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Market Outlook for 2017: Sluggish Growth with a Focus on New Realities

While the current uptick in the economy is good news to all industries, continued low oil prices and political unpredictability are making it difficult to get financing for projects, according to speakers at the 2016 VMA Market Outlook workshop in San Diego last August. This is especially true in the water and wastewater infrastructure and chemical processing markets.

SOME OF TODAY'S UNCERTAINTIES

  • The recovery of the U.S. economy (as well as many other countries) has been much slower than after past recessions. While companies have assets and access to affordable credit, many are not investing in capital improvements, which contributes to the slow growth.
  • The U.S. elections, the Brexit situation, and political upheavals and bad policies in other areas of the world have created hard-to-predict situations and nervous investors.
  • Oil and gas prices remain low, while coal and nuclear in the U.S. are dying and renewable energy sources are picking up speed throughout the world.
  • Demand for  consumer goods, power, water and infrastructure in undeveloped and developing countries is increasing, spreading economic considerations around the globe.

In addition to those shorter-term issues, a new concern is making its way to the forefront of people’s minds—and it promises to have long-term effects. Nearly every workshop presenter expressed serious concerns about the ability of manufacturers and end users to get the skilled workers they need.

OIL AND GAS

Give it Two Years

Despite a 75-80% fall-off in drilling activity recently, John Spears, president of Spears and Associates, was optimistic about the future of oil and gas over the next two years.

“World oil demand is estimated to increase 1.5% in 2016 and another 1.6% in 2017,” he said.

That demand is coming from emerging markets, which now account for over half of worldwide oil demand. India and China also will see demand growth—Spears said those countries will need 300,000 barrels per day (bpd) this year.

As a result, even though 500,000 bpd was added to the market by post-sanction Iran in 2016, global oil supply is expected to grow only half a percentage point this year as reduced output from the U.S. offsets gains elsewhere.

Spears said it will take only about 18 months to deplete the “extra” 800 million barrels of oil that have been placed in inventory over the last two years. “With this trend, we will likely have negative inventory by 2018,” Spears said.

As far as drilling activity, Spears said that when the need grows sufficiently, U.S. producers will be able to finish about 1,800 oil wells now awaiting oil price recovery (which he said is above $50 a barrel). He predicted that producers would need to start increasing production by the second half of 2018 to fill the emerging gap between demand and supply, and that may mean well completions beginning next year in anticipation. That will be good news for valve and associated equipment demand, he said. He also reported that:

Natural Gas

U.S. spot gas prices fell to around $1.60 per million British thermal units (mmbtu) last spring. Drillers are responding by making their operations more efficient. For example, “Operators have found that an ever-longer horizontal section doesn’t get as much bang for the buck,” he said. Instead of continuing horizontally, drillers are drilling shorter lengths then going to a different place and reversing direction to drill back towards the original spot. “This way they utilize as much as possible of the resource,” he said.

These changing drilling methods and price fluctuations from weather and supply issues make it difficult to forecast drilling activity.

Meanwhile, gas consumption has grown at a 2.4% compound annual growth rate (CAGR) since 2012, with 45% of the growth coming from power sector needs, where gas has taken over coal’s share. U.S. gas output is projected to reach 74.8 billion cubic feet per day (bcfd) in 2016 (up 0.8%), but has not grown since the third quarter of 2015.

Spears projected that by Thanksgiving 2016, gas inventories should allow prices to get back to around $3.20. “We do not project gas prices going back to the $4 or $5 level,” he said. Still, new techniques have put the incentive to drill a well at about $3.

Meanwhile, “Where are you going to find the people to run the equipment when you do gear up?” he said.

16 sum mow Oil inventory Spears

Rig Activity

U.S. rig activity is projected to fall about 45% in 2016, but then will rise about 30% in 2017. “It’s a tough environment for the producers,” Spears noted, because “they don’t have the access to Wall Street to get funds to support activity.”

Canadian rig activity is projected to fall about 39% in 2016 before rising about 30% in 2017. A challenge there “comes from Alberta’s plans to double its carbon tax to C$30 per tonne by 2018,” Spears said, along with a 100-megatonne per annum cap on oil sands emissions (up from 70 million megatonnes).

