u.s. economy and business outlook: can it take a licking and … · 2019-04-17 · u.s. economy and...

U.S. Economy and Business Outlook:Can it Take a Licking and Keep on Ticking?

Jim MeilACT RESEARCH Co., LLC

April 12, 2019Follow @actresearch and @jp_meil

Who is ACT Research?

ACT Research Co., LLC, Copyright 2019

•Recognized leading publisher of industrial and commercial vehicle data and analysis•Founded in 1986•Columbus, Indiana

Our mission: To improve and expand N.A. analytics in capital goods, industrial, and commercial vehicle markets to promote a better understanding of trends and risks in those businesses

2

Follow on twitter – FREE insights & commentary: @jp_meil & @actresearch

Why we’re happy and worried at the same time…

• Expansion cycle is mature• 2018 growth solid, 2019 decent start• But it’s not as good as this time last year• Probabilities grow for recession in 2020 (1 in 3 chance)• Fed rate hikes add uncertainty• Global momentum weaker in EU, JA… CH hard to read• Beltway could be worse, but it’s bad enough…

….with 2020 elections on the horizon


Start End GDP Mfg IPFeb-61 Dec-69 106 5.1 6.8Nov-70 Nov-73 36 5.5 9.4Mar-75 Jan-80 58 4.6 6.7Nov-82 Jul-90 92 4.1 4.0Mar-91 Mar-01 120 3.8 5.6Nov-01 Dec-07 73 3.0 2.8

81 4.4 5.9

Jun-09 >Apr-19 118 plus 2.1 1.33.0 2.5

Compound Annual Growth Rate (CAGR)

Average

Duration (months)

Over the last 12 mos

Source: National Bureau of Economic Research, BEA, FRB

U.S. Business Cycles since 1960

Weakest Post-World War II recovery

4ACT Research Co., LLC, Copyright 2019

Main Street satisfactionAnxieties focus on Washington & Rest of World

• Business/consumer confidence• Job market• Corporate profits growth• Stocks• Credit standards and loan

availability still pretty good

• Trade negotiation risk• Europe possibly in recession plus Brexit• Federal Reserve rate increases, lagged impact• Flat yield curve• 2020 election cycle already underway• Crazy world global risk mix: UK, China, Turkey,

Syria, NKorea, Russia, Iran, Venezuela

Not-so-happyHappy


Our Favorite Leading Indicators

• Yield curve (long/short interest rate spread)• Purchasing Managers Index (US/NA)• Commodity prices• Stock market trends • Confidence surveys


-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

Perc

ent

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

10-Year Treasury Rate

90-Day T-Bill Rate

U.S. 10-Year Treasury Rates and 90-Day T-bills

7Source: U.S. Federal ReserveData through March 2019 ACT Research Co., LLC, Copyright 2019

8

Short rates just under 2.50%

10 year yield at 2.38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

30

35

40

45

50

55

60

6520

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

1820

19

Index

50 =

Neutr

alISM Purchasing Managers’ Index -- Manufacturing

Source: ISM Manufacturing Report on BusinessMonthly data through March 2019

Below 50 = declining

Above 50 = growing


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

80

85

90

95

100

105

11019

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

1820

19

Inde

x (19

86 =

100)

NFIB Small Business Optimism Index

Source: NFIBMonthly data through February 2019

4 months of decline after 2

years of sustained high

(Fed Gov shutdown)

First big jump in November 2016

ACT Research Co., LLC, Copyright 2019 10

102030405060708090

100110120130140150

90 92 94 96 98 00 02 04 06 08 10 12 14 14 1819

Inde

x, 19

85 =

100 (

SA)

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

Percent

Sources: U.S. Bureau of Labor Statistics and Conference BoardMonthly data through March 2019

Unemployment Rate(right scale, Inverted)

Conference BoardConsumerConfidence(left scale)

