the itr advisor volume 4 -...

© 2017 ITR Economics™ - 603.796.2500 - www.itreconomics.com - All Rights Reservedpage 1 OCTOBER 2017

The

ITR AdvisorMACROECONOMIC OUTLOOK

MAKE YOUR MOVE™

Plan for increasing volume and higher costs over

the next three quarters if your business is related

to the industrial economy. Additionally, do not straight-

line your budget through 2018 and into 2019 because the trends are shifting over

the next 18 months.

Steep Rise FlatMild DeclineMild Rise

Steep Decline

The US industrial economy is growing. Average annual US Industrial Production was up 0.7% in August. Accelerating growth trends in the manufacturing sector (up 0.9% year over year) and the mining sector (up 1.4%) are contributing to the accelerating growth trend in US Industrial Production. However, US Electric and Gas Utilities Production is contracting (down 0.7%) and will likely decline further in the coming months. Year-over-year rise in US Utilities Production

will return by early 2018. Leading indicator evidence generally suggests that US Industrial Production will accelerate into early 2018. However, plan for a slower pace of growth in 2018 as a whole (1.1%) than in 2017 (2.2%),

particularly in the second half of the year. Rising global demand and higher commodity prices contributed to growth in Nondefense Capital Goods New Orders and both Wholesale Trade segments. The auto industry will be counter-cyclical over the next year as the recession in Production deepened through the third quarter of this year. Plan for contraction in the first half of 2018 and rise in the second half.

US consumers are finding themselves in an optimal economic situation consisting of rising real wages, low unemployment, low interest rates, a rising stock market, and relatively-low commodity prices. US Overall Wage Growth is at 3.4%, 0.5 percentage points above the five-year average of 2.9%. Prices at the pump remain low. A rising stock market is creating additional wealth for Americans who own equities. A strong US consumer is good news for further growth within the US housing market. However, the recent decline in US Savings as a Percentage of Disposable Personal Income, a two-year leading indicator to US Industrial Production, signals that consumer purchasing power may be constrained in 2019 (and 2018, but to a lesser extent). Avoid straight-line budgeting during this period of business cycle rise, as slowing growth in 2018 and a mild recession in 2019 are approaching.

INDUSTRY SNAPSHOTSArrow denotes 12-month moving

total/average direction

Retail Sales

Wholesale Trade

Auto Production

Manufacturing

Rotary Rig

Capital Goods

Nonresidential Construction

Residential Construction

VOLUME 4

ITR ECONOMICS’ LONG-TERM VIEW 2017: Accelerating Growth 2018: Slowing Growth 2019: Mild Recession

“A strong US consumer is good news for further growth within

the US housing market.”

“Leading indicator evidence generally suggests that US Industrial Production will accelerate into early 2018.”

OCTOBER 2017 Published Quarterly by ITR Economics™


4Q17 1Q18 2Q18ITR Leading Indicator™

ITR Consumer Activity Leading Indicator™

US Leading Indicator N/A

Purchasing Managers IndexUS Total Capacity Utilization Rate N/A

Retail Sales Wholesale Trade• US Total Retail Sales are rising at an accelerating

pace• Expanding employment and rising wages are

driving the trend• Consumer spending will increase throughout

2019 with the fastest pace of rise through the first half of 2018

• Total Wholesale Trade was 5.7% higher in the 12 months through August than the year earlier

• Commodity prices are rising; Subsequently, expect Wholesale Trade values to rise

• Don’t be afraid to extend credit to your customer base this year while the economy expands

Auto Production Manufacturing• North America Light Vehicle Production for the

year ending in August was 1.7% below the prior year

• Contraction is likely to persist through the end of the year before a recovery sets in for 2018

• This looks to be a slow-growth sector through 2019

• US Manufacturing Production is accelerating in its rate of rise

• The accelerating pace of rise will likely persist through the first half of next year

• Prepare your sales and marketing teams for slowing growth in the second half of 2018

Rotary Rig Capital Goods New Orders• Average North American Rotary Rig Count

during the 12 months through September rose 43.8% above the same time last year

• Expect the Rig Count to increase into early next year to support rising demand

• The Rig Count will then vacillate around the current level through 2018

• Nondefense Capital Goods New Orders for the year ending in August were 1.1% above the previous year

• Firms are increasing investment in capital goods this year, but New Orders are expected to contract in 2019

• Ensure your supply of machinery is sufficient to handle a higher workload in 2018 and beyond 2019

Total Nonresidential Construction Total Residential Construction• The rising trend in Total Nonresidential