16 sum mow rig counts Spears

Forecast

  • U.S. oil prices will recover to about $50/barrel by the end of this year and about $60 by the end of 2017. That means oil traders will begin to anticipate the potential for inventory draws beyond 2017.
  • U.S. gas prices will average about $2.30/mmbtu this year. Gas prices are forecast to average over $3/mmbtu in 2017.
  • The global market for surface and subsea equipment including wellheads and Christmas trees will total $19.5 billion in 2016 and rise to $21 billion in 2017. Global spending on rig equipment is forecast to total $11 billion in 2016, down from 2015, then fall about 10% in 2017. Most of what’s needed will be replacement for worn-out equipment; it will be about 2018 before new equipment is needed.

LNG/GAS EXPORTS

Activity Shifts

Four years ago, Liquified Natural Gas (LNG) was a very heated market and, “We (the U.S.) were discussing export capacity and ways to capture the market,” said Ken Medlock, senior director, Baker Institute for Public Policy, the Center for Energy Studies. While the U.S. will remain a major player, today, “There is new capacity going online in other areas of the world closer to where the need exists.”

Meanwhile, “The role of natural gas in meeting the demands of the developing world is largely dependent on the availability of networks and grids,” said Medlock. He shared with the audience a global picture at night to illustrate where power is needed.

16 sum mow LNG exports Medlock

Eastern China has brightened considerably recently, he pointed out. Since the current per-capital income within China’s interior is 1/20th of what it is on the coast, “It’s just a matter of time before the lights get brighter there,” he said.

Medlock also explained that, as more than 500 million people move into the middle class around the globe in the next 20 years, the first requirements they have are roofs over their heads, food and clothes. After that, they start using energy. Meeting those energy demands will require unprecedented levels of investment.

“So where does natural gas fit?” he asked. In the developed world, demand is relatively flat, which means opportunities arise as older infrastructures need to be replaced.

The last major build-out of coal-fired infrastructure in the U.S. was in the late 1970s to early 1980s, Medlock said. When that infrastructure meets its life end, the decision to replace must be made.

While a percentage of the replacement will be in renewables such as wind, solar and geothermal, Medlock said natural gas will remain a significant portion for at least the next few decades.

Shale has been a driver behind the growth of natural gas and crude oil, but that driver is U.S.-centric, he said.

The growth of energy use “is an international conversation,” he reminded the group. India is beginning to grow and economic reforms have been launched to develop road infrastructure across the country, which will connect the country and promote internal development.

In China, “More than 60% of the infrastructure built to create or transmit power was built in the last decade,” he said. “They are not going to retire that any time soon.”

However, the Chinese government is thinking of moving toward renewables and natural gas “so there will be opportunity for new builds. That means an opportunity for LNG,” Medlock said.

Including all gas resources, there is about 2,500 trillion cubic feet (tcf) of natural gas available at wellhead prices below $6 in North America, so this continent is likely to be a driver of supply-side global gas market development for years to come. However, the LNG market is saturated because demand didn’t materialize the way it was anticipated and production has begun in many other areas of the world, he concluded.

For example, Australia’s LNG is exporting to Malaysia and other markets close to them, such as China and India. The U.S. is expected to emerge as the third largest LNG exporter in the world.

Medlock stressed that Asian demand is going to drive the market, but there will also be LNG import growth in Latin America. Because the U.S. is connected to Canada and Mexico, existing infrastructure to get the gas from Canada to the gulf and out can be used.

“Politics have an impact when you talk about pipelines, but once you put natural gas on the water as LNG, you can transport it anywhere in the world as long as there is receipt capacity,” he pointed out.

Medlock believes gas prices overall will moderate. “The U.S. price remains among the lowest in the world, but the bottom line is: it is affected by demand, which is often seasonal, and by global trade.”

Forecast

  • Elasticity of supply in North America will push the large, long-term price impacts onto international markets.
  • North America is positioned to take an increasing role in the global gas market balance, carrying geopolitical and environmental impact.
  • Renewables will capture greater market share, but they face challenges that even cost abatement policies cannot sustainably address.
  • Energy efficiency will play an important role in balancing demand in an increasingly environmentally sensitive world.

