Rebound in casting markets bodes well for U.S. foundries.
Prospects for a robust recovery in the near term have declined substantially in recent months. Accordingly, growth of the gross national product in the current AFS forecast is weaker than what was originally thought. Perhaps the most discouraging news has been from the Establishment Employment Survey. Nonfarm employment has grown very little since May 1991, the month the National Bureau of Economic Research recession dating committee has indicated as the likely trough of the recession.
Other recent evidence has tended to confirm that growth has been very weak since July. Existing and new home sales have declined in recent months and housing starts fell in September. Industrial production was basically flat in August and September. In addition, the index of leading indicators stalled in August and declined slightly in September. Finally, consumer confidence dropped in October as measured by The Conference Board survey.
Though recent evidence has demonstrated weakness in the U.S. economy, it is the view of AFS that the recovery will continue. Low inflation, even with low employment growth, will help to bolster real income growth, increasing consumption. Growth in consumption, in fact, has been strong relative to income growth. Inflation, particularly producer's prices, has been moderate. The moderate producer price inflation is expected to restrain consumer price gains over the next six months to a year, helping to keep interest rates down. Low mortgage interest rates, projected to be the lowest in 14 years, should buoy housing activity.
The advance estimate of real GNP growth for the third quarter of 1991 was 2.4%. This growth is somewhat misleading since final sales grew by only 0.6%. A smaller drawdown in inventories, compared to the second quarter, accounts for this discrepancy. Real inventory change was $33 billion in the second quarter, but only $15 billion in the third quarter.
On the other hand, the weak final sales are due to a substantial worsening of net exports. Net exports decreased from $12.5 billion in the second quarter to $32.8 billion in the third quarter. imports were surprisingly strong, suggesting, at least for the second and third quarters of this year, that the import share of the current strength in consumption and investment is unusually strong, weakening the recovery substantially.
Though recent developments indicate that the U.S. economy is weakening, AFS still believes the recovery will continue. For the fourth quarter of 1991 and the first quarter of 1992, we are expecting real GNP to grow by 2.8% and 2.9% at an annual rate. Much of this growth is due to moderating drawdowns in inventories. Consumption in July and August was strong, making for a 3.6% increase in the third quarter. The advanced retail sales report for September was weak which implies a fourth quarter growth rate of 1.5% for consumption. Residential investment will contribute to growth in the fourth quarter of 1991 and during all of 1992. Real GNP growth is expected to be 0.4% in 1991, 2.9% in 1992 and 3.2% 1993.
Real income continues to increase modestly, as wage growth outpaces inflation and employment advances, however-slightly. Nonfarm employment, has been stagnant since May. Despite weak employment growth, consumption has been strong. Real consumption advanced 2.5% and 3.8% in the second and third quarters, as the savings rate fell to 3.8%.
Consumption will average a little less than 3% growth through the forecast period, but is expected to be weak in the current quarter. AFS expects employment growth to gather steam in the next six months, solidifying income gains. Once employment growth picks up, consumers should be able to sustain 3% growth in consumption and increase their-savings modestly. Real consumption should grow by 0.4% in 1991 and 2.7% in 1992.
The U.S. economy and the American metalcasting industry are greatly affected by the global marketplace. International competition will become increasingly important as regional trading blocs exert their power. U.S. foundries are coming to understand that they do not compete with just the foundry across the state or in another part of the country. The American metalcasting industry competes with foundry operations and finished products containing castings from around the world. Today, U.S. foundries must strive to comprehend the global economy, import threats and export opportunities.
One has to look carefully these days to find bright spots in the world economy. In fact, aggregate world GDP (gross domestic product) will post a small decline this year-the first annual decline in the entire postwar era. With activity still soft in most regions, the continuing problems with the Uruguay Round of the GATT (general agreement on trade and tariffs) are causing more discussion about the advantages of regional trading blocs. Meanwhile, the shakiness of the Tokyo financial markets in the wake of a host of scandals raises the risk of a higher global cost of capital.
The two locomotives for the past couple of years, Japan and Germany, have both slowed noticeably of late, with Japan arguably already entering a growth pause or recession. A combination of tight Japanese monetary policy, higher costs of capital, over-built inventories and the bursting of the "bubble economy" that has sent real estate values plummeting is the primary cause. Still, it will probably be a Japanese-style recession-GNP may stagnate, but not actually turn negative.