Construction temporarily stalled• Plan for Construction to accelerate in 2018• Focus on quality control to avoid inferior work

resulting in additional costs to fix issues that could have been avoided

• Total Residential Construction is growing at an accelerating pace

• Plan for the single family market to expand further in 2018

• Multi family housing is not expected to provide much in the way of opportunities based on the vacancy trend(s)

INDUSTRY ANALYSIS

• Plan for accelerating growth in US Industrial Production through early 2018

• The ITR Consumer Activity Leading Indicator™ and the Purchasing Managers Index are signaling that more growth lies ahead for the economy

• The US Total Capacity Utilization Rate suggests slowing growth for the industrial economy beyond the first quarter of 2018

LEADING INDICATOR SNAPSHOT

Green denotes that the indicator signals cyclical rise for the economy in the given quarter. Red denotes the opposite.


US Corporate Profits have been generally rising since reaching a cyclical low in December 2015, helping to propel the stock market to near daily record highs. Profits are rising as the industrial side of the economy and business-to-business activity accelerate, allowing businesses to increase their investments, and likely leading to rising productivity growth.

Domestic industries are broken down between the financial sector and the nonfinancial sector, with the former accounting for approximately 27% of total profits and the goods-producing sectors accounting for the remaining 73%. Corporate Profits for Domestic Financial Industries were up 3.5% during the three months through June compared to a year ago, but that sector is experiencing slowing profit ascent at best right now. In the near term, Profits for this sector could continue to decline as insurance claims for damage caused by the hurricanes in Texas and Florida have the potential to impact insurance companies’ profits negatively. The goods-producing industries, meanwhile, are seeing improvement as economic activity in the US, as well as abroad, accelerates. Corporate Profits for Nonfinancial Industries in the second quarter (the latest available data) were up 7.4% compared to the year-ago level. Part of the support for Profits is coming from rising US exports of goods which are benefitting from the decline in the US dollar and a growing global economy. The monthly US Dollar Trade Weighted Exchange Rate has been generally declining since December 2016 and is down 7.6% since then, making US goods sold abroad more affordable.

Drilling down deeper into the nonfinancial sector, manufacturing is the largest component at 22.1% and is itself broken down into durable (56%) and nondurable (44%) manufacturing. Rise in profitability for the Fabricated Metal Products Industry and the Machinery Industry is partially driving the rise in Corporate Profits for Domestic Durable Goods. Both subsectors are benefitting from the industrial economy accelerating. Profits for other Durable Goods, which includes wood products, primary metals, transportation equipment, and furniture, are also contributing to rise in Profits for Durable Goods. On the other hand, Profits for Computer and Electronics Products and Electrical Equipment, Appliances & Components are below year-ago levels and provide fewer growth opportunities.

Corporate Profits for Domestic Nondurable Goods, meanwhile, were down 3.1% year over year in 2Q17 but have been in a rising trend since early 2017. The largest component of this group, Profits for Food, Beverage, and Tobacco, has been in a general declining trend since mid-2016, and Profits for the second quarter were down 15.5% year over year. Profits for Chemical Products, the second largest component, are also lower compared to last year but are in a rising trend, helping support the recovery in the nondurable goods profits.

Going forward, there are some cross currents for corporate profits. The tightening labor market will put upward pressure on wages across industries, affecting corporate profits negatively. Businesses will need to focus on retaining their productive employees, as hiring new employees will be more expensive than keeping existing ones. At the same time, rise in health insurance costs will divert cash flow and corporate profitability. Ensure that you have a plan to raise prices or improve productivity to mitigate the labor inflation. While there may be some positive effects on after-tax corporate profits from the proposed tax reform plan, the trend for pre-tax profits, as discussed above, will face headwinds. Don’t count on Washington to fix the pre-tax issues. You will have to do that yourself.

What you need to know: Corporate Profits are rising for most industries, but expected higher labor costs could have a negative impact.

A CLOSER LOOK: Corporate Profits

Trends in Second Quarter Corporate Profits By: David Katsnelson

Rising Profits

Declining Profits

FinanceManufacturing

Retail

Petroleum

Fabricated Metals

Machinery

Information

Utilities

Transportation

Food, Beverage, Tobacco

Chemical Wholesale Trade

Computers Electrical Equipment


READER’S FORUMI have been considering upgrading some of the older pieces of equipment in our factories, but I was planning to wait until next year when our cash position is better. Typically, we can buy them outright, but we are considering borrowing. What is your suggestion?

Yes, this year would be a good opportunity to borrow and save cash for later. Keeping some “dry powder” to handle contingencies and to make opportunistic purchases will put you in good stead for the business cycle rise of 2020 and 2021.