THE PETROCHEMICAL MARKET

North America is Champ

Mark Eramo, vice president, IHS Chemical, said opportunity for growth in the chemical industry exists.

“But the story in this industry is the same basically as it was last year. As long as predictions hold true that crude will return to nearly $80 a barrel and gas will stay low, North America is still the most attractive place to invest in petrochemicals and plastics,” he said.

ExxonMobil and Sabec have announced a major project on the U.S. gulf coast, an indication they believe North America is the place where they can count on the availability and good prices of natural gas.

Still, because demand growth is questionable, many companies are holding off on making build decisions, he said. Russia and Brazil have not recovered from 2009’s economic woes and are currently facing recessions. While India remains a bright spot with steady growth, the full impact from China’s economic reform has yet to be seen.

The result, according to Eramo, is a slowdown in approving new investments for 2020 and beyond. Lower costs added to the pause in demand result in price declines. While lower prices can stimulate chemical demand, those prices also lower margins, which could force re-assessment of capital spending. The combination can create tight markets in the near term and will influence future investment decisions.

Compared to its rate of advancement and to other countries in the world, China is seeing a much lower level of spending. “There is a capacity overbuild that has created a supply surplus in certain product chains,” Eramo said. As a result, “there will be a change in the kinds of products,” he said. Also, private company investment continues to gain market share in that country. ­Meanwhile, “they [Chinese companies] are getting more active in overseas investment, and the government’s policy is moving toward market-driven dynamics to drive investments,” Eramo said.

China represents about 50% of the 4% growth in plastics consumption and will add nearly 250 million metric tons of capacity in the next three decades, he said. Almost half of that capacity is owned and operated by private companies, which are also building infrastructure in preparation for new plants.

“The question arises—Does private investment change behavior?” Eramo asked. “Can you expect companies in China to react and act in response to market conditions? And what does all of this mean for the valve industry?”

The Chinese government also is promoting industry consolidation to combat pollution and improve industry efficiency and safety. “We’re seeing all the right things happening in China. The economy there is still growing and more people in China are consuming more of their own things,” he said.

16 sum mow eramo

In North America

Low-cost energy and natural gas liquids provide a sustainable advantage for a new investment wave in North America, Eramo said. Advantaged feedstock will enable an additional wave of building beyond 2020, assuming crude oil prices recover (to near $80/barrel) and low natural gas pricing (near $3/mmbtu). However, logistics and port infrastructure investments are desperately needed to support a higher level of exports.

Shale oil and gas have brought back competitive economics to the U.S. Domestic and international companies are seeking to invest to leverage the low-cost opportunities, and new entrants in the market will create increased competition in domestic markets.

“North American ethylene capacity will increase to more than 45 million metric tons by 2020, driven by low-cost ethane feedstock,” said Eramo. All of the current growth lies in turning the feedstock into base chemicals, but there will be more growth in derivative units.

However, delays will come from issues regarding the quality and availability of labor. “In terms of executing this size and complexity of plants, there are problems getting the right kind of people to plan, build and operate them,” Eramo noted. “There have not been projects like this built in the recent past, so finding people who can make them happen is a challenge.”

FORECAST

  • 2016 will see a 10% earnings decline; 2017-2018 should see earnings improve as demand grows into supply base.
  • Decisions to put investments on hold in 2016 could lead to supply limitations in 2020 and beyond as demand growth accelerates.
  • By 2019-2020, earnings should peak as oil recovers and demand grows into installed capacity base.

THE WATER MARKET

A Leaking Situation


While the 2015 water and wastewater market exceeded predictions by growing about 5%, water construction was down in 2016 compared to the previous year, though wastewater was up.

“The flat numbers are certainly not because there isn’t a huge need for work in the market,” according to Tom Decker, water marketing and business strategy consultant. “The American Society of Civil Engineers has projected a $113 billion shortfall in water projects over the next few years, and the Environmental Protection Agency (EPA) says that over the next 20 years, water needs a $384 billion and wastewater needs a $271 billion investment,” he added.

