B-to-B will continue to be strong in 2018 and outperform B-to-C in 2019
ITR Economics CEO Brian Beaulieu will be presenting at the MHEDA Convention on Monday, May 7, 2018, at the Loews Miami Beach Hotel in Miami Beach, Florida. His presentation, “The Winds of Change” will discuss the current business cycle status of the U.S. and North American economy and where the economy is heading. Brian was gracious enough to discuss his presentation and the state of the economy with The MHEDA Journal for this issue of the magazine.
The MHEDA Journal: What would you say is the general economic outlook for 2018?
Brian Beaulieu: The general outlook is positive. The leading indicators are telling us to expect a good year. Stronger in the first half than in the second half, is what the leading indicators are currently saying. The consumer is in great shape. Labor is tight, so businesses are turning to capital equipment to help them through the labor crunch. All systems are go.
TMJ: For people in the material handling industry, you mentioned capital equipment; are there any other key business indicators that people in our industry should be monitoring?
BB: We look at some small business capital expenditure indicators. They are currently positive. We’re looking at machinery utilization levels, and they’re running above a year-ago levels, that’s another positive indicator for folks in our space. For material handling in general, the B-to-B space is expected to continue to do very well. Whether that’s material handling through distribution or DC, or material handling through a production facility, both sides of that equation look to be very positive in 2018.
TMJ: In the first quarter issue, we always do a survey of our members to get their feeling going into next year. And it is up across the board, but with the caveat that they’re counting on tax reform to pass. How much would the passage or failure to pass this proposed reform affect your forecast, if at all?
BB: Well, it really depends on what shape it finally takes. There are two very different proposals, one from the Senate and one from the House, and it’s going to have to go through reconciliation. No one knows what it’s ultimately going to do. Here’s what I can tell you, though. Based on our analysis, your readers should not expect that passing this tax cut for corporate income taxes is an automatic stimulus for the economy. It usually does not work out that way. Invariably, they’re going to try to make this as revenue neutral as possible, which means that some are going to win and some are going to lose. Some corporations may win but if these tax changes don’t help with the spending side or if it actually adds to the deficit, we’re going to see a drag from the consumer side or we’ll see higher costs, because interest rates will go up because they just added to the deficit. So it’s hard to say. But if there’s going to be a positive impact for our readers, it will likely come in 2019 more than 2018. By the time they get around to passing this thing and it actually makes a difference, it will be 2019. And in terms of a forecast for 2019, if everything goes right and the stars align, we can probably take away some of the softness that we have built into 2019. But here’s the caveat with that. We think B-to-B is going to hold up well in 2019. Our concern for 2019’s GDP growth rate is in the B-to-C space, not the B-to-B space. So, it’s not like we’re anticipating any difficulties for them in 2019 anyway. It’ll be a slower year, a year where they’re going to have to play with some pricing, but it could make it an even easier year, I suppose in 2019. It’s too early, though, to know any of that with confidence. We don’t see any big downside to the economy from it; we just don’t see any big upside, either.
TMJ: What would be the reason for B-to-B to hold up through 2019 and B-to-C to be a little bit softer?
BB: Right now it’s in the leading indicators. For instance, we’re seeing that the personal savings rate, as a percentage of disposable income, is coming down. That trend leads retail sales by about 23 months. Let’s call it 2 years between friends. It’s coming down now, and it has been coming down for about a year, that means that in 2019 retail sales will be on the backside of the business cycle. That’s a concern for the B-to-C space. The B-to-B side we expect will continue to be bolstered by such things as the tight labor market, we’re still going to be fighting our way through finding ways to diminish the need for labor. That’s not going to go away. We think in 2018-19, you’re going to see Amazon and other kinds of e-commerce continuing to build out, which always necessitates more brick and mortars, just not at the retail level, it will be in the logistics chain more than anything. It’s just going to stay relatively low unless they really blow out the budget and if that’s the case, that’s another negative we can take off the table for the B-to-B space because there’s some sensitivity there for interest rates. And that doesn’t look to be a problem for this business cycle. The bottom line is that we have two reliable negative leading indicators for the B-to-C space telling us to be careful about the 2019 cycle but we don’t really have any negative leading indicator signals regarding actual pain in the B-to-B space for 2019.
TMJ: You mentioned the labor crunch, that’s something that has been forefront for our industry for several years. There’s been an increasing shift toward automation among customers and our members have had to be dabbling in that arena. Are there any other strong industries or areas that if members aren’t involved in yet, they should think about getting involved in?
BB: I can’t think of another very broad brush aspect, because the automation is so huge. And at ITR Economics, we see this going on for at least another 10 years. There’s no end to this labor shortage situation. In fact, immigration policies in the U.S. are likely to exacerbate the issue, rather than ameliorate it. So, businesses need to become ever more creative. For 2019, sometimes it’s silly to say these things because it’s not like you can just pull a lever, but to the extent that you can direct a sales force or marketing efforts in a different direction, you’re going to look to some of the areas that will hold up better than others. And we think that will be the food industry, the energy industry, whether that’s energy distribution or energy technology to get it out of the ground, both should be doing better than average in 2019, and logistics in general.
TMJ: Going into the 2018 midterm elections, will the results of these elections change your opinions or forecasts at all?
BB: No. What I expect is that the Democrats are going to make some impressive strides in the midyear elections. And Republicans haven’t been able to pass anything so far this year and their ability to pass legislation is only going to go down after the midterm elections. We expect more gridlock than anything else in Congress. And that circles back to a primary point that we have been talking to people about and that is to stop looking to Washington for solutions. You are the solution. You can figure out how to make things happen. Stop relying on them. Alan and I are doing research for our fourth book and the whole book is going to be about how the business owner, the CEO, has the power, not Washington. We’re so tired of people assuming Washington has this great economic power over their lives that politicians really don’t have.
TMJ: Is there anything that we haven’t touched on thus far that will be an important part of your presentation at MHEDA?
BB: There are a couple of things I know that I will be touching upon. One of them is that trade is important to the United States and you can’t limit imports without seeing a corresponding limit on exports. When the administration says that we can put up barriers and get protectionist and that won’t have any impact on our exports, that’s just silly. Of course it’s going to have an impact on exports. All this blustering is kind of dangerous. Another question that we didn’t talk about that we sometimes get asked is “How concerned are we about North Korea and its impact on the economy?” And my answer would be that I’m more concerned about Saudi Arabia than I am about North Korea. That’s a bigger problem for the U.S. And from an economic perspective, you buy on the cannons and sell on the trumpets. That’s the old investment adage. Going to war is not bad for the economy. It’s actually good for the economy more often than not. That’s not a negative as far as we’re concerned, as far as something that will lead us to take positivity off the table. The other aspect that we want to warn people about is that they need to find ways to decrease their price sensitivity. That’s nice economic jargon for they need to figure out how to raise prices. Because their labor costs aren’t going to go down. Their material costs are going to be going up. If they’re not raising prices, it’s all about cost cutting elsewhere. And you can’t cost cut your way to prosperity. You have to figure out how to raise those prices.