Take Advantage of the Good Years to Prepare for the Bad

Sept. 29, 2018
Speaking to system integrators at an Epson Robots event, economist Brian Beaulieu railed against common political attitudes about tax cuts, tariffs, manufacturing in Mexico and manufacturing in the U.S., explaining how they will affect a looming decline.

If you want to know how the economy is likely to shape up in the coming years, don’t listen to politicians. Pay attention, instead, to the leading indicators—economic projections based on mathematical models rather than rhetoric.

Speaking earlier this week in Philadelphia, Brian Beaulieu, CEO of ITR Economics, stressed this to a group of system integrators, showing a history of the accurateness of his company’s predictions to stress the importance of such indicators. “You drive the top line,” he said. “I’m here to help you protect that bottom line.”

The discussion, nonetheless, got fairly political. Beaulieu spoke out against a common theme from politicians who insist that the U.S. does not manufacture here. He railed against tariffs and the limited benefits of corporate tax cuts. And he sang the praises of manufacturing in Mexico.

Addressing integrators gathered to get a sneak peek at new products coming down the line from Epson Robots, Beaulieu provided some good news: “The next two years look good,” he said. “Be confident, plan on it, budget for it, expect more from your people and yourselves.”

But he also spoke of the bad news: rough times starting in 2030, when ITR expects the economy to face a severe business cycle decline lasting about 10 years. That’s not exactly news—it’s something Beaulieu and his brother Alan have been preaching for about six years. It bears continual repetition, though, not as a scare tactic, but as a call to action.

“You have time to prepare,” Beaulieu said. “You have time to retire. If you own your own business, you have time to sell your business.”

Of course, much of that advice is of greatest use to those who are 57 or older—who might be able to retire or sell their businesses in the intervening years before the bottom falls out. “We’re not going to have to worry about this,” said Beaulieu, who counts himself among those old enough to retire in the not-so-distant future. For those under 44? As Beaulieu puts it: “It sucks to be you.”

Preparing for decline

But there are things you can do to take better advantage of the next couple years, and to be better prepared for painful years—including figuring out how to deal with the inflation that will be coming, reducing your price sensitivity, retaining your people, driving efficiencies with technology, investing in hard assets now, and learning how to manage profitless prosperity.

In the meantime, the economy continues to carry on with its cycles of ups and downs, and we are nearing a point that ITR expects to be a peak—a little bit higher this time than usual, Beaulieu said. He expects businesses to be feeling the pressure of too much work and not enough hours in the day. “If you’re not feeling good about the economy, there’s something the matter with you or your business,” he said.

But don’t give in to the temptation to build a new factory just because business is looking good right now. The timing is not right for that. Though it might be a bit painful to take a hard look at the future, you’ll be better off if you do. “It always pays to deal with the reality of the situation rather than some fairy tale you want to contrive,” Beaulieu said.

That reality? We have a couple years of solid growth before things start to slacken. At that point, there will still be growth, just at a slower rate. “You’ll have to work harder to generate flow out of a pie that isn’t growing as fast,” Beaulieu said. “But it’s still growth.” Some recession comes in around 2022.

Labor woes

There are ongoing factors throughout industry that will continue to worsen, including a labor pool that makes it hard for manufacturers to find the skilled labor they need.

President Trump has made a point throughout his campaign and presidency about bringing more manufacturing operations back to the U.S. But Beaulieu argued that manufacturing in this country is really not the issue. “Many politicians would like you to believe we don’t manufacture as much in the United States. We do. We just don’t employ as many people to do it,” he said. That is a matter of survival to compete on the world stage. “If we were labor-intensive, we wouldn’t be able to compete globally. We’re capital-intensive.”

Beaulieu did not pull any punches in emphasizing this fact, encouraging the automation professionals in the room to “obviate labor,” he said. “Get labor out of the equation. Do that, and you’re a winner and you’re part of the future.”

This isn’t to say that automation is killing the labor market, Beaulieu later pointed out. That sort of view gets the cause and effect backwards. “Robots aren’t replacing people. Robots are selling like hotcakes because we can’t find the people,” he said. “If you think they’re replacing people, you’ve been listening to too many politicians.”

Labor issues are only going to get worse, making it harder and harder for manufacturers to find the people they need. Beaulieu noted job openings for 6.6 billion people—a rise of 11.5 percent year over year.