In Germany, a strange twist is emerging. The western portion seems to be taking a breather after events of the past year, with higher interest rates taking their toll on the construction and interest-sensitive sectors, and weak growth in the rest of Europe hurting exports. But the eastern portion should soon be touching bottom.
Construction there is surging and the need to improve roads and infrastructure, like the telephone system, will keep demand high. With strong German companies steadily rationalizing factories in the east, 1992 should see quite a turnaround there. At a minimum, the pervasive pessimism about the east is decreasing. Of course, the financial drain on the German treasury will continue for years to come.
The rest of the European and United States economies are still bogged down. Most monthly indicators for the United Kingdom, France and italy are more positive than negative now, but none can yet claim to have clearly escaped from the doldrums. Canada, after enduring the longest and deepest recession of the G7 (Group of seven) countries, posted strong positive GNP growth in the second quarter of 1991. But the Canadian economy is still dependent on the U.S. recovery for sustained progress.
Elsewhere, East Asia is holding its own. Growth is generally off a few percentage points because of slowing domestic investment, surging imports and tightening monetary policy aimed at cooling inflation. And some parts of Latin America are posting decent gains as privatization spurs activity. A large question mark continues to hang over the former socialist countries of Eastern Europe and the Soviet Union.
For most metalcasters, 1992 will show an upturn in sales and general improvement relative to 1991 results. This will occur largely because of the wider economy's projected real GNP growth. As is normally the case, growth will be uneven among the various markets, therefore some markets and metals will show stronger gains than others.
Overall, demand for metal castings was off 9.6% in 1991. This negative growth had and will continue to have a severe impact on foundry closings. However, 1992 looks brighter. Overall growth for the year should be close to 3.6%, with most of the growth coming toward the latter quarters of the year. in general, demand will not reach the levels it did in 1990 but it is moving in the right direction.
Demand for all iron castings declined 9.7% in 1991. The biggest drop (10.2%) was for gray iron castings. Projected growth for total iron in 1992 is 2.9%. Engines, turbines and medium and heavy trucks markets should lead the growth. On the other side, valves and fittings, pumps and compressors, and special machinery will show slight declines.
Carbon and low-alloy steel showed a decrease in demand of 12.7% for 1991. Growth should occur in the 8.6% range for 1992, recapturing much of the loss for 1991. Railroad-related castings took the biggest hit in 1991 but should show the biggest gain for 1992, bringing this market close to 1989 levels. These massive swings in demand for railroad castings account for most of the changes in demand for the overall carbon and low-alloy steel markets.
Construction equipment and medium and heavy trucks should have a healthy rate of growth for the coming year. The valves and fittings, and pumps and compressors markets will continue to lose share to high-alloy steel castings. All other markets will have no significant shifts in demand.
The high-alloy steel castings markets slowed 6.2% in 1991. Demand in 1992 should bounce back to 1990 levels (growth of 6.6%). The railroad, valves and fittings, and pumps and compressors markets will have the most growth, with all other markets staying basically the same.
Aluminum castings markets dropped 7% in 1991. The coming year looks better with an increase of 4.7% overall. Leading this growth will be the passenger car and light truck market. There should be a strong increase in the use of permanent mold aluminum castings in this market, primarily because of the Corporate Average Fuel Economy (CAFE) bill requirements. The aircraft and aerospace markets bucked the trend in 1991 and will show a slight increase in 1992.
Copper-base castings showed a decrease of 8% in 1991. Demand in 1992 should increase about 1.5%. The biggest drop during the 1991 period was the "other" market category. This was the case because this category is predominantly consumer products, which as a whole did not do well because of low consumer confidence. There are no markets in particular that show significant deviations from the projected overall 1.5% growth for 1992.
The North American auto industry's list of current troubles is intimidating.
The Big Three's continuing surrender of marketshare to the Japanese marks a fundamental shift in control of the industry. And there promises to be plenty more of the volatility that became commonplace over the past decade-plants closing as other plants open, and employment continuing to contract as competition forces greater efficiency. It will be interesting to see if the Big Three remain the Big Three as we know them today. Some scenarios see Chrysler falling to number five or becoming part of a Japanese or European automaker.
