by brian beaulieu an era of growth or stagnation? 14...in a nutshell, this perspective says that the...

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TrendsReportTM | CORE

ITR EconomicsTM | AUGUST 2014 | www.itreconomics.com

Our Near-Term Economic Outlook

A hot topic currently being thrown around among pundits and economists is the idea of secular stagnation. Secular in this usage

means a very long-term, non-cyclical trend over several decades, as opposed to short-term business cycles over a few years. The thrust, according to former Treasury Secretary Larry Summers, is that even with interest rates near historic lows, the available returns from real investment might not induce business to act: to build capacity, to expand into new markets, to grow the economy, and to create jobs. The result, say proponents of this theory, is a long-run decay of the rate of capital investment, which creates a drag on aggregate demand and thus a seemingly permanent reduction in the long-run (secular) rate of growth in the economy. In a nutshell, this perspective says that the low-hanging fruit in terms of business opportunities are quickly used up, so real investment slows and with it the economy.

Executive Summary • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

AN ERA OF GROWTH OR STAGNATION?

Brian BeaulieuCEO, ITR Economics

by Brian Beaulieu

US Industrial Production OverviewThe short-term trend that we see in current US economic performance isn’t showing any serious signs of this at present. Our benchmark US Industrial Production is growing at a 3.4% annual clip. Manufacturing, at 74.23% of total Industrial Production, has consistently been one of the strongest contributors in the post recession period, up 3.0% over one year ago. The Mining sector is growing at a 7.0% annual rate, on the strength of oil and gas production as the US continues to be the largest producer of oil and gas in the world. Utility Production gains are mild, but still 2.7% above one year ago. Industrial Capacity Utilization is a mere 0.5 percentage points below the 30-year average. The strength of the US economy is all the more impressive considering that the global economy has not returned to full throttle.

Consumer and Business Indicators Pointing UpOn the consumer side, Retail Sales are up a healthy 3.8% year-over-year in real terms. Investment in capital goods, as measured by Nondefense Capital Goods New Orders (ex. Aircraft), rose 4.6% year-over-year. Nearly every subsector is above year-ago levels, with some exceptions showing just mild decline in consumer goods and machinery. An overview of the Purchasing Managers Index, the US Leading Indicator, and the ITR Leading Indicator shows that while they are off their 2013 highs, they are not showing any collapse or quit in the US economy.

http://www.itreconomics.com

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What about the Long-Term Outlook?Are there warning signs of potential secular stagnation in longer-term indicators? Perhaps. Note that the current Capital Goods New Orders figure is almost a percentage point below the long-run average of 5.4% annual growth (with data going back to 1969). This trend is currently slowing, and we expect the slower rate of growth to continue into 2015. However, this appears to be a cyclical variation more than secular stagnation. Also, observe in the chart below that the long-run trend line (dotted red line) in the growth rate of US Industrial Production over the past 25 years is mildly downward sloping. The impending slowdown in US Industrial Production that we are currently forecasting will run slightly above this long-term trend. But observe that unlike, for example, Japan (the poster child for secular stagnation), the trend is driven almost entirely by successively deeper recessions in 1991, 2000, and 2008. We do not expect the soft landing of 2015 and the following recession of 2019 to continue this downward trend of deeper and deeper downturns. The inter-recession periods show little sign of stagnation in the US.

Take Advantage of Today’s OpportunitiesTo sum up, there are a few long-term warning signs, but the news for now is good. The economy is growing and will continue to do so over the next few years. The US may be in for a period of slower growth (secular stagnation), but the jury is still out on that. One thing we are certain of is that the next few years will provide you with opportunities for growth and enhanced profitability. Contemplating a long-term trend is needed for strategic and succession planning reasons, but don’t lose sight of the immediate opportunities that today’s economy is giving you. Develop growth strategies with a positive future in mind.