U.S. Consumer Confidence & Unemployment

11

March Confidence

coming back after Fed Govt

shutdown


600800

10001200140016001800200022002400260028003000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Inde

x, 1

941-

43 =

100

, Lin

ear S

cale

60080010001200140016001800200022002400260028003000 Index, 1941-43 = 100, Linear Scale

Source: U.S. Federal ReserveData through March 29, 2019

12

S&P flirting with all-time highs after anxieties during Q4 retreat

U.S. Stock Market S & P 500


Stock market as lead indicator


Mark Hulbert, Wall Street Journal, March 4, 2018

U.S. Industrial Production by NAICS sector


Rising tide is NOT lifting all sectors

Unusual disparity in industrial growth

US Industrial Sector Performance 2009 to date

NAICS code Sector

%Share of IP Output

Feb 2018 to Feb 2019

CAGR since June

2009Total (Mfg, Mining, Utilities) 100.0 3.9 1.7Manufacturing Total 74.4 2.5 1.4Nondurable manufacturing 34.5 0.4 0.5

311 Food 6.2 -0.3 1.5312 Beverage and tobacco product 1.9 -4.9 0.0313-4 Textiles and products 0.7 -1.5 -0.3315-6 Apparel and leather goods 0.2 -13.9 -4.8322 Paper 2.6 0.2 -0.1323 Printing and related support activities 1.5 -4.5 -0.6324 Petroleum and coal products 2.7 0.6 0.9325 Chemical 12.3 2.7 -0.4326 Plastics and rubber products 3.5 0.7 2.3

Durable manufacturing 39.9 3.8 2.3321 Wood product 1.2 -2.5 4.0327 Nonmetallic mineral product 2.1 -0.6 2.9331 Primary metal 2.3 5.2 0.2332 Fabricated metal product 5.6 4.4 1.3333 Machinery 5.9 6.6 0.7334 Computer and electronic product 5.9 5.0 4.4335 Electrical equipment, appliance, and components 2.0 1.8 1.33361-3 Motor vehicles and parts 5.8 1.6 6.53364-9 Aerospace and miscellaneous transportation eq. 4.6 7.2 1.4337 Furniture and related product 1.3 1.5 1.9339 Miscellaneous 3.2 2.5 -0.3

LEADER - bests class by 100+ bps

Rate of Change

LAGGARD - trails class by 100+ bps

15Source: SteelBenchmarkerhttp://steelbenchmarker.com/files/history.pdf

SteelBenchmarkerHot Rolled Band at $783 per metric tonne, down from $1,000 peak last summer


SteelBenchmarkerCold Rolled Coil at $928 per metric tonne, down from $1,105 peak last summer


SteelBenchmarkerScrap prices in $370-400/gross ton range now, stable over 12-18 months

Steel prices reflect Economics 101

• Demand: Slower growth• Supply: Adjusting to trade and tariffs, though

this can change with policy moves


91011

1213141516

171819

95 97 99 01 03 05 07 09 11 13 15 17 19

Millio

ns of

units

- 3 M

onth

Mov A

vg(SA

AR)

91011

1213141516

171819

Sources: Ward’s Automotive and Motor IntelligenceSales data through March 2019

U.S. Light Vehicle Retail Sales

19

2015-2019 flat trend

17.0-17.5m SAAR

-----------Plateau just

like 1999- 2006


Mar 2019/Mar 2018 (1.1)CAGR since July 2009 5.4

Growth Rates %

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

40

45

50

55

60

65

7019

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

1820

19

$Bil -

3 Mo M

ov Av

g (sea

s adj

annu

alized

rate)

Source: U.S. Census BureauData through January 2019

U.S. Non-defense Capital Goods (excluding aircraft)

Shipments

Orders

Capital goods activity may

be rolling over after 2+ year upswing


4.31.6

Shipments Rates of ChangeLatest 12 month trendCAGR since June 2009

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.519

9419

9519

9619

9719

9819

9920

0020

0120

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0420

0520

0620

0720

0820

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1120

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1620

1720

1820

19

$Bil -

3 M

o M

ov A

vg (s

eas a

dj a

nnua

lized

rate

)

Source: Census M3 Industry ReportData through January 2019

U.S. Construction Equipment

Shipments

Orders

21

UP YEAR AHEAD

• Infrastructure

• Rental demand

• Aging current equipment stock

• Light comm’lconstruction

• Exports and slower housing sector are the big risks


3.41.0


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1.01.21.41.61.82.02.22.42.62.83.03.2

