Regional Manufacturing Outlook
Tuesday | 17 March, 2009 | 9:20 am


By Provided KeyBanc Capital Markets

March 2009 - Introduction
The Midwestern manufacturing base, heavily exposed to automotive, construction equipment and steel, has been deeply impacted by the ongoing recession. The credit crisis, now in its third calendar year, has contributed to a severe decline in demand for goods and services, a steep rise in unemployment and an expected decline in regional GDP.

The basic materials sector illustrates the speed at which the economy declined following the Lehman Brothers bankruptcy in September. Many metals and manufacturing companies reported a fourth-quarter loss in the midst of a record year for earnings. The Big Three automakers are now facing enormous liquidity concerns, resulting in significant additional job losses as automotive production forecasts have continually been revised downward. Major construction equipment makers like Caterpillar and Deere & Co. have dramatically scaled back to adjust for declining demand. Most economic forecasts expect the first half of 2009 to be challenging as manufacturers hope for a rebound in late 2009 and into 2010.

One positive aspect may be in the Midwestern housing sector, where the rate of decline in existing home values has slowed considerably over the course of the year, as indicated in the latest Case-Shiller index. Further, the Institute of Supply Management's February report of national manufacturing levels provides initial indications that the contraction in the economy is slowing. The latest manufacturing index rose to 35.6, with new orders paving the way. Although still well below the threshold level of 50 that tips the balance between contraction and expansion, the current levels indicate the worst might be behind us.

GDP & Employment
Real GDP declined 1.2 percent year-over-year in Michigan in 2007, while the other states experienced an average 1.6 percent rise. The figures are expected to be much worse across the board for 2008. Also, as of December 2008, manufacturing sector employment had dropped in all states except South Dakota, as compared with December 2007. Michigan and Indiana exceeded the national average drop in employment.

Most of the Great Lakes states reported second or lowest quintile change in real GDP in 2007 over 2006, especially the Rust Belt states that are closely associated with the automotive sector. Although the Bureau of Economic Analysis has not published updated state GDP figures for 2008, most economic estimates point to a sharper contraction in these states than that of the national figure. However, the economies of the Great Plains states, mostly supported by agriculture and heavy machinery manufacturing, are expected to have fared much better than the rest of the region.

Durable goods orders fell across the country and impacted industrial manufacturing in a major way. The order momentum started to slow in the second quarter of 2008 but plunged sharply toward the end of the year. Rising unemployment and declining net worth led consumers to rein in spending for durable goods.

Overall unemployment rates across the region increased 1.7 percentage points year over year, as of December 2008. Michigan's employment situation has worsened over the past five years, with the state's unemployment rate exceeding that of the region by about 4.7 percentage points as the state crossed the 10 percent mark in December.

The Midwest region has, like the rest of the country, seen widespread increases in unemployment in the fourth quarter of 2008 and into 2009, especially in the manufacturing sector. Not surprisingly, the automotive-heavy states of Michigan and Ohio were heavily impacted, but the largest decline was registered in Indiana.

Chicago Fed Midwest manufacturing indices
(All CFMMI data are indexed to 100 as of 2002)

The base CFMMI declined to 96.4 at the end of November 2008 and is expected to decline further in December. Overall Midwest Industrial Production Index followed similar trends but ended November above the index base level.

The steel sector CFMMI closely tracked the overall CFMMI, but it dropped sharply in the fourth quarter, as can be expected from the sharp decline in steel demand that prompted mill capacity utilization to be cut back to 40 percent to 50 percent levels.

The automotive sector CFMMI experienced a precipitous falloff in 2008, as demonstrated by a November reading of 65.5.

Following a sharp uptick in the fourth quarter of 2007, the general machinery and appliances sector also fell off in the second half of 2008, but it fared much better than the other sectors.

International trade
The Midwest region's top exports were transportation equipment (mostly light vehicles), machinery (mostly construction equipment) and chemicals. These three components made up 60 percent of the region's exports in 2007. About 48 percent of the region's exports were in the NAFTA region.

Michigan and Ohio accounted for 18 percent of U.S. and more than 65 percent of the Midwest region's transportation equipment exports in 2007, comprising mostly light vehicles and railway equipment. A weak dollar contributed significantly to the export growth through 2007, and its resurgence toward the end of 2008, coupled with slowing global demand, will most likely shadow the current slowdown.

Similarly, Illinois, Ohio and Wisconsin accounted for 18 percent of U.S. and 61 percent of the region's machinery exports in 2007.

Exports from the region to the emerging (BRIC) economies experienced strong growth in the past five years. Exports to Russia grew at a 45 percent CAGR, and those to China, India and Brazil grew an average 22 percent from 2002 to 2007.

The S&P/Case-Shiller Index continued to demonstrate a steep fall in Midwestern home values. However, the rates of declines were less than the national average in all but the Detroit area. The Ohio housing market has demonstrated a much slower rate of decline in home values, providing some indications as to how far valuations have to drop before bottoming out. Falling mortgage rates and an abundance of distressed sales have provided a backstop to the market in the Midwest region, as well.

The Midwest region had an average 35 percent drop in new home permits, on par with national levels. The Illinois and Michigan markets reported the steepest year-over-year drops in permits.

Grief Inc.: Loan refinancing
In February 2009, Grief, Delaware, Ohio, raised $700 million in three-year senior secured credit facilities, with KeyBanc Capital Markets acting as co-documentation agent. Grief manufactures steel, plastic, fiber and corrugated containers, protective packaging and containerboard, and provides blending, filling and packaging services for a range of industries.

Lubrizol Corp.: Senior secured term loan
In February 2009, Lubrizol, Wickliffe, Ohio, raised $150 million in a senior secured term loan, with KeyBanc Capital Markets acting as joint lead arranger and administrative agent. Lubrizol is a global manufacturer of specialty chemicals, serving refiners, lubricant producers and other industrial manufacturers.

Gibraltar Industries: Divestiture of SCM Metal Products
In November 2008, KeyBanc Capital Markets successfully completed the sale of SCM Metal Products Inc., Research Triangle Park, N.C., a wholly owned subsidiary of Gibraltar Industries Inc. to Platinum Equity. SCM Metal Products is a manufacturer of metal powders and pastes for powder metallurgy and related applications, with production facilities in North Carolina and Suzhou, China.

CG Electrodes: Revolving credit facility
KeyBanc Capital Markets raised a $130 million revolving credit facility for CG Electrodes LLC. St. Mary's, Pa., to finance a dividend payment, refinancing of existing debt and other corporate purposes. CG Electrodes is a manufacturer of premium, ultra-high-power graphite electrodes used as consumable conductors of electricity in the electric arc furnace steel-making process.

Disclosure Statement
KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., member NYSE/FINRA/SIPC, and KeyBank National Association (KeyBank NA), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank NA. Banking products and services are offered by KeyBank NA.

Regional GDP measures have not been updated for 2008 by the Bureau of Economic Analysis as of printing.

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