When Brian Beaulieu of ITR Economics asked attendees at VMA’s 2015 Leadership Forum what economic issues most concerned them, the plunge in the price of oil was high on the list. The impact of a high U.S. dollar, the possibility of interest rate hikes and the future of shale gas were also subjects of interest, and Beaulieu ensured that he would cover them all and much more in his presentation.
A High Dollar and the Price of Oil
Beaulieu said that, while the strong U.S. dollar has hurt exports to some degree, because the U.S. is not an export driven country, it is not a great concern. That is partly because the strong dollar means also that inflation is non-existent and that means that the Fed could keep interest rates low until next year.
However, the strong U.S. dollar has had an effect on oil prices. “This was not forecast,” he said. “We did not see this happening for a couple of reasons. We did not see how strong the dollar would become and we did not predict that the Saudi’s would change the game. We anticipate that oil prices will continue to be weak through 2016, but in the fourth quarter there may be some upside pressure.” Beaulieu predicted that oil could rebound by about $20 per barrel and the U.S. dollar will weaken slightly in 2016.
While the rig count throughout North America is going down, oil production is not decreasing, although it may level off, according to Beaulieu. “This comprises about 10% of industrial production in the U.S. so there will be an impact, but that is not the biggest slice of our economy. Consumer spending makes up almost 70% of GDP, and lower oil and gas prices are good for the economy.”
U.S. GDP had risen for 6 quarters by early February 2015, and comprised 22.7% of the world’s total. “Bottom line, the U.S. is still the world’s number one economy, and has been for the last 80 years,” said Beaulieu. “We expect it to continue to be number one for the next 50 years or so. Other markets that hold potential include Mexico, but it is risky. When investing, it makes sense to be North American-centric.”
There are currently 318 million people in US and it is expected to grow by 100 million by 2050. “More people means more economic activity,” said Beaulieu. “Compare that to Russia, which has a declining population. As that continues, they will become more and more difficult and bombastic.”
Beaulieu pointed out that, compared to other countries, the U.S. is blessed with many natural resources and is generally willing to tap into them. He mentioned shale gas as an example. “If we’re smart, we’re not going to stop,” he said. “India has great natural resources but continues to screw it up. Canada’s finances are superior to the U.S. but their manufacturing base is slowly eroding and dripping south because of high energy costs and high environmental and labor costs. Mexico has fantastic resources,” he said. “This is where you want to go. Education is going up and there is a burgeoning middle class. Korea is an emerging powerhouse and will remain so. Brazil is in recession. In the long run, it is a major player because of population and resources, but its bureaucracy and its animosity toward the north limit its potential.”
Leading Economic Indicators
“Our forecast says we will see improving conditions in 2016 in the European Union. Commodity prices in general for 2015 are dead as a doornail, but swing to the upside from 2016 to 2018,” said Beaulieu. “In the U.S., we don’t need Europe for US to grow. It’s just math. The U.S. likes to buy things more than any other place."
Beaulieu does expect a housing recession, although nothing like it was in 2007. “A huge portion of the younger population is not likely to own a home. They can’t afford it,” he said. “For those who can, they should buy those rental properties in an urban area. Not suburban. And be near water; humans like to live near water. If you are going to buy on the water, remember that oceans are going up 19 inches per 100 years, so buy something 60 inches above highest tide, and you’ll have a 300-year investment!”
Beaulieu pointed out that the stock market is not a reliable predictor of the economy. “If the S&P goes down 15%, I won’t worry about it,” he said. “If stocks go down for 8 months or less, don’t worry about it.”
Beaulieu said that another financial indicator, that of new orders of nondefense capital goods excluding aircraft, is difficult to analyze right now. “We think that what is developing is similar to what happened in 2007 and 2008. There will be a weakness, than a rebound.” He said. “We will be watching this carefully.”
Another traditional indicator of economic health was consumption of crude oil. “It used to be that GDP and oil consumption rose at same rate. But after the last recession, GDP kept going up but oil consumption did not. We have changed. We are awash in oil and likely to stay that way. During that same period, renewable energy consumption increased. So consumption hasn’t changed a lot, we’re just getting it from new sources,” he said.
Other positive trends are in non-residential construction, which is accelerating, as is private chemical construction where there is a huge increase. “More warehouses are being built as well,” said Beaulieu, “because e-commerce means more warehouses. There is no downturn in office buildings either. The only soft spot for the next year is power construction. Just not much going on there at this time.”
Beaulieu predicted that interest rates would go from 2 to 5 per cent in 2016 and higher after that because of a stronger labor market and price inflation. “Being down for so long is not normal,” he said. “Rising rates are normal. So if you need to, borrow money now. Whether it is 2 to 5% or 7 to 10%, it’s just as painful. We think by 2018 interest rates will go up enough to hurt the market.”
What if interest rates don’t go up? What if fiscally conservative president takes office in Jan 17? “That president will want to bring down debt and cut federal spending. This is painful and it would take about 18 to 24 months to affect the GDP. It’s neither good nor bad, it is what it is,” Beaulieu pointed out. “But if we don’t, it just makes the pain in the long term much worse. No matter, we look to be hurting in the first half of 2019. We are at risk.”
According to Beaulieu, there will eventually be inflation. “We can’t print as much money as we have without inflation happening. And the green movement is inherently inflationary. Take Germany for example. Going green has cost them dearly. Green is expensive, and the more we go down that avenue, the more inflationary it will be.”
While Beaulieu and the team at ITR believe that the decade of the 2020s is going to be strong, he stressed that they are still projecting a recession during the first half of 2019. They anticipate it to last for approximately two quarters and will be relatively mild. However, he noted, “When the U.S. goes down, the whole world has pain. The Chinese will be affected and hurt more than anyone. It could break their back.”
Beaulieu pointed out that the overarching concern between now and 2019 is going to be labor. “Labor costs will become a major thorn in our sides, and it is because of that our profit margins could suffer. If we don’t manage it, we will prosper on the top line but won’t make it on the bottom line, which is what counts. We have five million openings, but no one to fill them. There is a huge number of structurally unemployed. They have no skills, don’t want training and are in the wrong location and won’t move,” said Beaulieu. “Millennials don’t stay in same place to work. The average time is three years. You need to reach out to local high schools to tell them to learn a useful trade. And if you have kids, make sure they are bilingual and know math. They will always have a job. And encourage kids to have diverse sources of income.
Other dark clouds are the U.S. healthcare system. “Americans think death is an option!” said Beaulieu. “We will do whatever we can to prolong life in last few years of life. That is very expensive. If you are under 45, you’re screwed. If you’re over 50, you’re the problem.”
Opportunities and Preparation Strategies
Beaulieu suggested that energy distribution, housing, water distribution/conservation, printed electronics, infrastructure, robotics, vocational education, security, health care, 3-D printing, food, natural resources (harvesting/conserving), entertainment and Mexico were all areas for growth opportunities.
To take advantage of these opportunities, however, Beaulieu recommended that companies and individuals:
- Budget for the rise in interest rates.
- Invest in customer market research to reduce price sensitivity.
- Make sure your training and retention programs are top notch.
- Make sure that your marketing and advertising spending is increasingly effective.
- Drive efficiencies with technology.
- Hire sales people and leaders.
- Lock in costs toward the end of 2015.
- Expand credit offerings to garner market share
Beaulieu also stressed that you should be ready for 2019 and asked, “What are you going to do to avoid the expected 2019 downturn?”