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About ITR Trends 10The ITR Trends 10 compares the current cyclical status of 10 major benchmarks of macroeconomic activity as they move through this business cycle and into the next. Think of the Trends 10 as a train with 10 cars. The majority of the “cars” have gone through a soft landing for the 2012-2014 cycle. Please note that not all of the remaining cars will go down into a hard landing. Many are likely to pass through a low between Phase C and Phase B without going into Phases D and A. This is the essence of the soft landing we are projecting for this business cycle.

Summary• New Orders have joined Financial, Housing, and Retail Sales in Phase

C, Slower Growth, of the business cycle this month.

• Production is nearing the top of the business cycle with an expected third quarter peak.

• Nonresidential Construction, Consumer Price, Foreign markets, Medical, and Wholesale Trade care in Phase B, Accelerating Growth, of the business cycle.

• We expect most market segments to go through a Soft Landing in this approaching cycle.

ITR Trends 10 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

ITRCurrentData

Phase A: Recovery

RECOVERYA

12/12 is rising and the data trend is either heading toward a low or is in the early stages of recovery. This is the first positive phase of the business cycle.

Phase D: Recession

RECESSIOND

12/12 is below 0, data trend is in recession at levels below the year-earlier level. This is the final phase and the second negative phase of the business cycle.

Phase B: Accelerating Growth

ACCELERATING GROWTHB

12/12 is rising above 0, data trend is accelerating in its ascent, and growth is occurring above year-ago levels. This is the second positive phase of the business cycle.

Phase C: Slower Growth

SLOWER GROWTHC

12/12 decline is in place, data trend is decelerating in its ascent or has stopped its rise, but it is still above last year. This is the first negative phase of the business cycle.

Foreign

New OrdersProduction

Nonresidential Construction

Consumer Prices HousingMedical

Financial

00Soft Landing

Hard Landing

Wholesale Trade

Retail


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ITR Leading Indicator Holds Steady

The ITR Leading Indicator jumped to 4.0 from June to July, tentatively reversing the recent trend of mild decline.

With the ITR Leading Indicator’s lead time of 9-11 months to the overall US economy (as measured by US Industrial Production), the latest reading indicates that if the upward movement persists, US economic activity will begin to accelerate by mid-2015.

Annual US Industrial Production continued to accelerate through the second quarter of the year, increasing 3.4% over the past 12 months. The mining component of US Industrial Production is driving growth, up 7.0% year-over-year. Results are tracking toward the high side of the forecast range, but we see no need to revise our outlook at this juncture. Input from the leading indicators still points to slower growth developing later this year and into next year. Mild deceleration in early 2015 will give way to more robust growth late next year.

ITR Leading Indicator™ • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

ITRCurrentData

and Economic Forecast

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ITR Leading Indicator

USIP 12/12

ITR LI Raw

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2010 2011 2012 2013 2014 2015 2016

Index Index US Total Industrial Production

12MMA Forecast Range12MMAActual

Forecast Period 12MMA Forecast Result

Dec 2013 99.4 - 99.8 99.6

Mar 2014 100.1 - 100.6 100.7

Jun 2014 101.5 - 101.9 101.8

Sep 2014 102.0 - 102.6

Dec 2014 102.3 - 102.9

Mar 2015 102.6 - 103.2

Jun 2015 102.7 - 103.5

Sep 2015 103.3 - 104.1

Dec 2015 104.2 - 105.0


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The US economy is growing at an accelerating rate. The current 3.4% annual clip is the fastest pace for US economic activity in 13 months, and early trend indications suggest that growth accelerated further in July. We expect additional gains during the coming months, but the rate of ascent will likely ease some time during the third quarter of the year and continue to decelerate into mid-2015. US Industrial Production growth will subsequently quicken during the second half of the year and into 2016.

The Total Industry Capacity Utilization Rate is hovering near the highest level since mid-2008 at 79.1% through June. With additional gains expected for the US economy during the next two years and beyond, Capacity Utilization will likely continue to edge higher as additional machinery and equipment is put to use in order to meet the higher level of output. This is a very good sign for companies that are involved in business-to-business activity (think Nondefense Capital Goods New Orders, page 18 of the Core Module) as additional wear and tear will equate to both repair services, and equipment replacement. The historical average for the Total Industry Capacity Utilization Rate is about 80.6%. When we see capacity pushing much higher than this level, it will likely signal an increased demand for new manchinery and equipment as factories, mining operations, and power facilities expand.

