Economy Slowing, but Not Like 2009

May 22, 2013
The rate of growth in the U.S. economy will be slowing later this year until a mild recession takes hold in the second half of 2014. The good news is that we are projecting that the consumer will keep the economy on a positive footing for the year as a whole, and that means 2013 will end above 2012.

Our benchmark for U.S. economics, the U.S. Industrial Production Index, was forecasted more than two-and-a-half years ago to end 2013 3.0 percent above 2012. And the forecast still stands today. However, we have modified our outlook for 2014 since the last issue, lessening the rate of decline we had originally projected because of the combination of a data revision by the Federal Reserve Board, healthy leading indicator trends, and the slow growth of China. We are now projecting that 2014 will come in at a thin 0.9 percent below 2013.

Many people will hear the word “recession” and start thinking of 2009; 2014 will be nothing like 2009. Your biggest danger will be straight-lining the growth rate of 2013 into 2014. Straight-line forecasting results in a misallocation of resources, usually in the form of costly excess inventory. Readers should also consider their hiring strategy later this year. I suggest you wait until at least mid-2014 to hire the people that will help carry the load in a busier 2015.

Slower growth

The rate of growth in the U.S. economy will be slowing later this year until a mild recession takes hold in the second half of 2014. An important barometer of this is retail sales. U.S. consumers are an incredibly powerful force, with consumer activity making up an estimated 67 percent of the U.S. economy. What we do as consumers will quickly impact distributors and manufacturers.

The good news is that we are projecting that the consumer will keep the economy on a positive footing for the year as a whole, and that means 2013 will end above 2012. The bad news is that headwinds faced by the consumer are likely to cause the last quarter of 2013 to come in just 1.3 percent ahead of the year before.

The headwinds include a reduction in take-home pay for millions of Americans as the FICA tax returned to its normal level. The 2 percent increase/return was needed, but does not make it any less painful. We expect healthcare reform issues to affect the number of hours part-time employees will be working later this year and in 2014. Less take home pay, fewer hours worked and less incentive by businesses to hire are already slowing the rate of growth in retail sales, and we expect these factors to slow the growth rate even further as 2013 unfolds.

Retail sales for the past 12 months, excluding automobiles and adjusted for inflation, are 2.0 percent ahead of the year-ago level. The last quarter is a thinner 1.6% ahead of the same quarter one year ago. The year-over-year comparisons are trending lower, signaling we are on track with our projection of a slower rate of growth in the U.S. economy later this year. The good news that March showed an 11.4 percent increase from February is somewhat diminished by the fact that February posted a steeper-than-normal decline, most likely because of bad weather.

The year-over-year comparisons in the Employment Trends Index are moving lower, which means that the number of people finding jobs in the future will be slowing down over time. A similar trend is occurring in the total number of online help wanted ads. A slowdown in job creation will make the news and cause many people to wonder about the viability of ongoing expansion in the U.S. economy. This uncertainty is expected to show up as a decline in activity in new orders for capital goods in 2014.

What is the bottom line for 2013 and beyond? We expect businesses to see growth for 2013 as a whole, a mild consumer-led recession in 2014, and a recovery in 2015. 2014 will give you a great opportunity to assess potential future bottlenecks when a busier 2015 rolls around. It is also important to step up training efforts prior to increased demands on your team.

Made in America

Manufacturing in the U.S. is on the rebound. It currently stands at $1.86 trillion, 11.9 percent of GDP (up from a low of 11.0 percent in 2009). Near sourcing and a more favorable cost environment are helping to reenergize a vibrant segment of our economy. Selling into American manufacturing is a very worthwhile endeavor when you consider the potential of this marketplace.

U.S. manufacturing, if treated as a standalone economy, would be the 10th largest nation in the world. That makes U.S. manufacturing larger than the GDP of both India and Canada, and only slightly smaller than the GDP of Russia and Italy.

I would be remiss if we did not note that China’s manufacturing base is larger than that of the U.S. Manufacturing in China is estimated at $2.52 trillion (30.57 percent of an $8.25 trillion economy). There is a lot of selling potential into the Chinese manufacturing economy as well, but the costs of reaching that market, as well as the IP risks, make a compelling argument for a strong U.S. focus.

Industry analysis

Annual General-Purpose Equipment production has been generally flat in the early stages of 2013. Production on an annual basis is 2.9 percent ahead of this time last year, but quarterly production is 0.9 percent below the same time last year. We expect production to move generally horizontal through 2013 and into 2014. Material Handling Equipment New Orders for the last 12 months totaled $34.2 billion, a record for this industry and a solid 5.2 percent ahead of this time last year. A slower rate of rise will be the defining characteristic through the rest of this year and into 2014.

Annual Electrical Equipment, Appliance and Component production is steadily moving higher, providing readers with more opportunities in the coming quarters. The annual growth rate is expected to diminish from today’s 3.3 percent to 1.8 percent by year-end. A mild recession is likely in 2014 as a result of mounting consumer difficulties. The Appliance Market Production Index is the main drag on annual production, as this market has been generally flat since August 2011. Annual Appliance Market production is up just 0.7 percent from this time last year. We do expect some improvement in this market for 2013, but it will be minimal at best (1.7 percent growth expected in 2013).

>> Alan Beaulieu, [email protected], is President of the Institute for Trend Research (ITR). The ITR blog can be found at