SCHAUMBURG, Ill. If the U.S. economy can muddle through the next 12 to 18 months, it might be poised to enjoy a bull run for three to five years, according to one analyst.
"Were all here this year, and well all be here next year despite what you might have heard," Eli Lustgarten said in referring to pessimistic outlooks presented by other speakers at the Metals Service Center Institutes economic forecast conference in Schaumburg, Ill.
Among the tailwinds set to bolster the U.S. economy in the long term are the potential for greater energy independence and trends bringing manufacturing capacity back from abroad, said Lustgarten, senior vice president and senior analyst at Independence, Ohio-based Longbow Research.
"Supply chains are too stretched," Lustgarten said, and it no longer makes sense to manufacture products in Asia and ship them to the rest of the world given freight costs, long lead times and potential disruptions, such as last years flooding in Thailand and the earthquake, tsunami and nuclear disaster that struck Japan in March 2011.
Shorter supply chains will result in a more regionalized manufacturing sector, with production facilities in Asia serving markets in Asia, those in Europe serving markets in Europe, and the same trend prevailing in North America, he said.
Such reorganization could benefit companies that make bearings, cutting tools and other products that will be needed as companies look to source components locally, Lustgarten said. Canton, Ohio-based Timken Co., for example, could be a winner as companies such as heavy equipment maker Caterpillar Inc., Peoria, Ill., move more production closer to home, while in Europe the same could be said for companies like Swedens Sandvik AB.
Still, Lustgarten cautioned that the United States is unlikely to see industrial production return to pre-recession levels anytime soon, especially given low consumer confidence and the difficulty small businesses are facing in getting credit.
While manufacturers benefited from a period of inventory rebuilding and a return of demand after the recession, inventories are now being trimmed, albeit at nowhere near the rates seen during the depths of the recession, he said. "We have clearly slowed down," especially compared with the first half of 2011. "And its hard to understand how things are going to get better."
Manufacturers might have to adjust to a "new normal" in which, for example, automakers sell 14 million to 15 million vehicles per year in North America instead of the average of 16 million to 17 million vehicles annually from 1999 to 2005, Lustgarten said.
Such outlookscombined with political and economic uncertainty not only in the United States but also abroadhave businessmen "sitting on their hands," he said.
Yet the U.S. economy might be the "best house in a lousy neighborhood," Lustgarten said, noting that German chancellor Angela Merkel is up for election in March and "treading on thin ice," while China has seen "everything stop" ahead of the Communist Partys politburo change in November. Brazil has seen some economic upturn recently, he said, but should be faring better given that the country is hosting the World Cup in 2014 and the Olympics Games in 2016.
While the economic slowdown could persist into the first part of 2013, not all end markets face a bad outlook, especially in heavy equipment, Lustgarten said. The U.S. drought, for example, saw prices for agricultural commodities shoot up, which should translate into higher revenues for farmers and a brighter outlook for agricultural equipment makers, although he warned that a repeat of this years drought could see "food riots." And in the construction sector, infrastructure might be underfunded, housing and private nonresidential construction activity is improving, Lustgarten said.
Other markets, however, are likely to remain challenged. The coal equipment market, for example, is "in shambles" due to federal policies that encourage power producers to move away from coal-fired plants, he said. And in the freight sector, manufacturers might have been "euphoric" in the first half of 2012 and overbuilt, leading to an inventory glut going into the second half and expected production cuts in the third and fourth quarters.
Another headwind for heavy equipment makers is increasingly stringent emissions standards, which are driving up costs on "virtually every piece of equipment," Lustgarten said.