Looking Ahead

KEY AEROSPACE INDICATORS

Aerospace and GDP – Leading Growth
The industry historically has simply followed the overall dips and rises in gross domestic product (GDP). The reasons are simple, aerospace follows general economic activity. However, in recent years, aerospace has been more of a leading, rather than lagging, indicator. In other words, aerospace growth has preceded overall economic growth and dropped following a drop in overall GDP. There are many ways to look at GDP, but the best way is changes year over year or, in other words, how well we are doing now compared to the same time last year. On average, each month throughout 2011, we have been doing about 4% better than the same time in the preceding year. In Q3 2011, GDP, for example, was about 4% higher than the Q3 2010, slightly lower than the mean of about 5% during the past 20 years. Barr Group Aerospace predicts GDP to rise at 3% to 4% in 2012.

The data is clear. The economy will not experience another major dip next year. Major macro uncertainties will, however, slow the growth from what would be 6% to 7% to a more realistic level of 3% to 4%, somewhat slower than 2011.

IMPLICATION: Overall, aerospace will grow after a flat first two quarters in 2012. We predict that aerospace will lead the recovery and grow by slightly more than GDP by the end of 2012. The aerospace industry should prepare for significantly higher growth in 2013 and beyond.

Aerospace Industrial Production – Expanding
Aerospace took a much larger fall than overall U.S. manufacturing during the recent recession, but jumped back quickly and now follows the overall growth trend of all U.S. manufacturing. Currently, the year over year growth in aerospace manufacturing is the highest it has been since 2007. The index, which has not been above 100 since 2007, is currently nearing 106; a major improvement throughout the industry and exactly what Barr Group’s Aero Indicator predicted some six months ago when, in May 2011, we reported 106 for the next six months. While the two indexes are not the same, our upward trend forecast was right in line with what actually happened, strong growth when many had predicted a decline.

IMPLICATION: The overall state of the U.S. aerospace industry is strong or stronger than it has been for many years. The industry is now on much more solid ground and should be able to withstand the uncertainties ahead in 2012.
 

Aerospace Capacity Utilization – Improving
Aerospace capacity utilization, or the percentage of total available manufacturing capacity used, fell from its peak in late 2007 of 88% to about 71% in November 2010, up from a near record recession low of about 66%. As of October 2011, capacity is still only about 80%. A tremendous improvement from last year but the industry continues to retain excess capacity. The good news is year over year capacity is up 8.37%

IMPLICATION: The aerospace industry will easily absorb the needed capacity in 2012 without any major expansions. Expansions, however, are ahead for 2012 and beyond.

Capital to Fund Aerospace Growth – Limited Bank Financing Ahead
When government borrows more, business can borrow less. In economics we call this phenomenon crowding out. With banks putting more than ever on deposit at the Federal Reserve, now more than $1.5 trillion dollars – when in the past they put only about $10 or $20 billion – the impact on the economy is enormous. With the Federal Reserve now paying interest, albeit at less than 1%, banks still rather invest in the Fed than take any chances with industry. Industries that depend upon bank loans will have a tough row to tow in 2012.

IMPLICATION: Companies that have easy access to the securities market, like Lockheed Martin and Boeing, will benefit from low interest rates. However, smaller firms who must go to their local bank will find it very difficult to get a loan. The bigger firms may find themselves insourcing more than ever to get the job done.
 

Jobs, Jobs, and Jobs – Be Patient Aerospace is Hiring!
Comparing the same month to the past 10 years uncovers a deep hole in jobs from 2007 to 2009. Now, however, we are adding jobs nearly every month. In October 2001, there were about 131 million Americans working and today only slightly more. We have lost a decade of job growth.

Jobs are rising in aerospace manufacturing. As of the latest figures there were nearly 500,000 workers employed in aerospace manufacturing, up almost 5% from a year ago. We expect the rate to continue rising at about 2% to 3% throughout 2012.

IMPLICATION: Overall, aerospace and U.S. manufacturing will see gains in 2012. If you need new workers now is the time to hire.

The wonder of free enterprise is pricing and profits quickly steer industry. It does not take long for our customers to let us know what they want or do not want and if we do not deliver, we had better do something else. In the aerospace and defense (A&D) earnings season of October/November 2011, of the 20 firms, 14, or 70% earned more net profit than Wall Street had predicted, only two, or 10%, earned less, and the remaining four, or 20%, performed as expected. Every single firm reported strong net income.

Going beyong these 20 firms, and looking at the entire industry (NAICS 3364), net profits are hitting new records. The highest quarterly net profit ever recorded had been $5.368 billion, but in the last quarter net profits hit an austounding $5.767 billion or almost 7.5% more. The question is if the level of profitability can be maintained. Yes, because even with the coming uncertainty, companies are leaner and have cut the fat and trimmed operations and will be able to sustain current profit levels even with only modest growth in sales throughout 2012.

