Road Signs

Dec. 19, 2006
The U.S. economy in terms of business-to-business activity is pushing higher, and there are no internal indications of a near-term high in the data trends or in the rates of change. The current growth in U.S. Industrial Production is 4.0 percent. Our forecast calls for a peak in the growth rate to occur in the second quarter of 2007. The subsequent decline is expected to mean slower growth in the U.S. economy and in your markets from mid-2007 to mid-2008. The situation deteriorates further in the second half of 2008 and in 2009.

Manufacturing Capacity Utilization (excluding selected High Tech) has been hovering between 81.0 percent and 81.8 percent over the last seven months. This is higher than the thirty-year average of 80.6 percent, and it is the highest running average since October 1998. Machinery Manufacturing Capacity Utilization is strong at 86.7 percent, and the three-month moving average (3MMA) is now at 87.3 percent, which is the highest since April 1980. These are clear signals that the industrial sector is running at a high level and that readers can look forward to healthy order activity in the coming months.

Business-to-business activity, as measured by Nondefense Capital Goods New Orders, is doing well. This is an important indicator of future U.S. general economic activity, and readers who depend on capital goods activity should plan on healthy levels of business going forward. Budget for increased levels of activity in the year ahead. Expand capabilities only if you are already stretched to the breaking point. Otherwise, use subcontractors, overtime or independent contractors in order to avoid a labor build-up a year from now. The forecast calls for 2007 to come in 6.4 percent better than 2006.

I recently received a comment from a chief executive officer who said that if we were wrong about our outlook for 2007 through 2009, the worst that would happen to us would be a blown forecast. If the forecast was wrong and he were to act on it, the results could be much more serious, including lost capital, lost opportunities, lost market share and diminished prestige as a business leader. It is hard to argue that as much as we prize our accuracy and professional reputation, CEOs who depend on our forecast have a lot more at stake. The answer to his comment comes down to “Road Signs.”

Watch for signs

CEOs and other decision makers who are new to the Institute for Trend Research (ITR) and our forecasts have a healthy skepticism and are hesitant to risk a lot on a first meeting/reading. The way to meet that hesitation is through the use of Road Signs. Simply put, Road Signs are predetermined events that must happen before any internal action is taken. This keeps the actions tied to actual empirical events.

We are now in possession of five Road Signs that indicate we are squarely on track with our forecast for 2008 and 2009.  First, ITR’s proprietary EcoTrends Leading Indicator is moving downward with conviction. Corporate Bond Prices followed our leading indicator into decline. The third Road Sign is the rate-of-change decline occurring in the Purchasing Managers Index, fourth is weakness in the U.S. Leading Indicator rate-of-change and actual index, and lastly we have an inverse yield curve in place (as measured by ITR). Five indicators, occurring in sequence, all indicating similar timing and a similar outlook; be careful about the road ahead as there is a decline coming that will require you to downshift, test your brakes and negotiate some interesting turns.   

Alan Beaulieu,