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A Year of Decelerating Growth

2019 will see slowing growth across the board

ITR Economics CEO Brian Beaulieu will be presenting at the MHEDA Convention on Monday, May 6, 2019, from 1:45 p.m. – 2:45 p.m. at the JW Marriott Desert Ridge Resort in Phoenix, Arizona. His presentation, “The 2020-2023 Business Cycle” will discuss the current business cycle status of the United States and how, though we are in a period of prosperity, that doesn’t mean that it is without bouts of cyclical decline. Brian was gracious enough to discuss his presentation and the state of the economy with The MHEDA Journal for this issue of the magazine.

a year of decelerating growth

The MHEDA Journal: What is the general economic outlook for 2019 and beyond?

Brian Beaulieu: 2019 will mostly be characterized by decelerating growth. Slowing growth. That’s across the board, pretty much. Some industries will be hit harder than others. And some will fare better than others, but that’s going to be the general trend. The admonition that goes along with that, by the way, that I’ve been telling people, is that if you want 2018’s results replicated in 2019, don’t count on an economic tailwind. You’re going to have to have some internal efforts that will allow you to achieve those same results in 2019. And going forward, the first half of 2020, weakness continuing is what we’re looking at. And then a business cycle rising trend in the second half of 2020.

TMJ: One of the things that the MHEDA Board has discussed when they put together their Material Handling Business Trends is how unprecedented this recovery has been all the way since the Great Recession. As an economist, how unprecedented is it?

BB: It is, in some ways, totally unprecedented. Certainly in the post-World War II history. In terms of the duration of the most positive phase of the cycle, which is the acceleration phase, this has been tremendous. It’s one that we’ll remember for a very long time as a new parameter-setting possibility for our economy.

TMJ: When you say that there is going to be a deceleration of growth and a softening in the first two quarters of 2020, is that just the ebbs and flows of the economic cycle? Or are there actual tangible factors that will play into that?

BB: Both, actually. Let’s deal with the tangible factors. Leading indicators are clearly pointing in that direction. They pointed to the rise, there is no reason that we should discount them when they tell us to expect slowing growth in 2019. On the other side of it, we’ve done a really deep-dive into the tax cuts, what they are going to mean for capital expenditures, which will matter to MHEDA members, and it is almost inevitable that the acceleration that we’ve been experiencing that can be attributed to the tax code changes, that wanes in 2019. It always has. I don’t believe in forecasting, and I never will forecast unprecedented behavior. So it is perfectly normal as part of the ebb and flow that you referenced. And in particular, we’re picking up some early signs of that. The September data for capital expenditures was not good. If there was a canary in the mine, that canary would be on the bottom of the cage. And we’re seeing optimism waning out there. The tariffs have created a tremendous amount of uncertainty and cost pressures. Both of which are not good for business. We’re very clear when we talk about the tariffs. There are winners and there are losers. If there weren’t winners, then we would never have tariffs. But the longer that they stay in place, the more imbalances get created within the economic system and those imbalances become manifested in the way of inefficiencies, higher prices and uncertainty. Those three things are not good for economies. So while there are some short-term winners, no doubt about it and hallelujah for those people, those other folks are figuring out how to pass through this entire cost increase. Some of them are figuring out that they can’t and it’s coming out of their bottom line unless they are getting some productivity enhancements. And that’s a real issue for a lot of folks. That’s going to bite into profitability potentially in 2019. That’s a major concern that we have. Biting into profitability decreases people’s incentive or desire or ability to buy new capital equipment.

TMJ: You mentioned the tariffs. Predicting what is going to happen in Washington is a bit of a fool’s errand, but do you think that those are going to remain in place, escalate, deescalate? When you’re putting your forecast together, how do you bake that in?

BB: I bake it in as if we’re going to deescalate the trade wars. But, and it’s a huge but, one of the reasons that my brother Alan has a much higher alert-level in his head about the economy is that there are a lot of things that can go wrong. We’re butting heads with China. They think a lot differently than we do. Over the last year, they’ve really worked hard to reposition their economy so that they are not as dependent upon exports to America for their daily bread. So, given their different mindset and the fact that they’re a proud people and nationalism is rearing its head in China and the economic changes, it’s not a sure thing that we’re going to come to some sort of agreement with them. We have renegotiated NAFTA, it’s called the USMCA. But that still needs to be ratified. I don’t know that that’s a slam dunk either. I think it should be ratified. In my opinion, it’s a win for the United States but there are also some wins for Mexico and wins for Canada. That’s the best sort of treaty you can have. So it should be ratified, but politicians befuddle me every day. So it’s hard to get inside their heads. And in terms of Japan, that has been rhetoric but absolutely nothing has been done about it. In terms of the steel tariffs against Canada, that’s not been happening until the USMCA has been ratified. And in terms of negotiating lower tariffs with Europe, that’s just been rhetoric, there has been nothing done on that score. So we’re seeing a lot of talking but we’re not seeing any action behind it, at least not that the public is being made aware of. I guess I have a jaundiced eye toward it. The whole world is going in a counter-globalization trend. Brexit is an example of that. You have the new chancellor of Austria. The president-elect in Brazil. You have the right wing in Italy. You have the president of China who has set himself up as the dictator for life. Their nationalism is running rampant right now. And you have Mr. Trump and his cadre of nationalists. None of this is good for peace and prosperity. The more me-first the whole world gets, the slower the world is going to grow. And I know that doesn’t play well in some political circles and I accept that. But I’m an economist, I’m not a politician, I just look at the reality of the numbers.