2014 ............... 2.7%

2015 ............... 1.9%

• Industrial Production accelerating at 3.4% annual clip

• Total Industry Capacity Utilization hovering near highest level since mid-2008

Current Phase

ITREconomicSnapshot

Forecast

Highlights

US Total Industrial Production • • • • • • • • • • • • • • • • • • • •

ITRCurrentData

Focus on the long-term trend of general economic growth over the next few years. Make sure your company and processes are adequately prepared for the higher level of activity anticipated.

ITRManagementNote

Index, 2007=100, N.S.A.

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Index Index Data Trend

12MMA Forecast12MMA3MMA

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Rate-of-Change

12/12 Forecast Range12/123/12

3.4

Data Link | Ask An Analyst


http://itreconomics.com/itr-trends-report-data

mailto:[email protected]

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TrendsReportTM | MANUFACTURING

ITR EconomicsTM | AUGUST2014 | www.itreconomics.com

SLOWER GROWTHC

Annual Metalworking Machinery New Orders totaled a record $37.9 billion in June, an 11.6% gain from the year-ago level. However, due to slower activity in key end-user industries, we expect annual New Orders will weaken imminently and decline through the first half of 2015.

Metalworking Machinery Inventories climbed to $65.8 billion in June, the highest level in over 12 years. Inventories are high and will likely expand further as Metalworking Machinery Production is growing at an accelerating pace. The higher level of inventories, coupled with a slowdown in New Orders, suggests that the accelerating gains in Production are unsustainable. Firms may look to draw down inventories to satisfy new orders. Expect Production to moderate in the second half of 2014.

Both annual Metal Cutting Machine Tools New Orders and annual Metal Forming & Fabricating Machine Tools New Orders are weakening, falling 3.3% and 18.1% over the past year, respectively. These two sectors will likely fall further in the near term, contributing to the decline in Metalworking Machinery New Orders through the remainder of 2014.

The Metalworking Machinery & Equipment Producer Price Index, a measure of inflation for producers, rose 1.5% in June 2014 from June 2013. The 1.5% inflation rate is below the 2.0% 10-year average, suggesting price pressures on manufacturers remain mild.

2014 ............. -2.0%

2015 ................ 3.6%

• High inventories could lead to slow-down in Production

• Cutting and Forming Tool orders are softening

Current Phase

ITREconomicSnapshot

Forecast

Highlights

Metalworking Machinery New Orders • • • • • • • • •

ITRCurrentData

Look for ways to cut prices in order to secure sales.

ITRManagementNote

Billions of Dollars, N.S.A.

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Bils $ Bils $ Data Trend

12MMT Forecast12MMT3MMT 37.9

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Rate-of-Change


11.6





12 ITR EconomicsTM | AUGUST 2014 | www.itreconomics.com

TrendsReportTM | FINANCIAL


The Consumer Price Index is up 2.1% from one year ago (1.6% on an average annual basis). Further acceleration in the data trend is indicated going forward, and results are trending near the high end of our forecast range.

As the US economy slows in the second half of this year and into early 2015, we expect the consumer price trend to settle down some, with average annual inflation for 2014 and 2015 around the current level.

Notably, Core CPI inflation remains stable at 1.9% above one year ago. Much of the rise in the broader index was driven by a 3.2% year-over-year increase in the Energy CPI. Recent difficulties in energy producing regions in the Mideast and Eastern Europe have probably contributed to the surge in consumer energy costs. Because these mostly impact gasoline prices, producer energy costs have not risen in parallel.

The Federal Reserve’s target rate, the Personal Consumption Expenditures Price Index, is creeping up on the targeted inflation rate of 2.0%. This makes less accommodating policy by the Fed somewhat more likely going forward as the inflation rate approaches the ostensible sweet spot. A pullback in monetary stimulus supports our outlook for generally slower growth in the economy over the next four quarters.

