Use a Mild Downturn to Prepare for Better Times

Sept. 19, 2013
A wall of worry lingers, but the U.S. economy is providing businesses with solid opportunities. There are reliable signals of ongoing U.S. expansion as we end 2013 and look into early 2014.

There are positive signs in economies around the world. Europe is slowly emerging from its second recession in four years, for example. China’s economy was slowing from the rapid expansion of the past several years, but is showing signs of increased activity again. Serious conflicts in Egypt and Syria have caused oil prices to rise above $107 per barrel, and yet the U.S. economy is steady as she goes. The U.S. economy, as measured by industrial production, is in its 43rd consecutive month of rise. A wall of worry lingers, but the U.S. economy is providing businesses with solid opportunities.

There are reliable signals of ongoing U.S. expansion as we end 2013 and look into early 2014. Housing starts and prices are rising, and have improved the recession-depleted “wealth effect” for consumers. Despite recent volatility in the stock market (S&P), it remains not far from its record high. Annual retail sales (excluding automobiles) reflect engaged, though cautious, consumers. Employment is slowly improving, although too many jobs are part-time or on the low side of the income scale, which has implications for a mild recession in 2014. Inflation is benign and most commodity prices are stable, if not below one year ago. The business mandate portion of Obamacare has been postponed until 2015, giving businesses additional time to prepare.

The U.S. Industrial Production Index, our benchmark indicator of the U.S. economy, was flat in July, registering a rather mild 2.4 percent gain over the past 12 months. This is on the low side of our forecast range. The internal trend dynamics indicate the pace of growth will slow going forward. We are projecting that a more noticeable decline will take hold by mid-2014, drifting to a March 2015 business cycle low. A reminder: The downturn will be more of a pothole than a sinkhole in that it will likely be very mild and short-lived by historic measures.

Here is what other leading economic indicators are telling us:

• ITR Leading Indicator. Our proprietary leading indicator is signaling growth in industrial production at least into the second quarter of 2014.
• Purchasing Managers Index (PMI). The PMI is signaling that the U.S. economy is not facing any substantive decline through the first quarter of 2014.
• U.S. Leading Indicator. The July monthly index hit a five-year high and the rate-of-change amplitudes are pointing to steady growth ahead for the next eight to 10 months.

American consumers are still shopping. Retail sales (excluding automobiles) rose in July, increasing 2.8 percent over the past year. Consumer spending is neither strong nor weak, but the good news is that there is no threat of the mushrooming consumer debt collapsing the economy as it did in 2008-09. The ratio of consumer debt to income is running near its lowest levels since at least 1980. The American Bankers Association reports credit card delinquencies at their lowest in more than 23 years.

The Federal Reserve seems committed to keeping interest rates low at least through 2014, which will stimulate a stronger consumer-led business cycle rising trend beginning in early 2015. We expect consumers to face some headwinds in 2014, with increased costs for healthcare, milder employment gains, and soft wage growth. A creditworthy American—with normal savings and low debt levels, rising home prices and a replenished 401(k)—means the consumer spending adjustment next year will be minor.

Ten-year U.S. government bond yields rose in July to 2.60 percent, a gain of eight basis points from June. The change falls within normal month-to-month parameters. The only thing noteworthy is that it comes after a drastic 30+ basis point rises in May and June.
We think treasuries will not keep rising at the current pace. The recent upward movement was a temporary correction to unsustainably low rates. U.S. debt projections do not warrant higher yields on borrowing at this time. Money is not fleeing the U.S. for fear of our debt. The recent upward trend to treasury rates will not be linear.

After a recession in late 2012 and early 2013, new orders for nondefense capital goods are rising at an accelerated pace. However, the recovery is uneven in the various sectors. For transportation equipment and aircraft parts, annual new orders rose 8.1 and 11.7 percent, respectively. New orders for industrial, construction, and metalworking machinery are in particularly strong rising trends, up 15.0, 21.4 and 9.3 percent, respectively. On the other hand, electromedical, measurement and control instruments have fallen 11.2 percent, and iron and steel mills have dropped 10.8 percent below the year earlier.

Uncertainty is the enemy of decision-making. Economic growth in many sectors is presently mild, and ITR has long been telling clients that the economy will be soft in 2014. But we are not seeing signals of impending economic collapse either. Use the coming year to strengthen your sales team and procedures for better days ahead in 2015. Hire key people to generate new business and streamline your operations. Upgrade your CRM or ERP to keep up with the coming pressures. Improve your Internet and mobile presence. Train your employees to enhance their technological prowess. All of the above takes money and time. We would urge readers to act now.

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

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