But there are some positive signs as well. For one, finished-vehicle imports from outside North America have been declining in share of the U.S. market since 1986. Favorable currency exchange rates as well as political pressure should help this trend to continue over the next few years. However, transplant Asian automakers are taking away significant market penetration by Big Three-built vehicles.
A major trend that should help U.S. auto firms in the future is consumer quality and value perception of domestic cars, which is expected to increase relative to imported products. This does not mean that we expect consumers, in general, will prefer domestic products over imported products. All we are assuming is that the massive and ongoing investments by domestic manufacturers aimed at improving product quality will eventually pay dividends in terms of consumer perception of domestic products in the marketplace.
Another factor that could improve the longer-term climate for domestic production is a free-trade pact with Mexico. Even if a North American common market caused a net shift of component production from the U.S. and Canada to Mexico, that trend might be more than offset by exports of finished vehicles southward from under-used assembly plants. There also is greater potential as the decade continues for significant exports from the U.S. to Europe and Asia.
Nearer-term, 1992 is almost universally-expected to inaugurate a new-cycle of U.S. market growth, after 1991 sales sank to their lowest level since 1983, marking a third consecutive year of decline. Total vehicle sales in the U.S. dropped from 15.4 million units in 1988 to 13.8 million in 1990. Sales in 1991 dropped to 12.5 million but should increase to 14.1 million in 1992.
The last U.S. auto sales recession also persisted for three years (1980-82) and was followed by a six-year boom of almost uninterrupted growth. The new cycle of market expansion should top out in 1994 with U.S. vehicle sales reaching about 15.6 million. If that happens, the six-million-unit overcapacity problem in North America could fall by half.
The CAFE bill, which requires auto manufacturers to produce a fleet of cars that conserve fuel, continues to send automakers to lightweight materials such as plastics, aluminum and magnesium. This legislation, coupled with consumer demand for automobiles with high horsepower-to-car weight ratios and respectable gas mileage, will have a profound impact on the demand for metal castings.
Automobile manufacturers plan to meet these demands in part by substantially increasing each automobile's aluminum content and decreasing its iron and steel content. Parts remaining in gray iron for example, will have thinner walls, reducing both vehicle-weight and gray iron tonnage. Plastics also-will play a larger role as these trends continue.
The construction sector, and residential construction in particular, is perhaps second only to the automotive sector in importance to the metalcasting industry. Although tonnage is less than in automotive, the breadth of metals and casting applications affected by construction is greater.
What matters most to those who need to keep an eye on residential construction activity is housing starts. Housing starts are, in turn, dependent on macroeconomic activity in general, mortgage interest rates and new home prices specifically.
AFS expects total housing starts to increase during the fourth quarter of 1991 (final figures were not available for the fourth quarter at the time of this writing), leading to an annual figure of 1.02 million units. The increase in housing activity during the fourth quarter of 1991 will be the result of slowly rising employment and income combined with a drop in mortgage interest rates. While housing starts did increase slowly during 1991, the rate of increase was less pronounced than the rate of decline during 1990, leading to a forecast decline of 13.1% in 1991 from 1990.
The increase in housing starts during 1991 was very slow, but we expect to see stronger increases in starts activity during 1992 in response to growth in employment and in disposable incomes, particularly in the latter half of 1991. Total housing starts should increase to a seasonally adjusted annual rate of 1.34 million units by the fourth quarter of 1992, and the average level of starts for the year will be 1.29 million, up from the 1991 average of 1.02.
While the unit increase in total housing starts during 1992 seems like a strong rebound given the weakness in the market over the last several months, it is actually a rather modest increase when considered in the context of housing rebounds following previous recessions. 1992 and Beyond
As has been the case in the past, the foundry industry's performance will be uneven in 1992. The recession's total impact on each individual foundry will depend primarily on its strategic focus. Foundries that have maintained a strategic discipline should be better positioned to compete under volatile market conditions such as those the foundry industry now faces, and those it will continue to face throughout the decade.
Looking further ahead, most indicators point to sustained growth in 1993. However, this depends largely on how soon we "really" come out of this recessionary period. For more in-depth analysis of these and other issues facing the metalcasting industry during the coming year, consult the 1992 Annual Forecost of Casting Demand, available from AFS Publications.
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|Title Annotation:||Forecasts & Trends '92|
|Author:||Rost, John E.|
|Date:||Jan 1, 1992|
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