Buck Up, Beat The Blues

It has been a busy two months since we last “talked.” Mr. Greenspan used the “recession” word out loud and scared a lot of people, the Chinese stock market had a meltdown of sorts, our own stock market experienced some sharp declines and the secondary mortgage market appears ready to implode. And let’s not forget the unrelenting pummeling of home builders. We are also hearing from a lot of companies that the last two months have been somewhat off compared to the strong figures posted for 2006.

It would be perfectly understandable if you were depressed by all this bad news, and perhaps we all should be. Many of you may remember that we have pushed out our recession forecast from mid-2008 until early 2009; we are hoping that was not a mistake. The next two to three months will be critical in evaluating the strength of the economy in the second half of 2008 as we wait to see what happens in some important leading indicators (the U.S. Leading Indicator, Corporate Bond Prices, Purchasing Managers Index and our own EcoTrends Leading Indicator).

Good news amid the bad

Some reality might help temper the bad news presented in the first paragraph. First, the money supply is expanding at a healthy 3.4 percent clip, which is the highest in three years. Another piece of good news is that retail sales are growing at an annualized rate of 4.6 percent, which is conducive to ongoing macroeconomic growth. The onset of seasonal decline in the quarterly figures is the mildest in sixty years. It seems we are using the money from the Fed wisely in that we are keeping the U.S. economy cruising forward at a comfortable pace. We will need to see a growth rate of about 2.5 percent before we get concerned about a forthcoming recession.The underlying trend for Industrial Machinery New Orders (NAICS 3332) has shifted to negative since the last report, with overt decline occurring in the rates-of-change and in the data trends. New Orders for the last three months are a disappointing 4.8 percent below the year-ago level. Internal and external indicators suggest that more troubles await this industry segment. You should freeze hiring and expansion initiatives and look to maximize existing sales leads, as they will be harder to come by later this year.  

The business cycle trend for Metalworking Machinery New Orders (NAICS 3335) is positive, though a slower rate of growth is definitely the order of the day. While the January 2007 Metalworking Machinery New Orders number wasn’t good, it was appreciably better than the latest New Orders data for Construction Machinery, General Industrial Machinery and Mining Equipment. Stay cautious in your plans for the remainder of 2007, as we have lowered our outlook for the year; expect 2007 as a whole to come in about even with 2006. Reduce overtime spending and rethink capital spending improvements unless they can help you with some interim rise in 2008.

Slower growth is the outlook for Electrical Equipment New Orders (NAICS 33531). The annualized New Orders figure is 12.2 percent higher than at this time last year. The growth rate is slowing, as anticipated, and is projected to slow to 3.6 percent by year-end 2007. A slower rate of growth in 2007 doesn’t mean there aren’t still plenty of sales opportunities, although margins will likely be squeezed. Consider taking contracts you might have ignored a year ago and monitor inventory levels carefully.

Overall, we would suggest that you take a deep breath, recognize that this economy is so big and so diverse that there are still lots of opportunities out there despite the headlines, and make your own trend outperform the macroeconomic numbers.       

Alan Beaulieu, [email protected], is Senior Analyst, an economist and a Principal with the Institute for Trend Research, in Concord, N.H.