“Managing in an Uncertain Economy,” a recent webinar hosted by the National Fluid Power Assn., had Economist Catherine Putney from ITR Economics put a somewhat upbeat spin on a downbeat economy. Here are nine takeaways from her presentation.
The economy is slowing. Rumblings of a downturn isn’t fake news. Growth in the U.S. Gross Domestic Product (GDP) is slowing. If one looks at the classic business cycle as a sine wave with four quadrants — rising during recovery and accelerating growth; declining in slower growth and recession — most contributors to the U.S. economy are in the latter two stages. The GDP trend shows that the economy is still growing, but at an ever-slower pace, and not where we were a year ago. Expect this to continue into mid-2020.
Better news for consumers. About 67% of GDP is tied to consumer consumption. “In terms of the consumer economy on the overall economy, expect more of a slowdown as we head into the next year,” said Putney. The good news is that the low point in GDP bottoms out at about zero growth. So the consumer economy will actually avoid recession.
Less so for industrialists. In terms of GDP growth, U.S. industrial production is going negative into the middle of next year. That means we will see a recession in the industrial economy. Growth in China and Canada is slowing; parts of Western and Eastern Europe are already in a recession. The U.S. is actually one of the last players following this recessionary trend because tax reform supplied an extra boost late in the game. But we’re not impervious, we’re still going to encounter this downturn into mid-2020.
Things could be worse. “If you compare the low point to the previous three downturns, it will be the mildest,” said Putney. It will not be comparable to recent recessions in the U.S. industrial economy: early 2000s was technology related; ’08-09 due to the housing market; and ’15-16 was oil and gas related. This downturn is just typical business cycle behavior, not triggered by one particular industry that pushes us into decline.
Politics doesn’t matter. Will the 2020 election have a bearing on the future economy? Not really, said Putney. There is no statistical correlation, going back to the 1950s, between the economy and whether a Republican or Democrat is President. The U.S. has a huge, nearly $20 trillion economy. Whether the White House is red or blue is not going to move the needle much. The recent tax reform, for instance, produced just a minor blip upward for GDP.
Pain depends on sector. All market sectors don’t move in lockstep. Total U.S. industrial production is forecast to slightly increase 0.5% in 2019 and 0.7% next year. That mirrors growth for packaging machinery. But construction machinery will be up 1.1% in 2019 and down 7.1% in 2020, and machine tools will take a -14.6% hit this year but will rebound 10.2% next year. Given the fact that some markets will go into recession, and others not, might make it possible to focus efforts into more-positive vertical markets.
Other factors. Inflation has started to slow and interest rates will hold fairly stable. For fluid power manufacturers and suppliers, that means it will be more difficult to raise prices. However, if you can reduce input costs, say due to lower raw material prices, you can improve profit margin.
The U.S. dollar typically strengthens in times of recession, and that can hurt exports. In terms of the U.S. trade war, China’s imports and exports are both showing declines, and are at the lowest level for quite some time. “What that tells me is that China is struggling more,” said Putney. “I don’t want to hang my hat on the overall trade situation, but at the end of the day, I think that that China is willing to suffer longer, which tells me that the U.S. is as of right now at the advantage compared to China.”
Fluid power predictions. Looking at pneumatics and hydraulics, not to be a bearer of bad news, but there’s going to be more of a decline over the next couple quarters, she said. What’s driving this decline? New orders for nondefense capital goods, which is a fancy name for B2B activity, is tightening. Businesses are not purchasing new equipment, they’ll wait until the landscape improves again. More people are pessimistic about the economy, which is fostering an environment for more risk aversion than optimism. We’re seeing the Purchasing Managers Index down; raw materials prices are generally lower due to declining demand.
That’s playing out in the fluid power industry. Hydraulic shipments are in negative territory and ITR actually revised the forecast downward for shipments in line with their outlook for B2B activity. The situation with pneumatics is much the same. We expect the recession to persist for at least another two to three quarters in the fluid power business before rising. Recovery will take place in the second half of 2020, and 2021 expects to show growth in the 5% range.
Long-term view. We know that there’s a slowdown coming. But with the labor market being tight, and the fact that the downturn will be mild, companies should probably avoid layoffs, advised Putney. Perhaps use this as an opportunity to train people, and work out any production inefficiencies, so you’re better prepared for the growth that’s going to come in late 2020 and 2021.
Regarding employment, it’s a major struggle right now for businesses to find skilled workers due to the tight labor market. But it’s also a fact that millennials, the 25 to 34 age group, are now the dominating demographic cohort in the labor market. That means businesses have to focus on satisfying millennials. We’re seeing quit rates go up, people just up and quickly leaving for another job. And they expect to have 6+ jobs in their lifetime, whereas 10 years ago people thought they’d have two jobs in their career. Millennials value work-life balance, so focus on non-monetary benefits, say flex-time, rather than solely on compensation.
Again, now is the time to prepare for what’s to come in the future, said Putney. Your competitors may be reactionary, cutting back on staff and liquidating inventory. Be proactive in times when things are down. Capitalize on the fact that we are going to see an upswing in 2021 when the economy’s back and thriving again.