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Friday, August 29, 2014

At FABTECH, Economist Sees Growth but Challenges

The U.S. economy is growing and stocks are at record levels. While many people complain about the economy, the fact is “things are getting better,” said Alan Beaulieu, president of ITR Economics, a global consultant specializing in economic trends and forecasts. “This is a good recovery.”

Growth for manufacturers will continue this year and through the first half of 2014, Beaulieu said yesterday at the FABTECH 2013 metalworking fair in Chicago. In the second half of 2014, however, there will be a “mild downturn, then more upside” beginning in 2015. The worst that can happen, he believes, is that the year will be flat for most businesses. For the record, ITR Economics is forecasting a 0.6 percent year-over-year decline for 2014.

There will be growth overall through 2017. After that the economic picture darkens. “The next big downturn will be in 2019,” Beaulieu advised. It might not be a repeat of 2008, but companies should prepare for it by investing in capital equipment and expansion beforehand, saving lots of cash to capitalize on the distressed opportunities that will emerge, and wringing as much efficiency from operations as possible now.

Alan Beaulieu, president of ITR Economics

Alan Beaulieu, president of ITR Economics

If business owners don’t want to go through another downturn like they did the Great Recession, Beaulieu counseled, they should sell their companies no later than 2017, ideally “to somebody you don’t like.”

Beaulieu’s remarks came during a keynote address at FABTECH, the annual metal forming, fabrication, and finishing expo, which kicked off its four-day run at McCormick Place on Monday.

ITR Economics bills itself as being accurate with its forecasts 94.7 percent of the time — and 99.6 percent of the time when predicting the U.S. GDP 12 months into the future. So when Beaulieu speaks, manufacturing executives and others pay attention.

What they heard at FABTECH was encouraging but also sobering: The U.S. economy is doing well, but there are long-term challenges. Beaulieu advised attendees to get their businesses in order and develop strategies for the downturn he sees in 2019.

The slight decline in business next year will be attributable to the economic impact of the Affordable Care Act (aka Obamacare) on consumer spending, along with the hit that consumers and businesses take from tax hikes, the inability of wages to keep up with inflation, and provisions of the Dodd-Frank financial reform law that will make lending by banks more expensive.

Now is the time to borrow money, Beaulieu said, since interest rates will start rising next year and make borrowing more expensive. Moreover, with a probable inflationary cycle for the next 15 years, debts incurred in 2013 can be paid off with less valuable inflated dollars.

Obamacare costs and tax increases (which will hit the middle class) are going to take away a lot of discretionary income from consumers. Young workers, especially, whose participation in Obamacare is vital for it to work, will be hit hard. Beaulieu says that a 27-year-old earning $37,000 per year will lose $1,500 in take-home pay to higher health insurance premiums.

THOMASNET NEWS PODCAST: Alan Beaulieu on Effects of Fiscal Realities 

This will affect a young worker’s ability to afford living space and buy a car and other products, and thus will send a shock wave of lower spending through the U.S. economy.

“The Affordable Care Act will have a negative impact on the economy in 2014,” he said.

Congress will not alleviate economic problems by passing more continuing resolutions in place of budgets, thereby adding to U.S. debt and maintaining the air of uncertainty about Washington’s ability and willingness to fix problems that impact business planning.

The Congressional Budget Office says deficits will increase from the current $17 trillion to $22 trillion in the coming years, Beaulieu added. And the federal government is not projecting a balanced budget until 2060. Canada, in contrast, expects to balance its budget in two years, and most of Europe will be in the black by the end of the decade.

Paying off this huge debt will fall heavily on those under 40 years of age. “The Baby Boomers are going to do well, but nobody else,” he remarked.

If this isn’t enough to worry about, Beaulieu also sees a 15 to 34 percent correction coming in the stock market. Corporate bond prices are dropping, the Federal Reserve is going to reduce the money it has been pumping into the economy (currently $85 billion per month), and the housing market will decline 4.2 percent by the end of next year. Now is the time for companies to take a defensive position to insulate themselves from these problems, he said.

His outlook, though, is not all gloom. America’s low-cost energy and ample natural gas and shale oil reserves are “enviable worldwide,” Beaulieu noted, and causing offshore companies to set up operations here, bringing with them investment and jobs. The technology of fracking is improving, which will increase the amount of shale oil that can be extracted from deposits while reducing the potential for environmental harm. California, in fact, has more oil reserves than Saudi Arabia, and U.S. net imports of energy are down to 38 percent, most of which is from friendly countries.

SEE ALSO: Beaulieu and Panelists Discuss Manufacturing’s Obstacles at FABTECH 

Manufacturing is coming back to the U.S. through reshoring and other initiatives. America’s neighbors are stable and offer economic opportunities, and the Panama Canal expansion project, which will allow bigger vessels and more cargo to transit through the passage as soon as 2015, will be “a boon to the U.S. economy,” said the economist.

While challenges loom — including a downturn around 2030 that could be as bad as the Great Depression, he said — the near term looks good for manufacturing. Beaulieu advised business owners to capitalize on opportunities and plan for difficulties in the next few years.

He also urged FABTECH attendees to monitor economic indicators: “Watch the leading indicators, and you can see your own future.”

These indicators include housing starts, the bond market, the Purchasing Managers Index from the Institute for Supply Management, retail sales, employment (though not unemployment, which he said is a “terrible indicator”), and order levels for nondefense capital goods.

 

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