 Commercial, Service Other Machinery 0 -14 2
Construction Machinery -7 -21 5 Forging and Stamping 2 -10 3
Engines Turbines -9 -11 5 Aerospace -1 7 4
Ag. Equipment -4 -3 3 Ship Boat Building -11 -17 -1
Mining and Drilling Equipment 13 -13 -24 Private Nonresidential Construction 12 -12 -17
Metalworking Machinery -2 -13 4 Public Construction 2 -1 5
Source Federal Reserve Board, Global Insight
Model, MAPI
17
Intermediate Industries Are In Recession
Material Manufacturing Production
Percent Change Percent Change Percent Change Percent Change Percent Change Percent Change
Industry 2008 2009 2010 Industry 2008 2009 2010
Paper -3 -8 0 Resins Synthetic -10 -15 5
Iron Steel -9 -33 5 Organic Chemicals -15 -15 7
Alumina Aluminum 0 -12 5 Inorganic Chemicals 3 -9 0
Glass 3 -15 4 Ag. Chemicals -4 -7 4
Source Federal Reserve Board, Global Insight
Model, MAPI
18
Declining U.S. Steel Production
U.S. Steel Production
U.S. Steel Production
Source Left Federal Reserve Board, Right
Federal Reserve Board FForecast
19
A Massive Federal Stimulus is On the Way
787 Billion Stimulus Package by Major Category
(Percent of Total)
Sources Joint Committee on Taxation, House
Committee on Rules, Congressional Budget Office
20
Infrastructure and Energy Projects, Education and
State Governments Receive the Most Funding
Major Categories of Discretionary Spending in
Stimulus Package (Billions of Dollars)
Sources Joint Committee on Taxation, House
Committee on Rules, Congressional Budget Office
21
US Dollar Appreciation and Global Recession Hurts
Exports Which Have Been a Pillar of Strength in
Manufacturing
U.S. Dollar Exchange Rates
World Trade Weight GDP Growth
Source Left Federal Reserve Board, Right
Federal Reserve Board FForecast
22
A Severe Manufacturing Recession
Non-High Tech Manufacturing Production
Non-High Tech Manufacturing Production
Source Left Federal Reserve Board, Right
Federal Reserve Board
23
The 2008-2009 Recession is As Severe As 1973-75
Length and Depth of Selected Post-World War II
Recessions
Recession years Length in months Peak-to-Trough Percent Change Peak-to-Trough Percent Change Peak-to-Trough Percent Change
Recession years Length in months GDP Private-sector employment Manufacturing production
2008-09 (forecast) 18 -3.0 -3.9 -12.2
2001 9 -0.5 -2.7 -6.6
1990-91 8 -1.5 -1.9 -4.7
1981-82 16 -2.9 -3.5 -9.5
1973-75 16 -3.4 -4.2 -15.6
1957-58 8 -3.7 -5.3 -14.5
Source National Bureau of Economic Research,
Bureau of Economic Analysis, Bureau of Labor
Statistics, Federal Reserve Board and
Manufacturers Alliance/MAPI
24
Two Speed World Advanced Countries In
Manufacturing Recession

• Manufacturing Production Growth

Source Government Statistical Agencies, Global
Insight, MAPI FForecast
25
Two Speed World Developing Countries Grow At A
Decelerating Rate

• Manufacturing Production Growth

Source Government Statistical Agencies, Global
Insight, MAPI FForecast
26
A Severe Global Recession
World GDP Manufacturing Production
World Manufacturing Production
Source Left Federal Reserve Board, Right
Federal Reserve Board FForecast
27
World Steel Production Collapsed at the End of
2008

• Global Steel Production

Source World Steel Association
28
Pervasive Decline in Global Steel Production
Global Steel Production
Million Metric Tons Million Metric Tons Million Metric Tons Percent Change Percent Change Percent Change
Country 2006 2007 2008 2007 2008 IQ to IVQ 2008
U.S. 99 98 92 0 -7 -39
EU-27 207 210 199 1 -5 -28
Brazil 31 34 34 9 0 -21
Russian Federation 71 72 69 2 -5 -40
China 423 489 502 16 3 -11
Japan 116 120 119 3 -1 -14
Korea 49 52 54 6 4 -8
Taiwan 20 21 20 4 -3 -20
India 50 53 55 7 4 -2
Other 285 293 279 3 -5 -33
Source World Steel Association