1994

1995

1996

1997

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1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

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2013

2014

2015

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2017

2018

2019

$Bil -

3 Mo

Mov

Avg

(sea

s adj

annu

alize

d ra

te)

Source: Census M3 Industry ReportData through January 2019

U.S. Material Handling Equipment

Shipments

OrdersUP YEAR AHEAD

• Warehouse, inventory, supply chain

• E-commerce

22

6.72.1



3.04.05.06.07.08.09.0

10.011.012.013.014.015.016.017.018.0

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Pric

es ($

/bus

hel)

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

Corn (right scale)

Soybeans(left scale)

Source: U.S. Department of Agriculture, Agricultural Prices http://www.nass.usda.gov/Data through February 2019

Corn, soybean, wheat prices

Wheat (left scale)

Ag commodity prices stable for 3+ years though well under early

decade highs


http://www.nass.usda.gov/

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.6

1.0

1.4

1.8

2.2

2.6

3.0

3.4

3.8

4.219

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

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1820

19

$Bil -

3 M

o M

ov A

vg (s

eas a

dj a

nnua

lized

rate

)

Shipments


U.S. Farm Machinery

24

RISKY YEAR AHEAD

• Row crop prices stable for now

• Inventories close to right sized

• Exports part of trade conflict collateral damage

GROWTH WITH RISK

• Crop prices stable

• Equipment stock aging

• Dec 2017 tax law changes should still benefit

• Exports still key though trade deals present risk

12.31.0



0%

10%

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30%

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50%

60%

70%

80%

90%

100%

1.0

1.5

2.0

2.5

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3.5

4.0

4.519

9419

9519

9619

9719

9819

9920

0020

0120

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0920

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1820

19

$Bil -

3 M

o M

ov A

vg (s

eas a

dj an

nuali

zed

rate

)


U.S. Industrial Equipment

Orders

Shipments

25

GOING NOWHERE FAST

• Slowing manufacturing sector

• Exports trending down

• Higher interest rates hurt3.4

1.0



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

3.219

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

1820

19

$Bil -

3 M

o M

ov A

vg (s

eas a

dj a

nnua

lized

rate

)

Ship-ments

Orders


U.S. Mining, Oilfield, Gas Equipment

FLATTISH YEAR AT LOW LEVELS

• Recovery aborted by crude oil price volatility – down Q4, up Q1

• Ever-present fear of OPEC discipline breakdown, return to sub-$45/bblwhere we were 4 months ago


(9.3)(5.0)


0%

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100%

0

5

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25

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5519

9619

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9819

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0020

0120

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1020

1120

1220

1320

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1720

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19

Thou

sands

(SA, 3

mo m

ov av

g)

Build Actual &

Build Plan

Orders

Source: ACT Research; Orders and Build data through February 2019 Build Plan data through August 2019

NA Class 8 Trucks - Orders and Build

27

Class 8 orders falling

because 2019 build slots filled


Latest 12 month trend 22.3CAGR since June 2009 7.3

Class 8 Build Rates of Change

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

5

10

15

20

25

3020

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Thou

sand

s (SA

, 3 m

o mov

avg)

Build Actual &Build Plan

Orders

Source: ACT Research; Orders and Build data through February 2019Build Plan data through August 2019

NA Class 5-7 Trucks, Buses, RVs - Orders and Build

28

Medium duty tied to

consumer, services,

construction –marked by

stability, slow growth


2.79.9

Latest 12 month trendCAGR since June 2009

Class 5-7 Build Rates of Change

Manufacturers’ Purchasing Managers Indexes

Source: Markit Economics 29

>54

Above Trend

51-54

Trend

45-51

Flat

54

Above Trend

51-54

Trend

45-51

Flat

European UnionIndustrial

ProductionY/Y growth

30

Year

-on-

Year

(YoY

) Gro

wth

Year

-on-

Year

(YoY

) Gro

wth Last 12 Months

5 Years

Source: Trading Economics https://tradingeconomics.com/european-union/industrial-productionData through January 2019