Retaining your people will be crucial to surviving in business, and that means understanding how to work with Millennials—the biggest generation we’ve ever seen in the U.S. “Find a way to keep the Millennials happy,” Beaulieu urged. “They will quit on average every two years. You’ve got to find a way to keep them longer.”

Tax cut effects

One myth that Beaulieu set out to destroy is the idea that lower corporate taxes will boost the economy. Don’t expect the tax cuts pushed through last year to have any lasting effect. “It’s more like nitrous oxide being added to the economy,” Beaulieu said. “You have an intake, a sudden surge, and then it fades.”

There’s a lot more to the economy than tinkering with the rate, Beaulieu added, likening the economy to a symphony orchestra—the tax code is just the percussion section. “You’re getting a one-off shot in the arm right now,” he said, adding that companies should by all means take advantage of the current situation. “But it isn’t going to change your life. It goes back to normal in six to nine months.”

Politics will play a larger role in the upcoming midterm elections than will the economy, according to Beaulieu, who showed a historical chart that backs up his claims of party power typically shifting during this timeframe. “At midterms, we very likely will get a switch regardless of how the economy is doing,” he said. “It’s not about the economy; it’s more about the politics.”

A global view

Looking on a more global scale, Beaulieu pointed to the “immense” opportunities ahead for both China and the U.S. This is in large degree due to the growing number of citizens in those countries—what Beaulieu views not so much as humans, but as “future consuming units.” Every 13 seconds, he said, there’s a new person in the U.S. That’s the net value of births vs. deaths, but also factors in legal immigrants to this country. Russia, conversely, is hurt by the number of citizens leaving its borders.

But Beaulieu’s favorite economy as he eyes the future is Mexico. They’ve got the growing demographics, and they’re blessed with natural resources the same way the U.S. is. They’re getting the rule of law in Mexico, he added, and education levels are rising along with the middle class.

“Politically, it’s not expedient to say Mexico is a great place to be,” Beaulieu conceded. “But I’m telling you—Mexico is a great place to be.”

Mexico’s leading indicators are going up, and ITR sees a nice rising trend out of the great recession in Mexico, Beaulieu noted. “We’ve got to get NAFTA squared away and get Mexico back online because there’s so much potential there.”

Given their predominance in the current news cycle, Beaulieu had a fair bit to say about the tariffs being imposed on U.S. trading partners. “We’re imposing tariffs on our trading partners at a time when their economies are naturally slowing down. That compounds the pain we’re inflicting on them,” he began. “It’s going to make the export market into the United States rather painful.”

But who will it actually be painful for? Not China, which has so far been hit with 10 percent import tariffs on $200 billion worth of goods, and Trump is threatening to impose duties on another $267 billion of Chinese products. It’s not the Chinese exporters that will pay the tariffs, but rather the importers. The importers will pass those increases on to their buyers, who will ultimately pass the cost on to the end users. “This is an inflationary event going on,” Beaulieu said, challenging integrators to think about how they will react to the change. “What are you doing about your prices? What are you doing as to those increases?”

Retaliation is a considerable factor, and those most affected by Chinese retaliation will be companies dealing in aircraft, computers and medical equipment. “You know your market; you know who you’re selling to,” Beaulieu warned. “So beware.”

Keep an eye on 2030

Beaulieu called me-first nationalism the new currency, but warned that interest rates will follow after inflation. Bloomberg has warned that interest rates could be up to 16 percent by 2030. “The wheels are going to come off the cart before then,” Beaulieu said.

Prepare now by taking advantage of today’s interest rates to invest in the future, Beaulieu urged. “Grow with other people’s money,” he said. “Cash is not king here; cash is weakness. You should be loading up on debt. Don’t sit cash-heavy at this juncture of this trend. You’re not reaching your full potential if you are.”

About the Author

Aaron Hand | Editor-in-Chief, ProFood World

Aaron Hand has three decades of experience in B-to-B publishing with a particular focus on technology. He has been with PMMI Media Group since 2013, much of that time as Executive Editor for Automation World, where he focused on continuous process industries. Prior to joining ProFood World full time in late 2020, Aaron worked as Editor at Large for PMMI Media Group, reporting for all publications on a wide variety of industry developments, including advancements in packaging for consumer products and pharmaceuticals, food and beverage processing, and industrial automation. He took over as Editor-in-Chief of ProFood World in 2021. Aaron holds a B.A. in Journalism from Indiana University and an M.S. in Journalism from the University of Illinois.

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