INSIGHT: Is the sky darkening - or brighter?

18 September 2008 14:09  [Source: ICIS news]

By Joe Kamalick


Some analysts think this is the dark before the dawnWASHINGTON (ICIS news)--As the credit crisis deepens there are widely held concerns that the financial market coronary will bleed out into the broader global economy and trigger a systemic worldwide decline - but others are not so sure.


Kevin Swift, chief economist at the American Chemistry Council (ACC), holds that the US will be dragged into recession by the credit crisis and the ailing American economy will infect even red-hot growth in developing economies such as China, India and parts of Latin America.


“The softness in the US and Western Europe is spreading to Eastern Europe, and Asia is vulnerable. Latin America had benefited from high commodity prices but now that is weakening,” Swift said at the Chemical Purchasing Summit in Boston, Massachusetts, .


Global chemical volume growth, which is tied closely with industrial production, is poised to slow to 3% in 2008 from 4.5% in 2007 and 5.2% in 2006, he noted.


“The supply chain is like a bull whip. The consumer has the handle and the chemical industry is at the end,” he said. “The slowdown in consumer spending will go up through the supply chain and hit chemicals.”


But other manufacturing analysts are not so certain of a general economic malaise that ultimately will eat away at producers just as it has consumed one-time giants in the financial sector.


Tom Duesterberg, president of the Manufacturers Alliance, argues that US and international producers of industrial and consumer goods are in better shape than their counterparts in the financial sector, especially because they are not beset by bad debt related to the underlying US real estate and housing crisis.


“First of all, the manufacturing companies that survived the last recession - the 2001-2003 recession that was much deeper than this one - have pretty good balance sheets and are good credit risks,” Duesterberg said.


“Coming out of the 2001-2003 recession, manufacturers have been much more conservative,” he said. “Apart from the hard-hit housing and auto sectors, which are on their heels right now, a lot of manufacturing is doing reasonably well.”


“The financial crisis has not affected the bulk of manufacturing so far. With their good balance sheets and credit standing, if they need working capital or capital for expansion, we haven’t seen any evidence that good companies can’t get it,” he said.


“That said, it is clear that lending standards are being tightened quite a bit, so terms for financing are getting a little bit tougher. And each new wave of this crisis weakens the overall financial system even more.”


“There is still plenty of credit out there, but each new blow makes it more problematic,” he said.


“One good thing is that there is plenty of international competition in financial markets,” Duesterberg said. “Where 30 years ago US companies had to rely on internal US institutions, now European and Asian banks play a large role, so there is more competition.”


“Of course it is a bad thing when someone like Lehman Brothers goes out, because that means there is that much less competition. But Swiss, German, British and Japanese banks are a little more active than they used to be.”


“To my mind, we are in one of the more serious economic disruptions this country has seen since World War II, but at this point it is mostly a financial sector phenomenon,” Duesterberg added.


However, the Manufacturers Alliance is made up largely of leading global manufacturing firms in electronics, aerospace, computers, medical technology, energy and chemicals, and the outlook for mid-size and smaller producers of industrial materials and consumer products is more uncertain.


Hank Cox, vice-president at the National Association of Manufacturers (NAM), is concerned about whether and how the financial crisis might affect producers.


“It is a bit early to see how all of this is going to play out, but we are concerned about the availability of investment capital,” Cox said.


“Manufacturing is highly capital-intensive,” he noted. “To be competitive in the global marketplace, we must have the most modern technologies and a steady stream of R&D [research and development] funds.” And that requires credit availability.


NAM’s 14,000 member firms represent the broad sweep of US manufacturing, including major players but also a large number of medium and smaller producers that might have less ready access to credit even in flush times.


Even so, Cox is not certain that the financial troubles afflicting Wall Street will necessarily infect Main Street.


“I don’t believe manufacturers are rethinking their capital improvement or expansion plans yet,” Cox said in answer to a question, “until they see how this plays out.”


“We are on unfamiliar ground here,” he said.


US Treasury Department undersecretary David McCormick conceded this week that “capital market stress continues to weigh on our economy”, but he told the Brookings Institute that “the housing correction is at the root of the challenges facing our financial institutions and our markets”.


“Housing poses the biggest downside risk to our economy and continues to be a drag on growth,” McCormick said.


“We are working to minimise the impact of the housing correction on the rest of the economy,” he noted, referring to federal stimulus programmes initiated earlier this year to, among other things, provide first-time home buyers a $7,500 tax credit.


“But we do not want to impede the progress of the housing correction, because the sooner we turn the corner on housing, the sooner we will see home values stabilise, the sooner we will see more people buying homes and the sooner housing will again contribute to economic growth,” he said.


Citing the recent rash of financial sector shocks and federal interventions, McCormick conceded that “it will take time to work through these stresses.


“Progress will not come in a straight line, and there will be bumps in the road as we make progress,” he said. 


“The events of the last few weeks are evidence of this and are important and necessary steps to work through the uncertainty and turmoil in our markets and minimise their impact on the rest of the economy.”


McCormick said there are signs of progress in the crucial housing sector. 


“Fewer new homes are being built, and this means the total number of new single-family homes on the market is down 27% from a July 2006 peak. And though it is early, new and existing home sales show tentative signs of stabilising.”


US new home construction fell 6.2% in August and forward-looking building permits were off by nearly 9% last month, the Commerce Department reported this week. But both housing sector measures were down less than in July.


Those moderating declines came as US residential builders reported an increase in contractors’ confidence about the housing market going forward.


The National Association of Home Builders (NAHB) said its home builders housing market index (HMI) gained two points in September to 18, rising from its record low of 16 in the previous two months.


NAHB president Sandy Dunn said many home builders “are sensing that home sales are nearing a turning point” because of the federal stimulus programme for first-time home buyers, the Washington support for mortgage market majors Fannie Mae and Freddie Mac and declining loan interest rates.


“Meanwhile, consumer confidence has risen and more households are saying that now is a good time to buy a home,” Dunn said. “All of these factors, along with the recent downward movements in mortgage rates, suggest that new home sales will be stabilising in the final quarter of the year.”


ACC economist Swift perhaps shares some of that expectation.


“In 2009, we expect the North American capital goods market to soften, but the housing and light vehicle markets to stabilise,” he said. “By 2010, we see nearly all end markets starting to improve.”


Manufacturers Alliance CEO Duesterberg appears to share that outlook as well.


“We are on record at the Alliance that we will be in a mild recession until the second quarter next year,” he said.


Still, no economic analysis can be complete without at least one “on the other hand” caveat.


As Duesterberg put it: “We can’t, the economic system can’t, absorb an unlimited number of blows with big financial institutions failing, because eventually there will be too much collateral damage to Main Street.”


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By: Joe Kamalick
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