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Friday, August 29, 2014

Make the Next Five Years Count, Economist Advises

The U.S. economy is growing, as evidenced by record highs in the stock market (which hit 16,000 for the first time on Nov. 21) and GDP, according to Alan Beaulieu, president of ITR Economics, a global consultant specializing in economic trends and forecasts. While the upswing from the Great Recession isn’t as robust as growth in the 1990s — which Beaulieu noted was “an exceptional period” — or the early 2000s, when “an asset bubble” drove growth, this is “a good recovery.”

The short-term outlook, moreover, is positive, with one hiccup, he said: The second half of 2014 will have a “mild downturn,” before “more upside” beginning in 2015 that runs through 2017. ITR Economics forecasts a 0.6 percent economic decline in 2014, although most companies will probably post flat results, he says.

Credit: Stuart Miles at FreeDigitalPhotos.net

Credit: Stuart Miles at FreeDigitalPhotos.net

Beaulieu presented this forecast during a keynote speech on Nov. 18 in Chicago, at FABTECH 2013, the annual metal forming, fabrication, and finishing expo. ITR Economics, he says, is 94.7 percent accurate in economic forecasting. His address provided a roadmap for company managers in strategic planning for the next several years.

One notable point Beaulieu made is that now is the time for companies to borrow capital while interest rates are still low. He said the U.S. is in a deflationary cycle, but this will change with an inflationary cycle that will last for the next 15 years. Debt incurred this year and next can thus be paid off over time with less valuable inflated dollars.

The slight economic decline in 2014 will be caused by tax increases on businesses and the middle class and by the cost of the Affordable Care Act. Both laws will impact consumer spending, along with the inability of wages to keep up with inflation. Another dark cloud on the horizon is the potential for a 15 to 34 percent correction in the stock market, which will affect business and personal spending.

Beaulieu sees a major downturn in 2019. While he didn’t elaborate on why this will happen, factors may include the continuing increase in federal debt (to $22 trillion from $17 trillion now), Congress passing the buck on budgets in favor of more continuing resolutions, and younger workers and others losing discretionary income to tax increases and higher health care premiums.

Consequently, he advised companies to get their operations in order by then. This includes reducing borrowing, paying down debt on new or expanded facilities and capital equipment, and hiring and training workers who will be able to cope with a down economy and inflation.

One problem is that the last time the U.S. faced an inflationary cycle was the late 1970s, and almost all managers from that period have retired, leaving companies short on hindsight experience.

There are positive influences on the U.S. economy that will persist, though. One is the relatively low cost of energy and logistics compared with other countries, notably Europe. This means that American products will be more competitive price-wise in global markets, and foreign companies will continue to set up operations in the U.S. There is also the expansion of the Panama Canal, which will allow bigger vessels and more cargo to transit the passage as soon as 2015.

Beaulieu also advised companies to look at opportunities in Canada and Mexico. The former is a stable country with ample natural resources (including energy) and a national budget that should be balanced in two years (it will take until 2060 for the U.S. to balance its budget, he noted). Mexico, Beaulieu said, also has economic advantages for U.S. companies and their supply chains, owing to its close proximity and the lower cost of doing business there. While some regions are plagued with violence by drug cartels, he believes Mexico will eventually overcome this problem like Colombia did.

Overall, Beaulieu’s short-term outlook is good news for procurement and other operations. From 2019 on, though, procurement departments and chief procurement officers will need to wring as much productivity and savings from their supply chains as possible or face what Beaulieu believes will be much diminished returns on investment.

 

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