TMJ: You also mentioned the effects of the tax reform, how much did that reform impact the economy and how did it impact your forecast? Did it change anything for you?

BB: It really did. We delayed the timing of the business cycle high from 3Q18 to 1Q19. That could have been normal forecasting error but it was consistent with what the leading indicators were telling us at the time. But I think it’s really a measurable impact of the tax code changes. And that is also why we’ve delayed the timing of the low into 2Q 2020, because we’ll still have to go through the normal corrective process. We delayed the high and so that caused us to delay the low. Noteworthy, though, is that we’re not forecasting the slope of the decline in growth to be any worse or any better because of the tax law changes. We’ll pretty much have digested all of that by the time we’re rolling past 1Q 2019. In other words, the tax law changes don’t permanently change behavior. They’re more of a one-off thing.

TMJ: The 1Q issue is our forecast issue, so we’ve been talking to a lot of MHEDA members, and one of the almost universal concerns that people have mentioned is the prospect of inflation. They anticipate that it’s going to happen, it’s going to continue, and they’ll have to raise their prices to deal with it. Is that something that is well-founded? And do you anticipate that will have any depressing impact on growth going forward? How can members combat that impact?

BB: It is, indeed, well-founded. I think they’re going to see more of it post-2019 in terms of general inflation, than in 2019. Although in 2019, material costs, because of the tariffs, are under some upside-pressure. If those tariffs remain in place. What they can do about it is develop a strategy and tactics for how they can push through these price increases. Is it a surcharge that they can call a tariff surcharge? Part of it is also defining their competitive advantage. Why are they worth this price increase? What’s unique about them that makes people understand that they are worth the extra money? Is your value-proposition exceedingly well-defined? Are there some more costs that you can take out of your business so that you can give yourself a little wiggle room? It all boils down to if you can’t find a way to push through price increases and take some more costs out, your bottom line is going to suffer. That’s what you’re going to be facing. Even if the tariffs go away come January 1st, they’re still going to need these strategies and tactics to deal with the longer-term. So going through this exercise is a very good thing for them to be doing. And it’s smart of them to be doing.

TMJ: ITR has an agreement with MHEDA in terms of providing some indicators that members can look at. Are there any other key indicators that people can be keeping an eye on as they do their annual forecasting?

BB: We’ve developed some new indicators. You always have to refresh that because the economy is morphing. Housing used to be a great indicator but it no longer is a terribly reliable indicator, but that would be one I would encourage people to go back to looking at. We have laid off a bit for the last couple of years because it has been out of whack, but housing seems to be softening up right now. In particular, I think they should be looking at the affordability of housing. Mortgage rates are going up. Home prices are going up. That means that affordability is becoming an issue. And we’re seeing the permitting trends in too many parts of the country are declining. And that’s not a good sign for 2019. That may not be obvious to everybody to look at. The other thing that I’d look at if I was the ordinary person, is I’d still be following the Purchasers Managing Index 112 Rate of Change that we calculate religiously. Follow the JP Morgan Global Indicator faithfully. What a lot of Americans don’t understand is that the whole world is going into this slow down. That’s evident to us because we follow the G7 leading indicators. We track world industrial production. So anything they can do to broaden their appreciation for how the slowdown in China is going and how the slowdown in Europe is going, will better prepare them for the territory we’re heading into. The rest of the world is leading us into this slow down, so we’re watching them very carefully and I think it behooves other business leaders to be doing the same thing.

TMJ: Anything we didn’t touch on that you think is important for MHEDA members to know ahead of your presentation at Convention?

BB: The labor shortage is going to continue on, in our estimation, for another 5 to 7 years. That means, at the bottom of all this is the understanding that businesses here and abroad need a way to get the work done without involving labor. And that’s a huge platform for everybody in MHEDA to be able to build off of in some way, shape or form. Whether that’s forklifts or entire inventory control systems in warehouses, there is a need to figure out how to be able do this with fewer people. And if you can do that, you’ve got yourself a nice competitive edge. Finally, if their e-platform, their digital platform, isn’t excellent, it’s out of date.