2014 ............... 1.4%

2015 ............... 1.5%

• Inflation trending higher, on higher energy costs this summer

• Price gains will moderate as economy softens

Current Phase

ITREconomicSnapshot

Forecast

Highlights

ITRCurrentData

If you’ve been considering raising prices, do it now before the economy moves into Phase C.

ITRManagementNote

200

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Index Index Data Trend

12MMA Forecast12MMA3MMA

235.0

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Rate-of-Change


1.6

Consumer Price Index • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

(Consumer Inflation) Index, 1982-84 = 100, N.S.A.





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Data Methodology • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

ITR Economics

Moving Total/Moving Average

Moving totals/averages are used to smooth out the volatility inherent to monthly data.

Monthly Moving Total (MMT) vs Monthly Moving Average (MMA): Totals are used for things where is makes sense to add the data together. For example, units sold, or total dollars spent. There are times when it is desirable to calculate a monthly moving average instead of a total. Averages are used when the data cannot be compounded such as an index, percent, price level, or interest rates.

3MMT or 3MMA: A three-month moving total (3MMT) or average (3MMA) is the total (or average) of the monthly data for the most recent three months. Three-month moving totals (3MMT) or averages (3MMA) illustrate the seasonal changes inherent to the data series.

12MMT or 12MMA: A twelve-month moving total (12MMT) or average (12MMA) is the total (or average) of the monthly data for the past 12 months. The 12MMT (A) removes seasonal variation in order to derive the underlying cyclical trend. It is also referred to as the annual total or average.

Rate-of-Change

A rate-of-change figure is the ratio comparing a data series during a specified time period to the same time period one year ago. Rates-of-change are expressed in terms of the annual percent change in an MMT or MMA. Rates-of-change reveal whether activity levels are getting progressively better or worse compared to last year. Consecutive rate-of-change illustrates and measures cyclical change and trends.

ITR Economics’ three commonly used rates-of-change are the 1/12, 3/12, and 12/12, which represent the year-over-year percent change of a single month, 3MMT, and 12MMT (respectively).

A rate-of-change above 0 indicates a rise in the data relative to one year prior, while a rate-of-change below 0 indicates decline .

Definition of an Index

An index is a statistical measure of percent change from a base value in a dataset. The base value is equal to 100. Any reading above 100 indicates a percentage gain above the base value and any reading below 100 indicates a percentage decline from the base value. For example: an Index with the base year 2007 means that the year 2007 is 100. A reading of 107 indicates a 7% gain over the base year. A reading of 94 means activity is 6% below the base year level.


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Four Phases of a Business Cycle

ITR Economics

Phase B Management Objectives™

Phase Early B - Growth:1. Accelerate training 2. Check the process flow for possible future bottlenecks3. Continue to build inventory4. Increase prices5. Consider outside manufacturing sources if internal pressures becoming tight6. Find the answer to “What next?”7. Open distribution centers8. Use improved cash flow to improve corporate governance 9. Use cash to create new competitive advantages10. Watch your debt-to-equity ratio and ROI11. Maintain/pursue quality: don’t let complacency set in

Phase Late B Early C - Prosperity:1. Stay in stock on A items, be careful with C items2. Consider selling the business in a climate of maximum “goodwill”3. Penetrate new selected accounts4. Develop plan for lower activity in traditional, mature markets5. Freeze all expansion plans (unless related to “what is next”)6. Spin off undesirable operations7. Consider taking on subcontract work if the backside of the cycle looks recessionary8. Stay realistic – beware of linear budgets9. Begin missionary efforts into new markets10. Communicate competitive advantages to maintain margins

Phase A: RecoveryRECOVERYA

12/12 is rising but remains below zero, and the data trend is either heading toward a low or is in the early stages of recovery. This is the first positive phase of the business cycle.

