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As the recession's haze clears, a brighter outlook emerges.

For those material handling companies left standing after the devastating recession of 2001 and 2002, the period is almost too painful to revisit. After record years in 1999 and 2000, manufacturers of material handling equipment watched their market crash, and the shock has still not entirely subsided. Industry sales dropped by 42.5 percent in those two years from peak levels, and for many companies the issue was one of survival.

But in 2003, the industry began to recover and this year, from all appearances, sales of material handling equipment and services are doing nicely—at least comparatively nicely.


An economic study prepared by DC VELOCITY for the Conveyor Equipment Manufacturers Association (CEMA) forecast an 8.5-percent increase in overall material handling business this year over 2003 and an additional increase of 12 percent in 2005.

Even so, most sectors have greeted the recovery with a fair degree of caution. Industry capacity still exceeds demand. Few companies are staffing up. And there are a few causes of concern.

One of those is raw materials. The Institute of Supply Management (ISM), which tracks business trends closely, said in its May report on manufacturing activity that respondents to its survey indicate strong demand, but expressed concern about rising material and energy costs. The price and availability of steel has been a particular concern for many material handling equipment manufacturers, but the ISM reports a long list of other commodities that have also risen in price.

On the up and up and up
Despite lingering uncertainties about energy and materials, it's clear businesses are also confident. In its semiannual Economic Forecast issued in May, the ISM said survey participants expect relatively strong economic growth in both manufacturing and non-manufacturing business for the rest of 2004. Purchasing executives surveyed predict a 6.0-percent increase in capital spending this year, compared to a 2.7-percent increase in 2003.

The ISM said in its separate monthly reports on business that the manufacturing sector grew for the 12th consecutive month in May and the non-manufacturing business activity had increased for the 14th consecutive month. Those reports are based on several indices that track trends in new orders, production, backlogs, employment and supplier deliveries. ISM said its Purchasing Managers Index for manufacturing registered at 62.8 percent and for non-manufacturing at 65.2 percent in May. An index reading above 50 percent is an indicator that the economy is expanding.

"It appears that second-quarter growth will be very solid, and the momentum should carry over into the second half of the year. 2004 is shaping up as one of the better years for manufacturing. Many respondents indicate that order backlogs are growing for the first time in several years," said Norbert J. Ore in a statement on the May results. Ore is chair of the ISM Manufacturing Business Survey Committee and group director, strategic sourcing and procurement, at Georgia-Pacific Corp.

Other indications of economic vitality come from the Leading Economic Indicators Index compiled monthly by the Conference Board. In an update issued in late May, which reported on trends in April, the U.S. leading index increased only slightly, by 0.1 percent. The April uptick left the leading indicator at 115.9 (with 100 representing 1996 numbers). The Conference Board said that for a six-month span that included April, the leading index increased by 1.8 percent, with nine out of 10 of the components advancing. The index predicts economic trends three to six months into the future. Thus, an increase in the index now signals economic growth for the months ahead.

And it's clear that the material handling industry will be swept up in the swell. Indications of growth can be found in quarterly reports from the Material Handling Industry of America (MHIA), which looks at trends in material handling manufacturing —specifically, trends in sales of conveyors, overhead cranes and industrial trucks.

The March report indicates that contraction in those segments finally ended during the third quarter of 2002, and that for 2003 overall, new orders grew 2.7 percent to $16.2 billion. Now, material handling equipment manufacturing is in an accelerating growth phase of its economic cycle. "Indications are that MHEM [material handling equipment manufacturing] is expected to remain in that phase through 2005," says the MHIA segment brief.

For this year, MHIA forecasts 3.0- to 4.0-percent growth in sales of conveyors and conveying equipment, following a 5.5-percent drop in 2003. An even more optimistic CEMA expects growth of 6.0 to 7.0 percent for the conveyor industry this year.

Rack companies, lift truck manufacturers and warehouse management systems firms are also seeing increased activity. The Industrial Truck Association forecasts growth of about 3.2 percent for the year, while MHIA forecasts industrial truck sales will grow by 5.5 to 6.5 percent following last year's 5.0-percent growth.

Building boom
Another indicator of the potential growth in material handling sales is the development of new distribution center facilities. ProLogis, a major provider of distribution facilities and services, in its year-end property market review of 30 major U.S. markets says that demand was outpacing new supply. While the U.S. vacancy rate was over 10 percent at year end, ProLogis expects to see some tightening this year. It said vacancy rates had fallen in 20 of the top 30 markets.

Perhaps more important, new construction starts amounted to 70 million square feet in 2003. That's still 45 percent below the cyclical peak, according to the report, but it does represent a jump from the 58 million square feet started during 2002. ProLogis expects that the demand for DCs will continue to grow at a moderate pace through the rest of 2004.

The ProLogis view is consistent with the results of a survey DC VELOCITY conducted among readers last year. A third of respondents to the survey said they were planning new distribution centers, and 40 percent indicated plans to retrofit existing facilities. Further, 63 percent said that their material handling budgets for this year were up over 2003 levels.

On a broader scale, gross domestic product—the total output of goods and services in the United States—grew at a 4.4- percent annual pace in the first quarter, according to the federal Bureau of Economic Analysis's preliminary report.

That's important. ProLogis, in its report, says that the demand for DCs and warehouse space is "governed largely by the rate of growth of real GDP." Thus GDP growth means greater demand for DCs, which means greater demand for the equipment needed to operate those facilities.

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