Meanwhile, the American Water Works Association says the U.S. needs $1 trillion over the next 25 years just to stay at the current level of service.

The condition of the water system in the U.S. has been called a national security threat, while the World Economic Forum says water shortage is the number one global crisis of the next decade.

This is despite public support for investment in water infrastructure.

“The episode in Flint had a big impact on public perception,” Decker said. But so far, the funds have not flowed as freely as the leaks in the system, “and much of the need is not necessarily in plants—it’s out in the system, for pipes, pumps and valves.”

16 sum mow WW needs Decker

Supply Shortage

A huge factor affecting water needs is shortage—the west, for example is in its fifth year of drought. “Lake Mead is now at only 49% of its capacity, and many cities are looking for alternative supply sources,” he said.

For example, San Diego has wisely created a multi-year program to maximize water re-use, while Houston is set to spend $2 billion to reduce groundwater pumping. Many others are looking for alternative sources of water, including desalination, Decker said.

Currently 17,000 desalination plants operate in 150 countries, with the most active areas of the world the U.S., India, the Middle East and China. While reverse osmosis is still the leader in this market (about 80% of the plants), development in the U.S. has slowed because of the economics of the process as well as concerns about brine disposal and the impact of intake structures on aquatic life. Still, Decker pointed out that a Frost and Sullivan study found that growth in desalination worldwide will be in double digits for the next four years—about a 13% CAGR worldwide.

Water re-use is also seeing growth, although only about 3.8% of wastewater in the U.S. is recycled back into the system. Other factors affecting the current market include:

Crumbling infrastructure: “We are still averaging about 240,000 pipe breaks per year in the U.S., and we lose in excess of 6 billion gallons of treated water per day” due to leaks, Decker pointed out. Utility companies do well if they can replace 1% of their systems per year, he said. “That means it takes 100 years to replace a system. And today’s pipe materials don’t have a 100-year lifespan.”

Overflows: Last year about 800 billion gallons of untreated water was released in the U.S. Cities such as Baltimore, Winnipeg and Nashville are developing multi-billion dollar programs to clean up overflows. “There is plenty of work out there in the overflow arena, and there is more enforcement from the EPA, forcing utilities to reduce overflows,” said Decker. The Obama administration’s EPA made this a priority issue, but “the question is, once Obama is gone, will the enforcement get pared back?” he asked.

Financial forces: While the need for funding is significant, utilities are not earning sufficient revenue despite the fact that rates are up about 6% in 2015 and have been up 41% since 2010. People are using less water, either because of conservation or restrictions, and rate increases are not keeping up with reduced volume. Decker pointed to a Black and Veatch study that showed only one-third of water utilities can cover their current and future needs with current rates; one-third will need to raise between 5-10% to cover costs, and the final third “simply don’t know where that money will come from,” Decker said.

Once funds are obtained, the other problem is finding construction companies able to bid, he added. Staffing shortages have made some firms reluctant because they are not confident they will find the skilled labor needed for big projects.

While about $120 trillion is available for infrastructure from banks and institutional investors, the price of oil is currently depressing infrastructure spending in some markets. Meanwhile big drivers for the global market include a growing middle class and urbanization in developing countries. Canada has just proposed a $90 billion infrastructure spend over the next decade and 12% of that will go to water and wastewater.

Forecast

  • A 2% overall growth will occur in the market for 2016 with the second half doing better than the first. For 2017, a continued slow growth pattern will occur but contraction will be part of the picture going into 2018.

POWER

Flatlining for Some

Kevin Geraghty, vice president, generation, NV Energy, began his presentation with this somber announcement: “I hate to say it, but coal and nuclear are basically dead in the U.S.”

The markets are no longer economically feasible, and the U.S. power market is flat, with less than 1% annual growth expected this year, he said.

“Everybody talks about environmental laws, the administration, new gas discoveries and lower cost renewables as a driver, but you know what is really driving this is energy efficiency,” he proclaimed.

The recession had a huge impact on the degree of efficiency and the way products are made, he added, and power consumption has not bounced back thanks in part to smart technology and other conservation efforts.

