With a series of headwinds causing turmoil, the U.S. economy has shifted onto the backside of the business cycle, into slower growth. Certainly, the U.S. is not immune to soft global demand and pricing for commodities, a strong dollar affecting exports, falling oil and stock prices, and worrisome news out of China.
The full effects of the most recent issues have not (yet) altered our outlook for 2015. Overall, we anticipate the U.S. will have a soft landing this year. Jobs and wages are rising. Consumer spending, construction trends, service industries and technology are bolstering the sagging industrial and new order sectors. A renewed rising trend is expected to take hold by mid-2Q16.
Mining for most metals and minerals has slowed, as has oil and gas. We have made some changes to our forecasts because of recent data revisions. U.S. industrial production will end this year on the lower side of our forecast range, from the prior 2.4 percent annual average growth rate to 2.1 percent. U.S. non-defense capital goods new orders will finish 2015 in recession, down 3.0 percent (annual basis). Consumer spending, construction, service industries and technology are bolstering the sagging industrial and new order sectors. Corporate profits are healthy and U.S. companies are not in the same highly leveraged positions as in 2008-09.
Consumer trends are balancing out the decline in the industrial sector. Employment, especially in the private sector, is expanding. Incomes rose 2.7 percent in the second quarter. Disposable personal income (after taxes) rose 3.0 percent over the past 12 months and the annual (personal) savings rate is a healthy 4.1 percent. Debt to equity for working Americans is the best it’s been in decades. The result is that consumer spending in retail (inflation-adjusted) is at a record high. More gains are anticipated, although the pace of growth will be milder in the second half of this year.
Wholesale trade of durable goods is slowing, consistent with the slowdown in the overall economy. Wholesale trade of non-durable goods will end the year negative, in part due to the drag in falling petroleum and farm products prices.
The fortune of the automation sector is closely tied to the performance of the machinery markets. Unfortunately, the first half of 2015 has been a very difficult period for new orders in the machinery sector. Industrial machinery new orders have been in recession since January, with June’s 11.9 percent contraction (on an average annual basis) representing the worst performance in more than two years. However, the second quarter of the year was much better than the first—industrial machinery new orders rose 25.6 percent over the previous quarter, making the second quarter the second strongest on record, behind only post-recession 2009.
New orders are up for construction (18.0 percent), material handling (10.6 percent), metalworking machinery (5.4 percent) and heating and air conditioning equipment (2.9 percent). However, mining is down 25.8 percent (annual basis), with no near-term upside momentum to speak of. ITR’s forecast calls for machinery new orders for all of 2015 to be 7.8 percent lower than the 2014 level. Rise will take hold in early 2016 and industry growth is expected to reach 9.2 percent for all of next year before slowing again in 2017.
Industrial machinery production is faring much better than new orders. Annual production growth was 4.1 percent in July, with monthly and quarterly figures suggesting further acceleration in the months ahead. Although production will slow as the U.S. economy cools towards the end of 2015, the downturn in machinery production will not be nearly as severe as that occurring in machinery new orders. ITR expects production to finish 2015 down 1.0 percent on a year-over-year basis, and then accelerate in both 2016 and 2017, with respective growth rates of 5.6 and 11.4 percent.
Beyond the annual trend data, ITR tracks a series of leading indicators, which offer a broad view of where the economy is headed. Several leading indicators, including the Purchasing Managers Index and the ITR Leading Indicator, have passed through tentative cyclical lows and are starting newly established rising trends. This is a positive sign for the U.S. economy in 2016. It suggests accelerating expansion in the overall economy beginning in the second quarter of 2016.
China’s economy, as measured by industrial production, is growing at the slowest rate since 1999. Ongoing declines in previously strong sectors such as mining, construction, retail sales and power generation have fallen significantly in the past 18 months. The recent volatility in the stock market, combined with the devaluing of the yuan, has left many concerned about the underlying health of China’s economy. As the second largest economy in the world, the No. 1 exporter and second largest manufacturer, there is reason to pay attention. China’s trends are a result of internal struggles, but also reflect the sluggishness in the global economies, including South America, Japan and Europe.
Across Europe, growth is projected to be mild and uneven. The Europe Leading Indicator, which leads Europe industrial production by 11 months and UK industrial production by nine months, is a mere 0.1 percent above the year earlier. The internal data indicates that growth in the industrial sectors of Europe and the UK will be flat to mildly down into the second quarter 2016. Europe industrial production (annual average basis) is currently showing mild improvement (1.0 percent). However, the internal trends are more negative. We expect it to finish 2015 even with the 2014 level.
Annual industrial production in the UK is at a three-year high, up 1.2 percent. However, the current rise is expected to decelerate through the second half of this year and end essentially flat or mildly down. The bright spot in the UK is the construction industry, with impressive increases from office (42.0 percent), medical (34.6 percent), housing starts (25.4 percent) and educational building construction (11.3 percent) over the past 12 months to May compared to the year earlier.
On balance, there is more positive news than negative. Indications are that 2016 will benefit from an improved capital expenditure trend and stronger retail sales trend. We should see total industrial production and GDP rising at a better rate in 2016 than what we are experiencing in 2015.
Be aware that labor costs are rising. Coupled with moderate inflation next year, labor could squeeze margins. People, equipment and capital will be needed in increasing amounts to manage the macroeconomic ascent of 2016 and 2017. Now is a good time to assess the needs for increasing activity in 2016 and 2017.
>> Alan Beaulieu, [email protected], is president of the Institute for Trend Research (ITR). The ITR blog can be found at www.itreconomics.com/blog.
