UK exporters to the US may have to wait until 2003 before the US economy revives, according to Gail Fosler, one of the country’s more authoritative economic forecasters.
Next year will see only sluggish growth across the Atlantic, as US manufacturers grapple with controlling costs and cashflow. But in the week that UK manufacturing confidence was reported to have hit a three-year low, Fosler, cited by the Wall Street Journal last year as the US’s most accurate economic forecaster, said any risk of deep recession was unlikely.
As chief economist at New York-based research group The Conference Board, Fosler told an audience at a Rockwell Automation global manufacturing conference in Atlanta this week that investment plans of many US manufacturers had been stalled. This is because of a massive withdrawal of lending facilities by banks, acting in the wake of the September 11 terrorist attacks.
‘The US economy has seen a $600bn contraction in credit, at a time when businesses have also faced a collapse in cashflow.’
The result, Fosler said, has been unprecedentedly swift moves to control inventories and freeze capital spending. ‘New orders simply stopped,’ she said.
Recovery is unlikely to show through until the end of 2002 or early 2003, she said, but will be led by a strong wave of investment in plant, equipment and technology.’There is a pent-up demand right now like we have not seen since the early 1990s. It is not that firms do not want to invest. They have all their plans stacked up, but no cashflow to fund them.
‘The next eighteen months will look sloppy and sluggish,’ she said. She predicts growth of less than 1% for the US economy next year.
Comparisons with the recession of the early 1980s are misplaced, Fosler said, because the conditions are dramatically different. ‘In the early 1980s there were interest rates of 20%, inflation running at 14%, and a major credit squeeze. Over the last 18 months, aside from the fall in the stock market, it is hard to see why conditions should be similar to those of 1981 to 1982.
‘My feeling now is that the US economy could hit only a mild recession, or no recession at all, and it is not an outside possibility that the US economy could actually grow in the fourth quarter of this year.’ She also pointed to continuing robust levels of spending in the US, with car sales and retail spending both holding up.
‘Globally, the manufacturing sector is alive and well,’ she said, dismissing suggestions that the sector would continue to shrink in western economies, in the face of continuing competition from low labour cost rivals.
‘Yes, we do see manufacturing capacity migrating abroad, but this is more a product of the globalising activities of domestically – based multinationals, investing in new capacity closer to their markets,’ she said. ‘A lot of the evidence shows that this is not just a product of labour costs.’
Fosler predicted that manufacturing will continue to hold its own in most western economies. In the US, manufacturing’s share of gross value added has remained at around 18 to 19% for the last decade. In the UK manufacturing takes a similar share of the economy, and the figure for Europe as a whole is also 19%.
‘In contrast with those who say manufacturing is going the way of agriculture: I disagree. Manufacturing is alive. It’s vibrant,’ Fosler said.