Market Overview

Economic Outlook Depends On The Data Points You Believe

Economic Outlook Depends On The Data Points You Believe


COLUMBUS, Indiana. Is the economy moving forward or stalling? Depending on where you turn, it's easy to find a data point to support either thesis. Panelists at ACT Research's 60th Seminar on March 26, 2019, tried to answer that question during panel discussions at The Commons, in Columbus, Indiana.

The consensus was that the economy is doing okay, albeit posting less growth than in 2018, but there are concerns going forward. After posting a strong 2018 with 2.9 percent Gross Domestic Product (GDP), Sam Kahan, chief economist, ACT Research and retired from the Federal Reserve Bank Chicago, said signs all point to slower times ahead with Real GDP forecast for 2.1 percent in 2019 and falling to 1.9 percent in 2020 and 1.4 percent in 2021.

Kahan said that consumption remains strong but the trade deficit, which climbed to a 10-year high in 2018 at $621 billion, is a drag on Real GDP.

Jim Meil, principal, Industry Analysis for ACT Research, said that global Manufacturers' Purchasing Managers indexes are mostly showing flat manufacturing growth in their most recent releases (February). Globally, the average index is at 50.6, at the high end of the flat range, but only India is above trend.

Abbey Omodunbi, assistant vice president & economist for PNC Financial Services Group, though, pointed to a number of factors that indicate the economy remains on solid ground.

"We need this expansion to continue until July 2019 to break the record [for longest expansion on record at 121 months], and I like breaking records," he said.

Omodunbi pointed to consumer spending, which makes up 70 percent of GDP. Consumers, he said, remain in a good place and willing to take on more debt. Wages are still rising and consumer debt ratios remain near historic lows. Unemployment is still expected to drop further to 3.4 percent, Omodunbi added.

Kahan is also looking at inflation, which he said remains near the 2 percent range the Fed prefers, but that energy sector prices could have a major influence on that as well as rising wage pressures. If inflation jumps back up above 2 percent, the Fed could reconsider its decision to delay rate hikes.

The good news is that most major indicators remain positive at this point, Kahan noted, with manufacturing and other key freight sectors slowing but still in positive territory. Industrial production posted a 4.1 percent gain in 2018, although tariffs and slowing stimulus weakened industrial production toward the end of the year.

"The real question is how slow will it get," Kahan said. He thinks 1.5 percent growth is possible.

Omodunbi, though, mentioned that the Yield Curve did invert last Friday, and nearly everytime the Yield Curve has inverted in the past 70 years, it has been followed by a recession within a year.

"I still think the probability of a recession is relatively low, but higher than it has been in recent years," Kahan said, adding that "rolling recessions" in various sectors such as manufacturing, retail or housing, are possible.

"I think the important part is the economy is going to slow down relative to 2018, but even the pessimist expects it to rebound [by 2020]," Kahan said.

There has been a divergence in what economic numbers are saying, Kahan said, noting retail sales as an example.

"Retail sales – post-Christmas - everything was great, but the official numbers come out and tell us October sales were great, November sales were great, but somebody stole Christmas," Kahan said. This contradicts hiring numbers, which were strong in January. Manufacturing data is also showing contradicting data, depending on where you look and what data point you believe in, he added.

"The question is do you look at each number separately, or take an average of all these?," Kahan said. "This volatility is going to continue for the next several months, partly due to the buildup of inventories, maybe because of tariffs."

Kahan said that building inventories are a concern and the outlook for manufacturing is less clear. The energy markets, which drive so much of the U.S. economy, are also uncertain. In the near term, there remains a supply surplus but weak global demand and economic concerns in Europe and Asia coupled with expanding U.S. shale production will challenge global markets and OPEC.

Diesel prices will be a concern as IMO 2020 is implemented to curb emissions from global shipping. Some experts think diesel prices will spike as IMO is implemented in January 2020, although Kahan said he remains confident in the market to adjust.

Any economic talk these days also includes a conversation on trade, and Leigh Smythe Merino, vice president of regulatory affairs for the Motor & Equipment Manufacturers Association (MEMA), covered current trade actions and the impact they are having on industry. Merino said that 2.4 percent of GDP is generated by the motor vehicle parts manufacturing industry, with 871,000 direct jobs provided by U.S. vehicle suppliers. Heavy-duty manufacturers account for 203,000 of those jobs, up 18.7 percent since 2012.

"Trade policy and the uncertainty that comes with it are of great concern to our suppliers," Merino said. "We really seeing different impacts on different companies and there are some subsets that see tariffs as an opportunity."

Merino said the pessimism level for light duty vehicle suppliers is at its lowest level since 2009.

"We're very concerned about the long-term impact of these tariffs and the uncertainty will impact suppliers willingness to invest, to innovate," she said.

Steel (25 percent) and aluminum (10 percent) tariffs, implemented in March 2018, impacted pricing on both trucks and trailers and remain in place. The new United States Mexico Canada Agreement (USMCA), which still hasn't been ratified by Congress, did not address these tariffs, so unless there is congressional action, expect them to remain in place as part of a new normal, Merino said.

"We've talked a lot about tariffs, but I would suggest that quotas are a greater concern," she said, noting that four countries: Argentina, Australia, Brazil and South Korea face steel and aluminum quotas so once those are reached, U.S. companies will be unable to source materials from that country. "This administration is big on quotas and they are still trying to negotiate quotas into deals," Merino added.

President Donald Trump has still not made a decision on a Section 232 investigation on autos and auto parts that could place tariffs on imported vehicles and components. A Section 232 is an investigation of imports based on national security grounds. Merino said MEMA and its members are united against this action.

"We have no basis that this is going to happen, but we also have no basis that this is not going to happen," she said, "so we are advising companies to prepare for the worst-case."

Unless the timeline is extended due to ongoing trade talks, May 18, 2019, is the deadline for Trump to announce a decision.

Within the USMCA deal is automotive "rule of origin" for vehicles. On heavy trucks, 70 percent of principal parts and 60 percent of complementary parts must meet this criteria, which states that parts or vehicles must be made in North America. Heavy truck makers have seven years to comply with this "regional value content" rule. Also, under the deal, 70 percent of steel and aluminum must be sourced from North America and 45 percent of heavy trucks must be produced by "high-wage" labor, making at least $16 per hour.

China trade talks continue, but $267 billion worth of additional imports are potentially at risk should talks break down. As of now, three separate tariff actions have been taken against Chinese goods totaling more than $50 billion at a 25 percent rate with a 10 percent tariff on another $200 billion of goods that faces a tariff increase to 25 percent should trade talks fall apart.

"Tariffs are not going to be lifted overnight [even if there is an agreement], so for the medium term, you should plan for them," Merino said.

On a positive trade note, the U.S. and Korea agreement from September 2018 will double the number to 50,000 units a year of U.S. automobile exports to Korea and phase out a 25 percent U.S. truck tariff on imports to that country.

President Donald Trump is expected to visit Japan in May and June where trade will be a top agenda item, and the European Union is expected to vote this month to start trade negotiations with the U.S.

"Does this country want tariffs or does it want investment?" Merino asked. "Companies are pausing investments [because of the uncertainty]."

Image sourced from Pixabay

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