https://tradingeconomics.com/european-union/industrial-production

ChinaIndustrial


31

Year

-on-

Year

(YoY

) Gro

wth

Year

-on-

Year

(YoY

) Gro

wth

Last 12 Months

10 Years

Source: Trading Economics http://www.tradingeconomics.com/china/industrial-productionData through February 2019

http://www.tradingeconomics.com/china/industrial-production

32

Year

-on-

Year

(YoY

) Gro

wth

Last 12 Months

10 Years

IndiaIndustrial


Source: Trading Economics http://www.tradingeconomics.com/india/industrial-productionData through January 2019

Year

-on-

Year

(YoY

) Gro

wth

http://www.tradingeconomics.com/india/industrial-production

U.S. Macroeconomic Outlook

33

2016 2017 2018 2019 2020Actual Actual Actual Forecast Forecast

Real GDP 1.6 2.2 2.9 2.0 1.9Consumer Spending 2.7 2.5 2.8 2.7 2.2Capital Spending 0.5 5.3 4.7 4.1 2.8 Equipment -1.5 6.1 4.8 3.1 2.2 Structures -5.0 4.6 5.6 5.5 1.2 Intellectual Property 7.5 4.6 3.9 5.0 4.0Residential Investment 6.5 3.3 1.8 0.0 0.7Government Consumption 1.4 -0.1 0.1 0.4 0.8Net Exports (2009 $B) -786 -859 -912 -1002 -1068Mfg Industrial Production -0.7 1.5 2.7 2.0 2.0Housing Starts (M) 1.18 1.21 1.24 1.26 1.29US Light Vehicle Sls (M) 17.5 17.1 17.2 16.5 16.1NA Lt Veh Production (M) 17.5 16.9 17.0 16.4 16.0Unemployment Rate (%) 4.9 4.4 3.9 3.7 3.8

90 Day Treasury Yield 0.3 0.9 1.9 2.4 2.410 Year Treasury Yield 1.8 2.3 2.9 2.8 2.7GDP Deflator 1.1 1.3 1.8 1.9 2.1

Percent Changes except where indicated Updated April 03, 2019

2016 2017 2018 2019 2020Actual Actual Actual Fcst Fcst

NA Lt Veh Production (M) 17.5 16.9 16.8 16.3 16.0NA Cl 5-7 Truck Prod (K) 171 183 208 202 202NA Class 8 Truck Prod (K) 228 256 324 335 243US Farm Machinery Eq Shp -22.5 10.9 17.7 8 8US Construction Eq Shp -8.5 14.4 9.8 5 2US Mining & Oilfield Eq Shp -31.3 22.4 -0.3 0 0US Industrial Machinery Shp -0.4 1.2 0.7 0 -2US Metalworking Eq Shipmnts -4.6 5.5 3.4 3 0US Material Handling Shipmnts 1.8 4.1 8.5 7 6Housing Starts (M) 1.18 1.21 1.24 1.24 1.26Mfg. Capacity Utilization % 75.0 75.2 76.3 76.0 75.5Oil Prices (WTI $/bbl) 43.1 50.9 66.0 55 55

Percent Change (except where indicated)

N.A./U.S. Industrial Markets/Production Outlook

Updated: March 29, 2019ACT Research Co., LLC, Copyright 2019 34

Sheet1

20162017201820192020

ActualActualActualFcstFcst

NA Lt Veh Production (M)17.516.916.816.316.0

NA Cl 5-7 Truck Prod (K)171183208202202

NA Class 8 Truck Prod (K)228256324335243

US Farm Machinery Eq Shp-22.510.917.788

US Construction Eq Shp-8.514.49.852

US Mining & Oilfield Eq Shp-31.322.4-0.300

US Industrial Machinery Shp-0.41.20.70-2

US Metalworking Eq Shipmnts-4.65.53.430

US Material Handling Shipmnts1.84.18.576

Housing Starts (M)1.181.211.241.241.26

Mfg. Capacity Utilization %75.075.276.376.075.5

Oil Prices (WTI $/bbl)43.150.966.05555

Percent Change (except where indicated)