IMPLICATION: Aerospace company profits will sustain themselves at current levels throughout 2012.
 

U.S. Sales of Aircraft and Parts and Air Traffic – Strong Growth
Then latest data indicates what we have been projecting at Barr Group for several months now. The commercial side is once again beginning to grow faster than the government sales side. Defense sales are on the decline while the commercial end is growing rapidly. We expect this trend to continue throughout 2012. Few realize the consequences of our central government grappling at the daunting task of balancing a budget that runs on more than 40% borrowed money. Most of the spending is mandatory, such as health and income security, and little besides defense is discretionary. When Congress recently was unable to decide what to cut, defense was hit with the biggest of all cuts. Next year defense spending in aerospace will certainly be down.

Official United States Department of Transportation (DOT) figures year over year, shown on pg. 37, are once again very strong. Even though fuel costs were up more than 27%, cargo and passenger traffic reached even higher levels. Even more encouraging was the fact that the industry added nearly 3% more employees.

IMPLICATION: Even though we will experience a drop in overall government sales throughout the aerospace industry commercial sales will more than offset that drop. Companies should begin the slow transition to more commercial and less government business in 2012.
 

Sales in General Aviation – Not Healthy Yet
It has been a rough year once again for general avaition. Historically the fourth quarter has always been the best for the industry. The best quarter to date was Q4 2007 with delivery of 1,074 aircraft. In the latest quarter that number has dropped to 280 or a drop of 74%. It seems that while the trend has been down, at least sales have stabilized and remained about the same throughout the year. We predict a slow but steady growth of 3% to 4% in 2012.

IMPLICATION: Expect sales in 2012 to show only modest growth.

Aerospace International Trade – U.S. Remains Competitive
More than any other single indicator of the competitiveness of the U.S. aerospace industry is the international trade balance. If we sell more abroad than they sell here our products must be either higher quality, have a more competitive price, or both. The most recent data again shows a strong trade surplus. Aerospace continues to be the only major sector of U.S. manufacturing to run a trade surplus. More than any other indicator it shows a strong long-term future for the industry.

IMPLICATION: More on-shoring than off-shoring throughout 2012. Foreign firms will be moving here more than U.S. firms going abroad.
 

The AERO Indicator
Say it all in one number. Are we safe and on course? The AERO Indicator mathematically combines all the above economic data and more into one forecasting number.

The AERO Indicator is a weighted average from a group of regression analyses of moving averages of very current aerospace commercial and defense related data, a survey measure of industrial opinions, and a daily index of stock market prices of a select number of small, medium, and large aerospace companies whose business is dominated by aerospace products, parts, and services. The weighting of AERO indicator averages, indexes, and surveys, and the time frame used in forecasting, is proprietary to Barr Group Aerospace.
 

How to Read the Indicator:
The reading of 99.60 for November 2011 means that during the next six months, the U.S. A &D manufacturing sector will contract at a 0.4% annual rate.

The Skies are Cloudy at 30,000ft
Since Barr Group first laid out the Aero Indicator in July 2010, it had a reading of 103.67 meaning a 3.67% annual rate of growth was ahead. That reading reached a peak of 106 in May 2011, when we then predicted a 6% annual rate of growth for the second half of 2011. The reading was right on target as aerospace production, aerospace capacity utilization, and air traffic rose significantly in the second half of 2011. Now the reading is only slightly negative so at best during the next six months the aerospace industry will be flat. However, we predict that after defense cuts are done and the accompanying rise in commercial sales come to fruition, the industry will return to 3% to 6% growth in the second half of 2012.

Many uncertainties remain in an election year. Changing strategies in national defense, unstable fuel prices, and the need for everyone to update old and aging fleets will all come to bear. Both Airbus and Boeing are currently reporting thousands of planes on order. Even though it will be cloudy in 2012, our indicators point to a safe flight throughout the coming year.

Dr. Saul “Sonny” Barr is the senior economist at Barr Group Aerospace, adjunct professor at TCU, and professor emeritus of Economics and Finance at the University of Tennessee. His company has provided economic development, consulting and training services to the Pentagon, Goodyear, Raytheon, Honeywell, Alcoa, Embry-Riddle Aeronautical University, local airports, and government, as well as many others. His company’s FREE website, AeroWeb, bga-aeroweb.com is visited daily by every OEM and prime, as well as thousands of small and medium sized companies each month. Aerospace intelligence and statistics, including news and commentary updates minute-by-minute on the AeroWeb.