Phase A Management Objectives™

Phase Late A - Recovery:1. Positive leadership modeling (culture turns to behavior)2. Establish goals: tactical goals which lead to strategic achievement3. Develop a system for measurement and accountability re:#24. Align compensation plans with #2 and #35. Be keenly aware of the BE (Break Even) point and check it regularly6. Judiciously expand credit7. Ensure distribution systems are ready to accommodate more activity8. Review and uncover competitive advantages9. Invest in customer market research (know what they value)10. Improve efficiencies with investment in technology and software11. Start to phase out marginal opportunities12. Add sales staff13. Build inventories (consider lead time and turn rate)14. Introduce new product lines15. Determine capital equipment needs and place orders16. Begin advertising and sales promotions17. Hire “top” people18. Implement plans for facilities expansion19. Implement training programs

Phase B: Accelerating GrowthACCELERATING GROWTHB

12/12 is rising above zero, data trend is accelerating in its ascent, and growth is occurring above year-ago levels. This is the second positive phase of the business cycle.


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Four Phases of a Business Cycle • • • • • • • • • • • • • • • • • • •

ITR EconomicsPhase C Management Objectives™

Phase Late C - Warning:1. Begin work force reductions2. Set budget reduction goals by department3. Avoid long-term purchase commitments late in the price cycle 4. Concentrate on cash and balance sheet 5. Reduce advertising & inventories 6. De-emphasize commodity/services in anticipation of diminishing margins7. Weed out inferior products (lose the losers)8. Encourage distributors to decrease inventory9. Identify and overcome any competitive disadvantages10. Make sure you and the management team are not in denial11. Cross train key people12. Watch Accounts Receivable aging13. Increase the requirements for justification of capital expenditures14. Evaluate vendors for strength15. Manage backlog through pricing and delivery, try to fill the funnel

Phase C: Slower GrowthSLOWER GROWTHC

12/12 decline is in place but remains above zero, data trend is decelerating in its ascent or has stopped its rise, but it is still above last year. This is the first negative phase of the business cycle.

Phase D Management Objectives™

Phase Early D - Recession:1. Continue force reduction2. Reduce advertising – be very selective3. Continue to avoid long-term purchase commitments4. Review all lease agreements5. Increase the requirements for justification of capital equipment6. Eliminate all overtime7. Reduce overhead labor8. Combine departments with like capabilities and reduce management9. Select targets of opportunity where price will get the business10.Tighten credit policies – increase scrutiny11. Look for opportunistic purchases12. Grab market share as your competitor dies

Phase Late D - Recession / Early A - Early Recovery1. Prepare training programs2. Negotiate union contracts if possible3. Develop advertising & marketing programs4. Enter or renegotiate long-term leases5. Look for additional vendors6. Capital expenditures & acquisitions considered in light of market-by-market potential7. Make acquisitions – use pessimism to your advantage8. People will be scared – lead with optimism and “can do” attitude

Phase D: RecessionRECESSIOND

12/12 is below zero and declining, data trend is declining to levels below the year-earlier level. This is the second negative phase of the business cycle.


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Checking Points • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

ITR Economics

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3/12 12/12

Positive Checking Points

1. 3/12 reaches a low2. 3/12 passes above the 12/12

The rate-of-change is making the transition from the previous cycle’s decline to rise in the current business cycle. Checking points #1 and #2 reflect this activity.

3. 12/12 reaches a low

The onset of business cycle rise is observed.

4. 3/12 crosses about the 0% line5. 12/12 crosses above the 0% line

The entry of the cycle into its steepest part of the rise is with checking points #4 and #5.

Negative Checking Points

6. 3/12 reaches a high7. 3/12 passes below the 12/12

Checking points #6 and #7 indicate that the business cycle is making the transition from rise to decline

8. 12/12 reaches a high

Business cycle decline begins with checking point #8.

9. 3/12 crosses below the 0% line10. 12/12 crosses below the 0% line

The entry of the cycle into its steepest part of the decline is with checking points #9 and #10.

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by brian beaulieu an era of growth or stagnation? 14...in a nutshell, this perspective says that the...

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