Sheet2

Sheet3

Recession?Steps triggering a business cycle decline

1. Central bank increases interest rates2. Short term borrowing rates rise, matching or topping longer-

term borrowing rates3. Bank margin erosion forces rising credit standards4. Overextended sectors get hurt by credit squeeze5. Shock hits vulnerable economy hard (oil prices, housing, tech

sector correction, financial collapse)6. Recession ensues


36

Short rates just under 2.50%

10 year yield at 2.38%

USA Yield Curve

Source: Federal Reserve Board, January 2019 releasehttps://www.federalreserve.gov/data/documents/sloos-201901-charts.pdf

Problem?Not soMuch (yet)


Fed survey shows credit still pretty easy(in contrast to recessions, circled below)

https://www.federalreserve.gov/data/documents/sloos-201901-charts.pdf

Recession checklist


Checklist Checkthe box

Central bank begins a series of interest rate increases (1988, 1994, 1999, 2004, 2015)

Yield curve flat

Banks raise credit standards

Overextended sectors pinched by credit squeeze

Shock hits vulnerable, overextended sectors hard (Gulf War 1990; Tech Meltdown 2001; housing, oil, IB’s 2008)

Recession ensues

38

• Danger signals for the economy

– Trump administration trade policy– Federal Reserve Board starts hiking rates again

Policy rate goes above 10 Year Treasury – “inverted yield curve”– Stock market nosedive – a new 15-20% dropoff– Banks tighten credit standards– Sudden change in oil prices – (mainly upward)– Imbalances, overheating, “irrational exuberance”

• Housing in 2005• Tech sector in 1999-2000


When does the expansion come to an end?

Wrap-up and Summary

• Expansion – long duration but slow growth• Main street is OK – problems in Beltway, rest of world• 2019 – feels 2018 tailwinds, but a diminishing force• Watch stock market and bank credit closely

…. used equipment market & prices too• BIG IF – if we dodge 2020 recession (30% chance)

…. expansion can go to 2023 or 2024Grading the years: 2018 gets an “A”

2019 can score a B+, 2020 should be a B- but with some risk

Updated: April 05, 201940ACT Research Co., LLC, Copyright 2019

ACT Research Company, LLC4440 Middle Road

Columbus, IN 47203

Phone: (812) 379-2085Fax: (812) 378-5997

Email: [email protected]

U.S. Economy and Business Outlook:�Can it Take a Licking and Keep on Ticking?Who is ACT Research?Why we’re happy and worried at the same time…U.S. Business Cycles since 1960Main Street satisfaction�Anxieties focus on Washington & Rest of WorldOur Favorite Leading IndicatorsSlide Number 7Slide Number 8ISM Purchasing Managers’ Index -- ManufacturingNFIB Small Business Optimism IndexSlide Number 11Slide Number 12Stock market as lead indicatorU.S. Industrial Production by NAICS sectorSlide Number 15Slide Number 16Slide Number 17Steel prices reflect Economics 101Slide Number 19U.S. Non-defense Capital Goods (excluding aircraft)U.S. Construction EquipmentU.S. Material Handling EquipmentCorn, soybean, wheat pricesU.S. Farm MachineryU.S. Industrial EquipmentU.S. Mining, Oilfield, Gas EquipmentNA Class 8 Trucks - Orders and BuildNA Class 5-7 Trucks, Buses, RVs - Orders and BuildSlide Number 29European Union�Industrial Production�Y/Y growth�China�Industrial Production�Y/Y growth� U.S. Macroeconomic Outlook N.A./U.S. Industrial Markets/Production OutlookRecession?�Steps triggering a business cycle declineSlide Number 36Slide Number 37Recession checklist�When does the expansion come to an end?Wrap-up and Summary �ACT Research Company, LLC�4440 Middle Road�Columbus, IN 47203��Phone: (812) 379-2085�Fax: (812) 378-5997�Email: [email protected]�www.actresearch.net� � � � �

u.s. economy and business outlook: can it take a licking and … · 2019-04-17 · u.s. economy and...

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