There are most certainly influences causing concern for some of the presenters at VMA’s 2018 Market Outlook Workshop, but there was also much to celebrate and an optimistic outlook for 2019 and 2020.
The Domestic Economy
According to William Strauss, senior economist and economic advisor for the Federal Reserve Bank of Chicago, the economy is doing very well. The U.S. is now in the ninth year of an economic expansion, the second longest in U.S. history.
However, there is slow growth in productivity, which he says is likely due to the weak pace of investment, and this could explain why—despite very low unemployment rates—wages have not gone higher.
Strauss’s optimism was mostly shared by Michael Halloran, senior research analyst at Robert W Baird. “Things feel a bit better this year, although nobody has any real idea where things are going from here,” he said.
To ensure they outpace peers, Halloran recommended that manufacturers increase their focus on higher-margin, recurring after-market revenues. “Best-in-class companies are adjusting internal incentive structures to maximize aftermarket sales opportunities. Sell solutions, not just products,” he advised.
Also important to stay ahead of the curve: the Internet of Things. “Last year people were moving toward it,” he said. “Now it is much more tangible. For the manufacturing world it is the way to have communications, to be interactive and to have the right data at the right time, controlled by the right people.” Halloran believes if you don’t have it in the next five years, you are going to be at a massive disadvantage.
On the downside, thanks to anti-free-trade rhetoric, policies and tariffs are threatening global trade across multiple geographies. Additionally, debt levels for governments are historically high and consumer debt also remains a drag on global growth prospects. Higher transportation and commodity costs are coming, and he sees inflation being a drag on the economy through 2019.
Another concern for Halloran and all the presenters, as in years past, is the issue of a shrinking labor force. Unemployment levels are at an unprecedented low and Halloran noted this tends to be a precursor to a recession. Historically, immigration has been used to help flex labor availability, but as immigration tightens, the situation can worsen.
This leads to another recurring theme: to move toward greater automation in manufacturing facilities and to offer to customers more products that have greater automation and need less overall human input.
Robert Champlin of Deloitte Consulting stressed that, for the mining sector, the necessity to innovate isn’t confined to just technology and automation. Because miners are traditionally averse to taking on new risks that may impact cash flow or license to operate, it is especially important they now adopt more innovative approaches to engaging with stakeholders, re-envisioning the future of work, and identifying the commodities that will be in greatest demand going forward.
Mining is one area in which additive manufacturing is becoming very attractive, because remote locations make it difficult to get replacement parts. Printing on demand could make the difference between losing one day or weeks of time.
Oil, Gas and LNG
Spears and Associates, noted that the health of the upstream segment is dependent upon our ability to find a market abroad. “Emerging nations now account for about 53 to 54% of global oil consumption. That is key to forecasting what’s going on in this sector as the emerging nations are growing at 3% per year for consumption.”John Spears, president of
“However, to access those export markets for the upstream operators and service firms, we now have to be very cognizant of issues surrounding midstream infrastructure,” he pointed out. “Pipeline takeaway issues are constraining opportunities.”
Jacques Rousseau, managing director of ClearView Energy Partners, said that global LNG trade is growing at a fast rate. It increased by 11% in 2017. Liquefaction facilities are being built in the U.S. and he anticipates 2018 will be the big year when a significant amount of capacity is added.
China could account for 37% of global gas demand growth between 2017 and 2023, but how much is provided by U.S. companies will depend on impending tariffs and sanctions.
In the petrochemical space, there was good news again from Mark Eramo of IHS Markit who believes that higher crude oil and natural gas production will ensure a significant supply of competitive natural gas liquids and methane feedstocks for chemicals.
In addition, the combination of high crude and stable natural gas prices make North America more attractive for gas-based chemical investments. North America is also able to leverage current technology and build world-scale projects, making it even more attractive to investors who are also now investing in projects with proximity to local markets.
Water and Wastewater
Tom Decker stressed that “It’s the Same Old Song” in the water and wastewater sector. The deteriorating infrastructure is a strong driver in the marketplace right now; according to the ASCE (American Society of Civil Engineers) Report Card, water in the U.S. grades at D, and wastewater grades at D+.
And when the AWWA did its state of the water industry survey, the number one issue for water managers was repair and rehabilitation of aging systems. The second issue is how to pay for it.
That is beginning to be resolved with water infrastructure funding (WIFIA) projects, which are starting to get loans. The program that was put in place in 2014 is finally getting used. Three loans have been put out in 2018 and a new round of applications is being considered. Also, recent survey results indicate that 88% of respondents support greater Federal investment in infrastructure and people would be willing to pay more for water.
It was no surprise when Alex Carrick, chief economist at ConstructConnect noted that one of the areas of greatest growth in the construction industry is hospitals and nursing homes in addition to warehouses for the increasingly digital retail space.
“Modern economies are all about moving people, goods and services faster, cheaper, safer and greener,” he said, “so the internet of things is also going to play a huge part in construction.”
However, he noted there is a problem finding the labor to do the building. Thus, the notion of modular buildings is becoming more popular, especially with respect to hospitals and schools. He said the industry is trying to attract women into the workforce, but they are more likely to consider work in a factory. If much of the construction can be done in a modular fashion, in a factory, then it will help ease some of the pressure.
Britt Burt, vice president of research for power at Industrial Information Resources, suggested that electricity demand growth in North America is being stymied by energy efficiency and direct-use generation. There is simply not as much demand growth now in the U.S., but natural gas is the dominant energy source for that being developed. State and federal policies, combined with reduced technology costs, are also driving renewables. The development of efficient and economic storage technology continues, and this could be a game-changer for renewables in the future.
The Global Economy
GM posed the question, “Are escalating trade tensions a threat to the global economy?” These, in addition to policy uncertainty and inflationary pressures are definitely downside risks for 2018 and beyond.David Teolis, senior manager of international economic and industry forecasting for
On the other hand, he believes the emerging market “catch-up” growth and pent-up demand, combined with new technological developments and the implementation of economic reforms in many areas around the world are positive. “The global economy is dynamic and adaptive,” he said. “But our ability to absorb a negative shock from terrorism, trade wars or natural disasters depends, in part, on where the economy is at in the cycle when they occur.”
Be sure to check out the Fall 2018 issue of VALVE for a comprehensive report on this event.