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Clouds on the horizon

The good economic times may not last forever.

By ·
{scmr_abstract}
By ·

“Lions and tigers and bears, Oh my.” The Wizard of Oz

I don’t think any but a few curmudgeons would argue that the economy has been hitting on all cylinders for the last two years. What’s more, the Fed recently raised its estimates for growth and reported that from where it sits, blue skies are ahead.

Today at MHI’s annual conference in Orlando, Jason Schenker, the founder of Prestige Economics, declared that view a little too optimistic, with clouds on the horizon. Those include a slowing of growth in 2019 and what I understood to be a mild recession in 2020, followed by a modest uptick in growth in 2021.

Why the divergence? Schenker told attendees that in an effort to remain politically neutral, the Fed is not considering the impact of tariffs on the U.S., or the global economy for that matter. “Willfully” ignoring the impact was his phrase. Instead of lions, tigers and bears, Schenker sees the impact of a tariff war with China, rising interest rates, potentially higher oil prices and a global slowdown, especially in emerging economies, as the most important clouds on the horizon.

Schenker is not alone in this assessment, despite the Fed’s optimism. Schenker noted that the IMF has recently revised its estimates for the global economy downward and that 81% of his clients are expecting a recession in 2020.

If there was a silver lining in those clouds, it’s that the market for material handling solutions, while softening in the next few years, will remain strong, because e-commerce sales are likely to continue to grow, driving the need for more equipment. In 2018, for instance, new orders for materials handling equipment are likely to be up 10.8% to a record $34.9 billion. Schenker is already seeing some softness, however, as the year comes to a close and is predicting a 4.4% drop in new orders in 2019, a 4% drop in 2020 and a 1.6% increase in 2021. He also expects continued interest rate hikes through 2020 followed by interest rate drops in 2021 to counter any economic slow down.

A few other high level bullet points of interest:

  • The impact of the new NAFTA: Schenker argues that the new NAFTA agreement really does represent a new agreement, but also believes that the changes are relatively modest and will have a limited affect on the economy.
  • Trade wars are (not) easy to win: If you want to know where the trade war with China is headed, Schenker says you need go no further than to pick up the books authored by trade representative Peter Navarro, who uses pretty hot and loaded terms when talking about how to deal with China. “Trade wars quickly become currency wars and that’s where this is going,” Schenker said. “This will not be over in 18 months and there is further downward risk (for the economy) over the next two years.”
  • Fiscal conservatism is dead: That’s a verbatim quote. Schenker said that he was among a group of CEO’s from Texas who met in Washington with Republican legislators last March in support of the current NAFTA. They took the opportunity to ask if the new spending bill would pass? “Sure, we just have to pork it up a little bit more,” was the response. Schenker’s point: When conservative Republicans are calling for more pork barrel spending, you know you have trouble.
  • Expect slower housing and auto sales as a result of continued interest rate hikes. 
  • The 2020 presidential election will be determined by the unemployment rate. Forget impeachment, Schenker said. Even if Democrats run the table in the 2018 mid-terms, there won’t be enough Democratic senators to impeach the president. On the other hand, all of the one-term presidents from Herbert Hoover forward went into their re-election in a rising unemployment environment.

About the Author

Bob Trebilcock
Bob Trebilcock, editorial director, has covered materials handling, technology, logistics and supply chain topics for nearly 30 years. In addition to Supply Chain Management Review, he is also Executive Editor of Modern Materials Handling. A graduate of Bowling Green State University, Trebilcock lives in Keene, NH. He can be reached at 603-357-0484.

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From the January-February 2019
If history is our guide, economies take a turn every nine years. Yet time and again, a strong business cycle and fading memories convince us the good times will go on forever. Ten years after the great recession, we surveyed 100 manufacturing firms to find out if businesses are ready to fight through the next recession.
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