It's that time of year, with the final data for 2006 coming in, when economic forecasters review their expectations for the previous year and gloat about their successful predictions, or quietly take their lumps. It's also time for them to refine their expectations for the current year based upon how the first quarter is shaping up.
No matter where you are on the organization chart, it's important for inventory managers to have a general idea of what's going on in the broader economy. Because the U.S. economy is so large—the nominal GDP for 2006 will surpass $13 trillion—macro-level policy changes and market trends can have a big impact down at the micro level where you and I live and work. Gathered from a variety of reliable sources, with the requisite disclaimer that no one knows exactly what might happen this year, here's MHM's down and dirty economic outlook for 2007:
Economic Growth. U.S. economic growth will slow down following a series of strong years that began in mid-2003. Overall real GDP growth of 3.2% in 2006 will taper off to an estimated 2.1% to 2.3% growth in 2007. Of course such macro level performance hides major sector-by-sector differences. Year-to-year new housing starts were down 15% in 2006. The supply of unsold homes on the market has been hovering around a 10-year high. This means that suppliers of construction and building materials, and the equipment vendors who supply them, will face another difficult year. If housing continues to languish it could pull down consumer spending in related sectors, such as appliances, furniture and carpeting. That hasn't happened yet.
Capital Spending. Businesses will continue to invest profits back into new plants, warehouses and offices. That's according to the semiannual economic forecast of the Institute for Supply Chain Management (www.ism.ws), released in mid-December. With capacity utilization at 84.5%, respondents indicated that capital spending will increase 8.5% this year, a similar pace to 2006.
Even slow-growing industry sectors will have their bright spots. The president of a material handling equipment supplier to the manufacturing industry told me last week that 2007 is shaping up to be a great year for his company, which recorded 29% of its annual sales target in January. This despite ongoing job losses in manufacturing and below normal capital spending by the major automakers.
Employment, Energy and Inflation: A perennial wildcard, world events impact oil prices like no other commodity. Prices peaked last summer over $70 per barrel, before falling back below $59 recently. With the spate of development triggered by higher prices, petroleum supplies may catch up with demand in 2007, pushing prices down even further. Non-farm employment increased by an average of 130,000 jobs each month in the fourth quarter of 2006. Nationwide the unemployment rate stood at only 4.5% in January, with little anticipated change in 2007. Core inflation, without volatile food and energy prices, has moved up from less than 1.5% to around 2.5% recently. But the elevated inflation levels of last spring and summer have eased off. Predictions call for inflation to moderate to 2.2% in 2007
With moderate growth and inflation below last year, 2007 will be a good year for the U.S. economy. This is good news for both manufacturers and distribution organizations. But the situation could change. Unforeseen events have a way of popping up. Keep your eye on the economic reports as the year moves forward and manage your inventory levels and locations accordingly.