16 sum mow USpowerMarket Geraghty

“There is a glut of energy in the U.S., and this is the most stable period for energy prices in 30 years,” he said.

The U.S. nuclear fleet will get very old in the next 25 years and much of it will be shut down for economic reasons (not because of problems). Operators just can’t pay the money to stay around. The exception is Palo Verde in Arizona and some plants in the Southeast, where there are regulated utilities and the costs to run the reactors are built into the rates, he said.

Geraghty expects half of nuclear power to go away while new coal plants will exist only if one scenario enters the picture: high oil prices. “I believe that daytime power requirements will be almost 100% solar and wind,” he said.

At the same time, storage of that power remains a problem, and natural gas-fired generation will cover the shortages.

“But in a decade or so, natural gas will be attacked as well. Most of the energy added in the U.S. will not use pumps or valves except for the southeast and the southwest where there are huge load needs,” he added.

For valves and pumps, “the most important thing to remember in North America is that baseload energy does not exist in natural gas and coal anymore, so they are starting and stopping,” Geraghty said. “That puts stress on the valves and that is where the valve and pump business can grow. Cycling is hard on the technology.”

Forecast

  • Coal plants that survive will run less and need to be flexible—most of these plants are base-loaded today and will need help with heavy cycling requirements.
  • Flat to negative growth in power generation and use will occur in the U.S. in the coming years.
  • Explosive growth will occur in developing nations.
  • The need for technological advances to enable efficiency and demand- side management, distributed energy systems and storage is increasing.
  • Sometime in the next decade, more energy will come from renewable resources than coal resources.

WALL STREET

Why Are Stocks So High?

The overall economic improvement people had hoped for after the recession is not happening, and fundamentals are stable-to-worsening in the economy, according to Michael Halloran, senior research analyst and managing director of Robert W. Baird and Company. However, the stock market continues to hit all-time highs, which is counter-intuitive given several negative variables affecting the marketplace, he added. Those variables include a strong U.S. dollar, which hurts U.S. exporters; impacts from low oil prices; slower growth in China; struggling U.S. debt-dependent emerging markets; and political instability in many markets. All of these are a drag on global growth, he said.

While Halloran remained optimistic about the distant future for capital expenditure (capex) investments, he ­wasn’t so cheerful about the short term.

“When political instability rises, you defer investment decisions. This is especially true with oil and gas projects,” he said. “Global demand outlooks remain sluggish, and persistent headwinds are reflected in recent orders and sales. Overcapacity, peak debt levels and the ongoing race to cut costs enough to preserve margins are negative factors.”

While the automotive, municipal water and wastewater, and U.S. residential and commercial construction markets are exhibiting some improvement, agriculture, general industrial, mining and oil and gas are trending downward while aerospace, defense, chemical and power remain stable.

The biggest negative for the process industry is cuts in oil and gas-related spending. Upstream capital spending in 2016 is projected to fall as much as 30-50% in North America and 10-20% internationally. Additionally, the effects of commodity deflation have spilled over into midstream and downstream projects, which means project deferrals and cancellations are likely to continue through 2016 into 2017. Oil and gas industry experts have speculated that oil prices of $60 to $70 per barrel must be sustained to justify a material rebound in capex, he said.

Service companies in oil and gas are making no money today, he said. As oil goes up, the service providers will raise prices, which means the capex pool stays the same, and there won’t be as much money for suppliers. While Halloran believes a recovery is coming, he sees no growth in 2017. There will be limited large scale capex projects and a heavy focus on after-market replacement of worn products.

The question is, why is the stock market so high? Many factors, including interest rates and a broader scale of economics are currently trumping the market, he said.

“Low interest rates worldwide mean that people are chasing yield. They want to make their money work so they push into riskier assets—stocks,” he said.

But that does not mean that companies whose stocks are going up are more valuable. In fact, many are restructuring, an accelerated theme over the last 18 months.

Restructuring brings with it “layoffs and facility consolidation, which means less power, less physical footprint. Facilities are being reduced 5-10% but when you ask managers if they will increase space again, the answer isn’t necessarily yes because capacity stays basically the same,” he said.

