With employment gains causing consumer spending to shift upward and lower prices at the pump providing more disposable personal income for discretionary spending, the U.S. economy is expected to grow through 2016. However, signs of weakness are clearly evident in the first quarter of 2015. The strength of the U.S. dollar, weakness outside of North America, and decelerating activity in the oil patch will sap some of the strength from U.S. industrial production.
The U.S. industrial sector, which has bolstered the world’s largest, most resourceful and vibrant economy, is shifting onto the back of the U.S. consumer. The good news is that the American consumer seems poised to do the heavy lifting.
The growth rate for industrial production will decelerate in the final three quarters of 2015, slowing from the 4.2 percent annual growth rate in January to a milder 2.4 percent growth rate by year-end 2015. Our forecast for GDP, on the other hand, which adds in the measure of construction, the service sectors, agriculture and technology, is expected to maintain a more robust rate of growth this year than last. The issues discussed here will mean that the macroeconomic pain during the current cycle will be largely confined to fossil fuel extraction, export-oriented heavy industry, and oil/gas-dependent businesses.
The strength of the U.S. dollar is becoming a more pressing issue. It may sound good that the dollar is strong, but “too strong” in any trend is usually a sign of an imbalance. The U.S. dollar rose 29.2 percent against the euro since its April 2014 low. This is the steepest one-year rise in more than 29 years of data (pre-euro, the German DM was considered the core currency). The average monthly closing value of the dollar in the first quarter jumped 11.3 percent from the fourth quarter of last year. What is “too strong”? No one can say. But based on some U.S. import measures and what is going on in the oil patch, we are likely reaching the point where a change in trend would be a welcome occurrence.
This is the third biggest quarterly surge ever (2Q1991 and 4Q2008 were both large at 13.2 percent and 13.5 percent, respectively). The two previous comparisons were during economic recessions in the U.S. They were followed by a quarter of relative stability and a transition quarter from rise to decline.
Exports from U.S. manufacturers are losing some of their competitive advantage over less expensive foreign imports. So when will the strength of the U.S. dollar moderate? Based on the data we see, not any time soon. This is not something a government or Central Bank can impose on the global market. And as long as monetary, fiscal and economic uncertainty exists in the global economies of Europe, Japan and China, the dollar’s strength is not likely to change anytime soon. Weakness in these economies is also creating a decline in demand for commodities and lowering prices, which is reducing U.S. mining operations and putting a squeeze on margins.
To date, U.S. oil and gas extraction has shown only a mild decline in the quarterly data. However, a flood of announcements from oil companies have warned of reduced capital expenditures on equipment, sizable employee layoffs, and shuttering oil rigs to reduce production. Oil prices appear to have stabilized in the mid $50s at this writing, but the damage from the rising dollar and falling oil prices last year will ignite a rapid deceleration in oil and gas extraction and ancillary support functions in 2015. Prices on steel production geared to the industry are down, as are capital goods new orders. These areas are not likely to recover until oil prices stabilize at a higher level in 2016 or 2017.
On the bright side, there are sectors in 2015 expected to remain strong. Annual commercial construction increased 13.8 percent in the 12 months to February 2015. Spending rose to $59 billion, the highest since November 2009. Annual warehouse construction to February is a stunning 53.2 percent above the year prior, the fastest pace on record. With the quarterly trend rising an even more robust 56.3 percent, there is more growth ahead. As consumers shift toward a higher volume of online shopping, and online retailers look to push for same and next-day delivery services, we will see additional volume in closer geographic locations.
Private manufacturing facilities construction is another bright spot. Annual construction is up 19.7 percent in the past 12 months and spending stands at $57.3 billion. This is quickly approaching the all-time high set in 2009. Construction is expected to continue accelerating as more companies shift back toward the U.S. This is especially true for key industries that are energy-heavy and can be easily automated such as chemicals, plastics, automobiles and textiles.
Non-defense capital goods new orders annual growth slowed through February to 4.8 percent. Deceleration will continue to be the trend for overall business-to-business activity as we move through the remainder of 2015 due to the retraction in the oil patch and the U.S. dollar’s strength. Slower investment in machinery and industrial equipment is largely driving the current slowdown within non-defense capital goods. For example, machinery new orders have drastically decelerated from their nearly 10 percent rate of rise in late 2014 to a more modest 4.1 percent annual rate. Demand for IT and computer-related equipment, on the other hand, remains strong. Computers and electronics new orders are growing at a 4.3 percent annual pace. Although this is not that robust, it is the fastest rate of rise since 2007. Electronic components new orders, which include semiconductors, circuit boards, microprocessors and computer modems, are increasing at a more rapid 7.9 percent pace with additional rise ahead for the industry.
Wholesale trade of durable goods is currently at a record high, up 5.8 percent over the previous 12 months to February. However, the internal signals indicate that revenue growth will rise at a slower pace in the second half of this year. Renewed rise will develop with the onset of 2016 and persist through 2017. The four largest contributors to this $2.6 trillion wholesale trade sector are electrical and electronic goods ($563 billion), professional and commercial equipment ($448 billion), machinery and equipment supplies ($433 billion) and motor vehicles and parts ($418 billion). Together they comprise almost 70 percent of total revenues. All are currently in Phase B, growth. However, machinery and equipment will shift into Phase C, slower growth, in the near term. Three markets they sell to (oil and gas, mining and farming) are experiencing downward pressure from the decline in commodity prices and the strong dollar.
There are plenty of opportunities for growth, especially in the technology/automation space, in 2015. Most sectors of the economy will be expanding. And many more industries are moving toward automation for answers to a growing skill gap that looms even larger by the end of the decade. Continue to improve/streamline product offerings. Invest in and expand your business and marketing strategies.
This is not a cautionary tale to become pessimistic or stop expanding. The leading indicators ITR Economics tracks are pointing toward some discomfort in some key sectors of the general economy in 2015. We see this deceleration as short-term, with improving global economic conditions in 2016. Businesses will need to refine/adjust previous expectations and revenue projections for 2015, and redirect efforts in sectors where growth is not built on oil and gas or exports. Those businesses that are consumer-driven or not directly impacted by the U.S. dollar or the oil patch should remain aggressive and bullish about their growth probabilities in 2015.
>> Alan Beaulieu, [email protected], is president of the Institute for Trend Research (ITR). The ITR blog can be found at www.itreconomics.com/blog.
