U.S. Economy Sees Continued Improvement

May 12, 2014
With borrowing costs still low and markets strengthening, businesses need to prepare for increasing activity going forward.

More than 25 years ago, Bill Gates said, “In three years, every product my company makes will be obsolete. The only question is whether we will make them obsolete or somebody else will.” These days, it feels more like three weeks. Personally, that is far too short a time. I am still adapting to technology changes from a year ago.

Conversely, a change that is welcome is the improvement in the U.S. economy. U.S. industrial production, our benchmark for the general economy, increased 3.1 percent over the past 12 months. In spite of a harsh winter, growth in the first three months of 2014 rose 3.7 percent over the year earlier. All three segments of industrial production (mining, manufacturing and utilities) are in positive territory and showing additional rise through the near term.

Equally impressive is the 8.2 percent rise in annual production for high-tech industrial production, which is pointing toward more gains. Annualized computers and electronics production is at a record high, up 5.9 percent above the year earlier, reflecting stronger demand in this sector. New orders for computers and electronics equipment (deflated) is in the expansionary phase of the business cycle, with a growth rate over the past 12 months of 8.5 percent and a record $1.2 trillion. At this level, new orders will support a reasonably healthy level of production for some time. The computer and electronic production business cycle closely matches that of the overall economy as measured by industrial production. We expect industrial production will continue to rise through 2015. The pace of growth will slow, but there are no storm warnings—no recession in view.

The leading indicators that cover a broad cross-section of the U.S. economy are also giving us upbeat signals. Our ITR Leading Indicator has moved lower from the September 2013 peak, but sits ensconced in positive territory with no collapse in view. Ongoing improvement in the economy is also visible in the Purchasing Managers Index (PMI). The April PMI, at 54.9, is rising well above the benchmark 50, indicating expansion in the manufacturing sector. The March U.S. leading indicator (raw) rose to its highest level since December 2007, up 6.1 percent over the same month a year ago.

Despite higher food, heating and gas prices, consumer spending on a multitude of goods is positive. Total retail sales (inflation adjusted) rose 4.1 percent in the past 12 months to a record $2.7 trillion in spending. The rate-of-change signals indicate spending will slow through the near term, which would not be unusual, given soft wage gains and inflationary pressures at the consumer level. People living paycheck-to-paycheck will naturally be inclined to reduce discretionary spending.

Automation World readers should see increasing activity and opportunities consistent with the growth in the general economy and business investment in technology. Companies are investing in capital goods to improve efficiencies and protect margins. Nearly all segments of wholesale trade are up on the year with only a few exceptions.

Annual nondefense capital goods new orders rose a healthy 8.4 percent in the year to March, but there has been a noticeable decline in the recent monthly and quarterly trends, signaling slower growth through the near term. Annual growth rates for some of the stronger sectors of new orders are as follows: industrial machinery (18.7 percent), machinery (8.0 percent), material handling equipment (8.6 percent), and refrigeration, heat and air conditioning (4.6 percent). Not surprisingly, on the down side are defense capital goods and communication new orders, which fell 20.5 and 22.3 percent, respectively. More decline for these two markets is expected.

Though the U.S. economy is in a stronger position, we are not yet firing on all cylinders. The accelerated rise in the housing starts over the past two years has ended, and housing starts are now in steep decline. Weather may not have helped, but the decline, which ITR Economics has been forecasting, began prior to the winter weather. The Mortgage Bankers Association reported that mortgage application activity (refinancing and home purchase demand) dropped to its lowest level since December 2000 (seasonally adjusted). Higher mortgage rates, tighter regulations (Dodd-Frank) and tight inventory in some markets resulted in a weak start to the spring season.

Nonresidential construction is recovering from the overbuilding of prior years, but the gains are spotty. Public construction and hospital construction, two large sectors, are creating a drag on total dollars. Commercial and office building construction are improving at a faster pace, but the overall number of projects and dollars spent remain well below pre-recession peaks.

Like the challenges I face in adjusting to new technology, every profitable business must continually adapt to fluctuations in the business cycle, the cost of new regulations (healthcare), inflationary pressures and a lack of skilled labor. With borrowing costs still low and markets strengthening, businesses need to prepare for increasing activity going forward. Competition will always be in pursuit. Innovation of existing products and improved services will be important to retain customers. Add top-notch sales people to help you penetrate new markets. Be prepared for wages, inflation and healthcare costs to press against cash flow.

Edward Demming’s words may be more relevant today than they were 50 years ago: “It’s not necessary to change. Survival is not mandatory.”