By Chris Kuehl, managing director, Armada Corporate Intelligence
It would seem to be such a simple request: “Mr. Economic Forecaster, are we or are we not in a recession? How bad might this be, and when might we expect to be out of it – if, indeed, we are in one?” Too bad those in the soothsaying business seem incapable of answering these questions.
A survey commissioned by the World Economic Forum resulted in 45% of those economists queried asserting that the recession already has started and was going to be long and severe. Another 45% said that there would not be an actual recession at all – more of a mild slowdown. Apparently, the remaining 10% didn’t understand the question. In truth, there is data to support an optimistic view and a pessimistic view. Lately, there has been a significant shift in attitude among previously downbeat economists, who now are starting to assert that the proverbial soft landing only is not possible but likely.
It all seems to depend on what sector of the manufacturing world a company is engaged in. When examining the Armada Strategic Intelligence System, some sectors clearly are doing better than others, although all of them have shown some signs of distress over the last several months. Automotive and aerospace lead the pack, but there also has been growth in the electrical sector, as well as computers. The challenges are most obvious in the sectors of machinery, primary metals and fabricated metals, as well as oil and gas (although that has started to perk up).
The good news is that the most recent data points in a positive direction, as there has been some decline in the pace of inflation at the same time that job growth has remained robust, and consumers are spending. Most important of all is the pace of capital spending. It is at over $74 billion, and that is a record level. Much of this expansion has been down to integrating technology and automation. The fastest sector for construction these days has been manufacturing – up by over 76% in the last year – almost all due to the use of robotics and the accommodation needed.
Capacity utilization is a key indicator for manufacturing. Generally speaking, the ideal reading is between 80% to 85%, as it indicates there is little slack in the system but there also is not enough pressure to cause shortages and bottlenecks. The national readings have been in the high 70s. There is more slack reported by the respondents but these numbers are higher than they have been in previous surveys.
The good news is most manufacturers are reporting increased capacity or have remained stable. Overall, surveys show 32.58% saw increasing capacity and 50.56% are stable, with 16.85% reporting decreasing capacity. This is consistent with other manufacturing observations, as companies shift more towards automation and robotics to cope with chronic labor shortages.
New Order Activity
Another key indicator is new order activity – showing growth more accurately than normal order activity, as it signals new levels of consumption. The new order numbers from the Purchasing Managers’ Index carry more weight than the other indices. The new order data is somewhat encouraging, as 31.28% report expanding new order activity, 39.11% report stable activity and 29.61% report new order activity is decreasing.
The US recently has slipped into contraction territory as far as the PMI is concerned – down to 46.3. This is not yet crisis territory but is getting worrisome. When these numbers are under 45, there is genuine concern regarding a slowdown. It only was a few months ago that the US numbers were in the 50s. Canada, likewise, is in contraction territory with a reading of 48.8 but Mexico still is clinging to expansion territory with a 50.9 mark.
One of the key factors as far as the economy is concerned is employment, as it has been baffling to the manufacturing industry. The anti-inflation efforts should have caused more of an impact on joblessness but relatively there have been few layoffs. Overall, respondents report that 24.44% are increasing their employment numbers and 60.56% report that employment has been stable. Only 15.0% report a declining workforce and much of this appears to be attrition, as opposed to laying people off.
The majority of manufacturers are reluctant to let people go, as it has become a challenge to find skilled workers that nobody wants to lose. The labor shortage has been chronic for years, and the most common pattern for companies has been to poach employees from their competitors and even their customers. The fact that wage inflation is rising faster than overall inflation indicates unemployment numbers are unlikely to worsen anytime soon.
There are some bright spots to share regarding inflation. Economists have been watching oil prices stabilize in the 70s (based on per-barrel prices), and that has meant declines in the price of diesel and gasoline, as well as feedstocks for plastics. The challenge in the oil sector is not in crude output but in refining capacity, and where there have been price hikes for feedstock it has been a refinery or transportation issue. There have been similar declines in steel and aluminum, although this reduction has been more recent. Roughly 32.96% of respondents have seen increasing prices but 38.55% have seen them stabilize, while 28.49% have seen costs come down slightly.
One of the more important cost shifts is seen in the logistics sector. A quarter or two ago, an overwhelming majority of respondents reported that logistics costs were quickly getting higher. The latest report showed that 49.16% saw these costs going up, 44.69% saw them stabilizing and 6.15% saw costs start to come down. This should change as the year progresses as the capacity issue has faded in the transportation sector.
At the start of 2022, there were 14 loads for every truck and there were similar issues in rail and maritime. Now, there are less than four loads per truck and many of the new entrants into the trucking business are leaving. In 2022 and 2023, there have been over 65,000 new trucking operations (most of them single truck companies). Many of these new drivers came from the manufacturing community and as they leave transportation, they will migrate back into previous jobs in manufacturing and construction.
Another solid indication of a recession is the rate of capital spending and investment – with that rate still very high, overall. This is not pointing at a recession. Over $75 billion in capex in the last year and that is an amount that exceeds anything seen in three decades. Among manufacturers in general, 47.22% indicate their capex investments are on track, 12.22% are delaying by only one quarter and 13.22% are delaying by two quarters. That still leaves 27.22% delaying indefinitely and this is a concern long term.
In the final analysis, the real issue is confidence in the future. At this juncture, the attitude toward the future generally is positive. Fully 51.23% assert their business outlook is positive, while 31.48% report stability in that outlook. Only 17.28% report a negative outlook. This confidence level exceeds that of the consumer but generally speaking, a boost in business confidence is reflected in consumer attitude about a quarter later.
What do manufacturers make of all this? The bottom line is that the US has not yet hit stall speed. The recession that was predicted to start at the end of last year has yet to manifest itself. The growth in quarter one was above 2.0% and it appears that quarter two will be close to 2.5%. This is about the 20-year average for the US economy. There still are plenty of warning signs and more pressure will be applied by the Federal government but, thus far, the likely pattern for the year is a slowdown while some sensitive sectors
The US almost never sees a 100% recession or a 100% boom. There always are sectors that do well, even as others falter, and likewise, sectors that struggle when everybody else is growing. The strong sectors include automotive, aerospace, technology, electrical equipment and healthcare (recently added). The sectors still reeling include traditional retail, office development, single-family housing and business aimed at the lower third of income earners. The entertainment and travel sectors are starting to surge, and there has been more growth noted in the oil and gas sector.
The plastics sector plays in all of the sectors and that creates a need for diversity.
Chris Kuehl is managing director of Armada Corporate Intelligence. Armada executives function as trusted strategic advisers to business executives, merging fundamental roots in corporate intelligence gathering, economic forecasting and strategy development. Armada focuses on the market forces bearing down on organizations.
More information: www.armada-intel.com