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
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
"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
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.