Though many companies have suggested that industrial trends are stabilizing in the short term, Halloran sees pressure remaining for 2016/2017. But the realities that industrial capital spending remains bleak, key input costs are rising and year-over-year (YOY) declines are occurring do not support the idea of stabilization. Halloran sees limited catalysts emerging to support expectations for the second half of 2016, and he expects 2017 revenue to be down YOY for many core industrial companies. Margin levels are largely expected to remain resilient.

Expansion from 2009 to the ­present is unique in that low growth has been the norm, and the gross domestic product and industrial production have lagged in comparison to past cycles.

“There is stagnant population growth, falling productivity, capital growth is nearing exhaustion due to low interest rates and peak debt, and there haven’t been big technology catalysts to spur growth,” he said.

Forecast

  • In oil and gas upstream markets where the focus is shifting from decline to rebound, a “lower for longer” dynamic will persist because of producers’ resilience and ability to ramp production quickly as prices rise. In midstream and downstream, many industry participants expect MRO spend will recover somewhat through 2016.
  • In chemical processing, capex spend growth will increase by more than 2% in 2016 and more than 3% in 2017.
  • In power generation, a material recovery is unlikely in the near term, but activity remains fairly stable and is increasingly targeted at natural gas, nuclear and ­renewable fuel sources. Energy efficiency remains a key focus area for projects.
  • In municipal water/wastewater, large capex infrastructure work has recently shown improvement and bears watching as infrastructure issues go before policymakers.

THE GLOBAL PICTURE

Murky at Best

Simona Mocuta, senior economist for State Street Global Advisors, said her desire to be optimistic about the world outlook this year has been tempered by BREXIT (Britain’s Exit from the euro market).

The status of the economy of the world today “should be better, but it could be worse,” she said, reminding attendees that what goes down will eventually come back up. Part of the problem today is the huge challenge of political uncertainty.

The year 2016 is the fifth year of sub-par growth and 2017 will be the sixth year, she pointed out.

“There is a lot of discussion that the next recession is right around the corner,” she said. As a result, “Many have lost the ability to think that things are going well, so that is a problem in and of itself,” she said.

Also, in many parts of the world, policies are generally ineffective, and can be harmful or destructive.

“Politics is a big negative to economic performance in an indirect way; politics direct policies that effect how growth and inflation work,” she said.

Still, despite BREXIT, Japan’s huge workforce problems and China’s relative slowdown, there are many positive signs, she said. The Eurozone recovery has gained traction; a let-up in the fighting in Ukraine has occurred; the Greek crisis has been temporarily resolved; oil prices are low; and the value of the euro has fallen.

“For many years we spoke of outperformance of developing markets compared to advanced economies,” Mocuta said. At the time, there was a huge differential between the two. The financial crisis of 2008 changed that scenario.

“Today, there is only a 1.8% difference. The deceleration in growth worldwide is driven mainly by the non-developed world,” she said.

Workers and Productivity

The biggest change affecting the world globally is illustrated by what’s happening in China. Before 2015, the country had “a growing working age population,” she said. That is no longer true and its effects have the potential for global implications.

“If there is not a 2% point gain per year, China’s costs rise, making it less productive and competitive,” she said.

Productivity is also affecting other countries, including the U.S. where the participation rate of working age people is at a record low.

16 sum mow Mocuta

“Since the recession, it keeps going down and we don’t know why,” Mocuta said. “Even when you account for those who gave up on jobs and the retirement of the baby boomers, there is still a gap.”

The biggest debate in economics right now is: why is productivity so low? she said.

Many companies are hoarding money and not deploying the capital they have, which hurts overall productivity. “Companies that are at the forefront globally are just as productive as they used to be; but others are not instituting innovations. A new way of doing business comes up, but the adoption rate does not trickle down,” she said.

Another challenge comes from retail space issues. “If you have to maintain a physical space, your cost of operating the business is already much higher than internet-based retailers,” said Mocuta.

Meanwhile, negative interest rates are detrimental, she said. [Negative interest rate does not mean negative real interest rates. It means a rate above zero but lower than inflation so that the money borrowed could be worth less after repayment is made]. These negative rates “are destroying the business models of insurance companies and pension plans,” Mocuta said. Central banks are trying to help; however, “sustainable growth is not the gift of monetary or fiscal policy,” she said.

