Prepare Now for a 2019 Recession

The U.S. economy is in a very good position right now, and should continue to see solid growth through mid-2018. But get ready to take advantage of a consumer-led recession in 2019, advises economist Alan Beaulieu at the recent CSIA Executive Conference.

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If you’re worried about the U.S. economy, take a deep breath, and stop. What you need to be worried about is how to best take advantage of the good times we’re in and the growth ahead so that you can be in the best possible position to weather the coming depression—which, when all is said and done, won’t be so bad.

Alan Beaulieu, president of ITR Economics and one of our industry’s most respected economists, pointed to several reasons why we should expect good days ahead: consumers are in good shape, the world is relatively calm, employment is rising, banks are lending, retail sales are rising, non-residential construction is improving, and deficit spending continues (no fear of austerity).

And GDP is growing, Beaulieu said, speaking at the CSIA Executive Conference this year in Puerto Rico (yes, there’s a place that needs to worry about its economy). “This is not a recovery, friends. This is growth. Wages are going up. There are more job openings than we’ve ever seen before. This is a good time,” he emphasized. Don’t be discouraged by higher rates of GDP growth in China, where the economy just isn’t as big, he added. “If you can get a growth rate of 3-3.5 percent, that’s good. We’re just too big [to grow faster than that].”

More than half of Americans have been misled into thinking that China outranks the U.S. economically, but in fact the U.S. is the largest economy in the world—seven times larger than China. “People just don’t get it,” Beaulieu said.

Our individual state economies outrank most countries in the world. To drive that point home, Beaulieu showed a map of the U.S. with all 50 state names replaced by countries whose GDPs match the state. New York State’s GDP is the size of Spain’s. Illinois has a GDP matching Saudi Arabia. California and Texas GDPs match the size of two of the largest countries (by land mass) in the world—Brazil and Canada.

Overall, our economy is looking good. “We’re about ready to head into the second half of 2016, and we’re picking up speed in all sectors,” Beaulieu said.

ITR expects the good times to continue through 2017, with a 2.7 percent growth rate, and on into 2018. “There are better times ahead, lasting until about halfway through 2018, and then we should see a full-blown recession in 2019,” Beaulieu said.

Government spending is one of the factors that will lead us into a recession, according to Beaulieu, who notes that it really doesn’t matter who gets elected to the presidency come November—the recession will come either way. Even if the new president is fiscally conservative, he said, it takes 18 months for any major piece of legislation to impact the economy. “Even if Washington tightens up on the purse strings, which wouldn’t be a bad thing, we will still have a recession in 2019.”

For industry, that 2019 recession will look nothing like 2008-2009. “It will be painful, but not traumatic,” Beaulieu said, referring to it as more of a cash event than anything else, and more directed at consumers. “So the more your industry is attached to consumers, the more you’ll feel it.”

As a whole, manufacturing in this country continues to move up, the pace of growth actually accelerating the past few months, Beaulieu said. We had record high manufacturing in the U.S. a few years ago, he said, and we’re reaching that point again. “If anybody tells you we don’t make anything here anymore, it’s just not true.”

Several industries are doing well in the U.S. right now. Automobile production is not declining anymore, and the ripple effect is going to create business throughout the economy, Beaulieu said. Chemical production has also stopped declining, and is outperforming the economy right now. “It will be a good space to be in for a long time to come,” Beaulieu said.

Beaulieu also made note of the idea that Dubai was set to supplant the U.S. in chemical production. “Obviously, they’ve failed, as the amount of money pouring into this country for chemical production has soared. We have a very dependable political system, and a very good workforce, and energy costs are low,” he said. Talking specifically to the integrators, he added, “You should be busy pushing for moving into this industry going forward. It is going to see increased demand and increased needs.”

Electronic component production is at a record high, and there is more upside potential in the second half of this year, Beaulieu said. Medical equipment and supplies will need to see increased efficiency to protect their margins as they go forward, he added.

A big question on many people’s minds these days is the effect of low oil prices on industry. Although consumption is increasing in the U.S. and China, Beaulieu noted, “what we desperately need is a cap on production.”

There are several reasons why oil prices should be going back up, Beaulieu said, pointing to forces both political and economic. “It would be really good for the world, not just the U.S., if oil prices go up,” Beaulieu said. He projects prices at $41 to $45 a barrel by the end of the year, and a mid-$50 range by next year.

Meanwhile, those low gas prices are helping consumers, who are doing well in the U.S. “More of us are working, wages are going up, we’re saving at a nice clip, and we’re driving the economy forward,” Beaulieu said. “For the next year or two, this is great news. Wages are just going to keep going up.”

But it will be a consumer-led recession come 2019. “We’re adding a lot of debt. We have really low interest rates, so we’re managing our debt well. But when interest rates go up, that will drive up consumer delinquencies,” Beaulieu said. “We’re adding the debt now because it’s so doggone affordable.”

Get ready now for the slump to come, and remember that cash is king in any downturn. “In 2019, that’s when you go on a poaching trip,” Beaulieu advised. “You start looking for acquisitions, and start getting aggressive with marketing, so you’re ready for the Roaring Twenties.”

Here are the actions that Beaulieu advises you take this year to prepare your business for the coming years:

  1. Budget for continued economic growth driven by consumers.
  2. Invest in customer market research to reduce price sensitivity.
  3. Make sure your training and retention programs are topnotch.
  4. Make your marketing and advertising spending increasingly effective.
  5. Drive efficiencies with technology.
  6. Hire salespeople and leaders.
  7. Lock in costs in early 2016. Renegotiate your lease now; renegotiate your janitorial services. “Lock in everybody except your economist, as far as I’m concerned,” Beaulieu said.
  8. Expand credit offerings to garner market share.
  9. Plan for higher wages and higher energy costs.

Beaulieu told system integrators attending the conference that their goal upon returning home should be to make sure they have enough—enough people, enough systems in place, enough training, enough research, enough everything to be ready not only for the next couple years of growth, but for the coming recession as well.

 

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