At VMA’s Annual Meeting this year, Sept. 25-27, members heard from two economists who revealed their predictions for the 2019 economy and offered suggestions to help members and end users navigate the economic waters over the next year.
Speaking on the domestic economy, Connor Lokar of ITR Economics said that, while the economy is doing “incredibly well,” we’re at the top of the business cycle, which means there is likely going to be a downturn. According to Lokar, that doesn’t mean a recession, it merely means a slowdown in growth from 2.5% in 2018 to 0.5% in 2019. However, ITR predicts the slowing will last only one year and that 2020 will return to higher growth, at 2.7%.
The Long View
Lokar noted that, while the administration’s tax cuts last year were a shot in the domestic economy’s arm, they do not present a long-term benefit to the economy. “It’s more like a temporary boost,” he said. “You’d think we would have taken the economic growth and used it to reduce debt. But that didn’t happen. This is really going to hurt us is in the 2030s.”
To avoid serious problems then, the U.S. would have to reduce federal spending by 2% a year right now just to hold the line on debt, but “we keep kicking the can down the road,” he warned. He offered many suggestions about how the upcoming generations can prepare for serious economic downturns that ITR expects in the 2030s, brought about, in part, by the out-of-control public debt.
What to Tell the Kids
1. Live below their means.
2. Learn a second language and become fluent in important languages like Spanish or Mandarin. This increases your value as an employee.
3. Each household should have multiple or diverse income streams so that all income isn’t coming from the same sector.
4. Choose careers oriented toward the “opportunities”
5. Pay off as much debt as possible by 2030. Get fixed rate loans. Amass cash.
6. Be ready to buy at the price cycle low in the depression. Think about paying for things that make money, such as multi-unit properties.
7. Most important, be self-reliant instead of advocating that everything be taken care of by the government.
While ITR’s projections for 2019 have improved, there are still risk factors for the next year.
Inflation is a concern and tariffs are just making this worse. This is directly inflationary to the consumer. If they buy more expensive goods, then they have less money to spend on other things. As of the date of the presentation, there were $60 billion worth of goods subject to tariffs aimed at China. “That means the manufacturers need to pass on those extra costs to the consumer. Inflation will happen as a result, and that leads to a huge amount of uncertainty,” warned Lokar. “Businesses are taking their foot off the gas because they don’t know what will happen. We see this as being mostly negative. There is hope for trade agreements, but that is not a guarantee.”
Another concern is in the labor market. There are not enough skilled, motivated employees to ascend into the space left by the retiring baby boomers. Migration is also a concern for states like California where high taxes and housing costs are causing people to move away.
“Retention is paramount; you just have to hold on to them,” said Lokar. “Right now, there are 425,000 open manufacturing jobs open in the U.S., the most ever.”
Connor recommended that companies invest in themselves to augment productivity to combat increasing labor costs and scarcity. Prioritize profitable opportunities and have a plan in place to handle elevated input costs. Part of that is being willing to increase prices. In anticipation of the slowing in 2019, build cash reserves now and develop your internal rates-of-change so that you can recognize when you are nearing your peak.
The Global Outlook
Jeremy Leonard of Oxford Economics offered his take on the global economy in a presentation titled “Industrial upcycle boosts valve prospects but growth peak has passed.”
Despite trade uncertainty and escalating tensions between the U.S. and China, there is still growth momentum around the world. The U.S. did benefit from the fiscal stimulus, although the second quarter of 2018 was likely the peak. The recently concluded USMCA (United States-Mexico-Canada Agreement and the truce between the EU and U.S. are also positive factors for the global economy, but rising protectionism and European concerns about tariffs and rising oil prices are expected to stymie growth, according to Leonard.
He also expressed concerns about higher interest rates because they, and rising commodity prices and capacity constraints, are putting upward pressure on inflation. Rising oil prices are also eroding household income, but because consumer spending is disproportionately for services, not goods, the headwinds are more likely to affect service industries.
While Leonard does not predict a global recession in the immediate future, if U.S.-China trade wars escalate to the point where the tariffs affect 3% of global trade, the worldwide economy would be impacted. The Asian companies that are most integrated into Chinese supply chains could be dramatically affected. “If we really get into this trade war, we would be skirting with a global recession,” said Leonard.
Trade slowdown is a worry for valve-using sectors, and capacity constraints, which we are seeing for the first time since the financial crisis, are starting to cause issues. Even though many companies are running full-out, CAPEX spending is not happening as it should because of the uncertainty that is deterring investment. “That’s why investment numbers are not going up,” he said. “There is a pull back in confidence, but the need to invest is still there. When we have some clarity, we will see investment increase.”
The Valve Market
Leonard said that most valve categories are set for growth in the coming years. “There were several years of relatively weak markets in the industry prior to the pickup in 2017. But that year exceeded expectations, and while 2018 will see less growth, it is still solid.”
The global valve market is estimated to have expanded 6.7% in 2017. All global regions posted increases, with Europe outpacing the U.S. and only slightly below the global average. Actuator markets saw more modest growth of 2.5% last year, partly because of the stronger performance relative to valves in 2016. Leonard foresees growth of 5.4% this year for valves, while the less cyclical actuators will see a more modest 3% expansion.
Regarding end-user industries, the water and wastewater, chemical and manufacturing sectors have seen the most growth, and Leonard expects this to continue into 2019.
There are risks, though. If the U.S.-China trade war intensifies, it could lead to rising prices for heavily traded goods, which would lead to reduced trade flow and slow industrial growth. Leading indictors of world trade have already weakened before implementation of many of the threatened tariffs, so this spells cooler growth even at the current levels of tariffs.
Oil prices are on the rise despite strong U.S. production. This is in part due to supply disruptions of product from Iran and Venezuela. Also, if central banks misjudge the path to policy normalization, there are risks of market turbulence if interest rates rise too fast.
Attendees of the annual meeting also heard from cybersecurity expert Maurice Uenuma. VALVE will be publishing a comprehensive report on his prescription for counteracting and preventing cyber crime in your plants, so be sure to check back in the next few weeks.