If you align well with the macroeconomy, consider the expected slowing growth in the latter half of 2018 and contraction in 2019 in your cash planning. Interest rates are relatively low, and inflation has been mild, making this a good time to use other people’s money and saving your cash for opportunistic purchases in 2019. This will also allow you to keep up with quality and the same cost changes your competition may be enjoying.

Please send questions to [email protected]

Ben Thompson, Economist at ITR Economics™, answers:

-2.1% 3.0%

Quarterly Growth Rate

STATE-BY-STATE: State Leading Indexes

• The map above depicts the State Leading Indexes produced by the Philadelphia Federal Reserve, which predict the six-month growth in State GDP

• The outlook for the US is generally positive over the next six months• The highest expected growth is in the Northeast (Connecticut, Massachusetts, New Hampshire, and

Vermont) as well as the South (Florida, Georgia, Alabama, and Louisiana)• Based on these leading indicators, weak areas going forward are in the Midwest (West Virginia, Michigan,

Wisconsin) and the West (Alaska, California, Oregon)

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OCTOBER 2017page 5

US Material Handling Equipment New Orders in the 12 months through August totaled $34.8 billion, up 10.5% from one year ago. New Orders are growing at an accelerating pace. We expect this trend to persist through the remainder of the year. The rate of growth will then diminish through 2018. New Orders will contract through most of 2019.

The Wilshire Total Market Cap is generally declining. This indicator typically leads New Orders by about five months, supporting our expectation that slowing growth will take hold in the near term. As the business cycle turns downward, new to market products can help MHEDA members outperform the rest of the industry.

US Material Handling Equipment New Orders

Brazil Industrial Production

0

10

20

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50

0

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30

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50

'11 '12 '13 '14 '15 '16 '17 '18 '19 '20

12-Month Moving TotalBillions of $

Brazil Industrial Production in the 12 months through August is virtually even with the year-ago level. We expect Production to expand into early 2019. Production will then contract through the remainder of that year.

Brazil Manufacturing Production is down 0.7% from one year ago. However, Production is expected to transition to an accelerating growth trend by the end of the year. Brazil Total Mining Production has recently transitioned to an accelerating growth trend. Increasing activity for each of these sectors will help lift Brazil Industrial Produc-tion in the coming quarters.

-45

-30

-15

0

15

30

45

-45

-30

-15

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45

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Year-over-Year Growth Rate

70

80

90

100

110

120

70

80

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100

110

120

'11 '12 '13 '14 '15 '16 '17

12-Month Moving Average

-15

-10

-5

0

5

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-10

-5

0

5

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15

'11 '12 '13 '14 '15 '16 '17

Year-Over-Year Growth Rate

© 2017 ITR Economics™ - 603.796.2500 - www.itreconomics.com - All Rights Reserved

OCTOBER 2017page 6

US Total Manufacturing and Assembly Production in the 12 months through August is up 1.0% from the prior year. Production is growing at an accelerating pace, and further rise in the rate of growth is expected in the com-ing quarters.

Demand from abroad is helping to lift Production. US Exports are up 3.2% from the prior year, and the rate of growth is rising. The dollar has weakened in recent months which will likely increase demand for US goods as they become relatively more affordable in foreign markets. Look to foreign markets for growth opportunities.

US Traditional Manufacturing and Assembly

US Wholesale Trade of Durable Goods

80

90

100

110

120

80

90

100

110

120

'11 '12 '13 '14 '15 '16 '17

12-Month Moving Average

US Wholesale Trade of Durable Goods in the 12 months through July is up 5.1% from the year-ago level. Whole-sale Trade is expected to grow at an accelerating pace into early 2018. The rate of growth will subsequently decline through the remainder of that year and the majority of 2019.

The Wholesale Inventory-Sales Ratio of Durable Goods is rising at an accelerating rate. Firms are likely increas-ing inventories with the expectation of further growth in sales. The Ratio typically leads Wholesale Trade by about two quarters, corroborating our expectation of accelerating growth into early next year

-9

-6

-3

0

3

6

9

-9

-6

-3

0

3

6

9

'11 '12 '13 '14 '15 '16 '17


1.0

1.5

2.0

2.5

3.0

1.0

1.5

2.0

2.5

3.0

'11 '12 '13 '14 '15 '16 '17

Trillions of $12-Month Moving Total

-10

-5

0

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-5

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'11 '12 '13 '14 '15 '16 '17


© 2017 ITR Economics™ - 603.796.2500 - www.itreconomics.com - All Rights Reserved

the itr advisor volume 4 -...

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