By Alan Beaulieu
For many in the material handling industry, the economic doldrums of the Great Recession have given way to tentative growth and improvement. 2011 was a year of growth for the U.S. economy and, more specifically, for the material handling industry. According to the first quarter 2012 issue of The MHEDA Journal, distributors are optimistic that this growth will continue into 2012. Those distributors will be happy to know that the Institute for Trend Research shares that optimism and forecasts continued growth this year.
One of the main pistons in the economic engine is business-to-business spending. In the past 18 months, we have seen B-to-B activity rise above prerecession highs. There is good spending going on out there and MHEDA members are positioned to take advantage of it.
Businesses continue to spend substantial money on gaining in efficiencies, processes and automation. These are vital, as they help companies become more productive, even during lean times. Since the recession, companies are doing everything that they can to put themselves in a strong position should the economy double-dip.
The media has called this a “jobless recovery.” While this isn’t strictly true, especially in the private sector, it does reflect companies paying special attention to efficiencies and automation, allowing them to do more with less. Because of this, MHEDA members should have seen an uptick in business in 2010 and 2011. If they didn’t, they may need to reevaluate their business plan. They may be selling into the wrong niches or selling the wrong products.
Consumer spending will also help fuel economic expansion in 2012. Retail sales have picked up as consumers have begun to believe that the recovery is here to stay. We have also seen the wholesale trade market gathering strength, which indicates that business owners see sustainability in the positive economic trends. Through November 2011, durable goods wholesale trade is up 12.3 percent year-over-year and nondurable goods trade is up 15.9 percent. The data for the material handling industry is even more encouraging. The machinery, equipment and supplies segment is up a staggering 19.7 percent year-over- year. According to leading indicators and our analysis of the rate-of-change and data trend probabilities, these segments will continue to grow in 2012.
There is good industrial activity going on in the United States right now. We have seen manufacturing get stronger. Those things provide business, especially to the material handling industry. And it’s very broad. The energy sector and agriculture, among many others, will continue to provide good business. Of course, as the players in the industry vary, there is no longer a canary in the mine. Years ago, material handling was reliant on the automotive industry. However, in the wake of the Japan tsunami last year, the automotive market tanked. But other sectors provided enough business to keep material handling moving forward. And now, we are seeing the automotive industry gaining strength, which will only help MHEDA dealers. All boats are rising and it is very encouraging.
The third and fourth legs of the economy, exports and government spending, also indicate growth in 2012. The ongoing financial crisis in Europe provides some pause, though it should not be enough to derail the U.S. economy. Moreover, Asia is still doing well and exports to the Far East should continue to be favorable. And if there is one thing our government does well, it is spend money. While there will be a slowdown in government expenditures, it will not be so dramatic as to offset economic growth.
Election Year Impact
Cutting government spending is one of the biggest issues in the 2012 elections. While the presidential election will dominate the headlines, we don’t expect the outcome of the presidential election to have any immediate impact on the economy. I will be keeping a much closer eye on the congressional elections, because those are the races that will have a long-term impact on the economy. To me, it’s all about who controls the Senate after November. I am looking for a strong fiscally conservative majority. That can come from either side of the aisle, but a veto-proof Congress of fiscal conservatives should give distributors encouragement going forward.
It will also be interesting to see how these elections impact the regulatory environment. This is an area that businesses should be watching closely. Implementation of Dodd-Frank and healthcare reform are areas of concern going forward. Though there is no telling exactly how much impact these measures will have, it is an area of uncertainty, and uncertainty is the enemy of effective decision-making. While it may not affect 2012, a lack of fiscal conservatives would leave us at ITR feeling further deflated about 2013 and 2014.
Forecasting the Next Recession
The party should last through 2012 and even the first half of 2013 before plateauing and ultimately recessing in 2014. This is a natural part of the business cycle. Every recession is followed by a recovery, which inevitably will lead right back into another recession. It is the normal expansion and adjustment process.
Though the situation in Europe and reduced government spending that we mentioned earlier will not significantly dampen economic expansion in 2012, they do make us nervous beginning in 2013 and extending into 2014. We are seeing a situation in China right now that could portend things to come in the U.S. Credit tightening and the specter of inflation are negatively impacting consumer spending in China. China, which has long been dealing with inflation problems, reigned in available credit to counteract that inflation. This was the correct move, but the follow-on effect is a slowdown in consumer activity, particularly for expensive durable goods. Businesses should begin planning now on how to combat a tight lending market as they arise in the U.S. in 2013 and 2014. By following the leading indicators, businesses can adequately prepare themselves for the next downturn in the economy.
One of the best ways to prepare for a downturn is to look 6 to 12 months into the future. Watch economic indicators like the Conference Board’s U.S. Leading Indicator and the ISM Purchasing Managers Index for trends. Another indicator to watch is Nondefense Capital Goods New Orders, which is a great measure of B-to-B activity. Take these indicators and then apply them to your business. Take the general economic information and make it personal. At ITR we call this trendcasting, and it is the most important thing you can do.
To prepare for the slowdown in 2013, it is vital to grab as much market share as possible in the next 18 months. Pull the trigger on any capital expenditures that you are considering. Do not straight-line forecast the good news of 2012 through 2013 because you will run out of money and have to scramble for customers. Another way to maximize growth is to hire skilled labor sooner rather than later. Skilled labor is not easy to find and it will not get any easier the longer you wait. The competition, however, will get stiffer and if you wait, the best employees may be taken, forcing you to spend money unnecessarily on training.
While we are excited about the prospect of growth and prosperity, it is vital that we not sit on our laurels. Maximize your return during the good times but be mindful that they will not last forever. Follow the economic indicators and prepare yourselves for whatever the economy may throw at you. It can be an exciting time in the material handling industry for companies who are prepared.
Alan Beaulieu is an economist and president for the Institute For Trend Research, located in Concord, New Hampshire, and on the Web at www.itreconomics.com. For a list of the leading ﬁnancial indicators visit the website or follow ITR on Twitter @ITROutlook.