Manufacturing industries in the United States, some already straining to fill orders, will continue to taste a turnaround in 1988 and reap the rewards of long-term structural changes over the next decade, according to a forecast made yesterday by the National Association of Manufacturers.
"The strength of manufacturing is the economy's best insurance against a recession in 1988," said Jerry J. Jasinowski, chief economist for the NAM.
Though the manufacturing sector is enjoying a strengthened export market due to the lower dollar and has made internal changes to become more cost competitive, its resurgence could be interrupted by several negative trends in the economy, the association said.
"While the threat of a recession in 1988 cannot be ruled out altogether," said Jasinowski, "we are cautiously optimistic that it can be avoided, especially if the health and vitality of the manufacturing sector continue to grow."
Instead, the group predicted a slowdown in growth to 2 percent from an annual rate of more than 4 percent, resulting in part from continuing fallout from the collapse of the stock market last October, restrictive monetary policy and a flat rate of consumer spending.
Though the negative "wealth effect" from the stock market decline has been less than what analysts first predicted, there has been -- and will continue to be -- a significant slowing of consumer spending, which was the primary engine driving the economy during the recovery, the forecast said.
But Jasinowski said, "We don't see consumption falling out of bed." He predicted that rising employment and a $30 billion boost in after-tax disposable income from tax reform will keep consumer spending from collapsing.
Demand is expected to fall, however, for goods such as autos and housing, which are sensitive to high interest rates and consumer debt levels.
What will carry the economy, instead, said Jasinowski, will be capital spending and an improvement in trade. "All of our members indicated they had not cut capital spending after the stock market crash, but they all have contingencies ... if the economy should take a sharp turn downward," Jasinowski said.
The association has forecast a $40 billion improvement in net exports this year, and half of the economic growth it is predicting is expected to come from the trade sector. The association expects the dollar to stabilize in the first quarter and therefore is forecasting "spectacularly good" trade figures for the second half of the year.
Jasinowski said capacity restraints will not hamper exports to a great extent because both world and domestic growth will be "sufficiently slow."
He noted, however, that firms have mentioned informally that they had cut capacity and employment more than they realized.
At the same time, some manufacturers are reconsidering where they buy parts and components as the dollar has continued to decline, making U.S. products price competitive with foreign sources. The NAM noted that about a third of imports are industrial supplies and materials that find their way into U.S. manufactured goods. Less dramatic will be the number of American manufacturers that decide to bring production facilities home from abroad or to expand domestic facilities dramatically, betting on favorable exchange rates.