Problems in the Eurozone arise from the disparity in the economies of the stronger vs. the weaker countries. “You cannot survive on austerity forever,” noted Mocuta. “The Eurozone does not have the current framework to balance productivity and currency values. This means richer countries have to pay out to the poorer countries because there is no way for the poorer countries to devaluate their currency to help counteract for less productivity.”

As far as BREXIT, Mocuta said many economic consequences could occur. The EU will lose its second largest economy and budget contributor, and it will lose influence in global affairs because of the loss of UK military capability. This will also increase the influence of Germany and France and may prompt calls for referendums elsewhere in the EU.

16 sum mow working age Mocuta

In regards to China, Mocuta said she doesn’t see a return to the 10% growth of previous years. Right now, “there is a big power struggle between reform vs. traditional and there is policy paralysis. It won’t be until 2018 or 2019 that we will see serious action.”

Forecast

  • Much of what will happen depends on the outcome of elections in the U.S., in Germany and in China.
  • For the UK, BREXIT could mean a slowdown in growth and a possible recession.
  • The window for any meaningful structural reforms resulting from the current political situation is late 2017, so financially, things will remain the same for the next year.

THE U.S. ECONOMY

Surviving the Tsunami

While the U.S. is the lead dog right now, outperforming the global economy, “It is still subject to the same pressures as those being exerted against the rest of the world. The major tsunami that is covering the world is low interest rates,” said Lynn Reaser, chief economist, the Fermanian Business & Economic Institute, Point Loma Nazarene University.

“Investors are chasing yield,” and the U.S. is the least unattractive alternative right now, Reaser said.

The money that investors are bringing to the U.S. has put downward ­pressure on treasury bond rates. “That is also distorting the stock market and forcing the dollar up, which is positive for imported goods, but negative for the export market,” she said.

Despite these negative challenges, Reaser was cautiously optimistic about the U.S. economy while warning that expansion will remain sluggish. She did not predict a recession in the near term, but noted that the slow growth worldwide is causing problems in the U.S. More pressure comes from neighboring Canada, which is suffering the impact of depressed energy prices, keeping its growth under 1.4%.

Positives/Negatives

Currently, housing demand is rising, government finances are in somewhat better shape, the Fed is in accommodative mode, and the job market “is doing fine,” Reaser said.

“We’re still hiring, job growth is moderate; we are nearly at full employment and wages are picking up and rising faster than prices,” she said. Meanwhile, consumers, who make up 7% of the economy in this country, are basically holding it up right now, she said.

The most significant negative is that the U.S. economy is not getting much help from the rest of the world, she continued. But another problem stems from lagging productivity. “Companies seem to be substituting workers for capital spending,” Reaser warned. That reality combined with the fact that businesses are buying back stock, paying out dividends and hoarding cash, seems to be getting in the way of capital equipment spending.

The Valve Industry

Reaser pointed out that valve manufacturing numbers are actually higher than manufacturing as a whole. However, “There is a big disconnect between energy and non-energy,” she said. The non-energy sector was stable when the energy markets were on fire. The sector then dove, and is now stabilizing.

“But while there is a lot of variation, manufacturing is clearly not in recession,” she said.

16 sum mow Valve Shipments Reaser

The bottom line for the valve manufacturing industry is that while low and stabilizing energy prices, increasing commercial construction and water system upgrades will drive spending, firms are limiting capital spending so they are not buying as many valves. Higher steel prices and a need for higher levels of wages are also negatives in the industry.

“A huge problem is the lack of skilled workers,” said Reaser. “Don’t let anybody retire in your company. You may not be able to replace them,” she joked.

Forecast

  • While the global economy will continue to be soft, the U.S. economy is plodding along. The Fed will remain cautious but will raise rates slightly. There is no recession in valve manufacturing; she sees modest firming in the market.
  • In the valve market, valves will show some improvement in 2017. 

Kate Kunkel is senior editor for VALVE Magazine. Reach her at This email address is being protected from spambots. You need JavaScript enabled to view it..

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