A solid, not stellar outlook

For people prone to worry about the state of the economy going into 2020, there has been news that could exacerbate concerns. For example, in September the closely watched Purchasing Managers’ Index hit its lowest point since the Great Recession. The index, calculated by the Institute for Supply Management, Tempe, Arizona, declined to 47.8% that month. October’s figure — the last available before this article went to press — saw a 0.5 percentage point increase but remained under 50%, which is the demarcation line between economic contraction and expansion. Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee, said October marked seven straight months of contraction in manufacturing. In a news release, he stated that in that month all but one of PMI’s subindexes registered at levels associated with contraction.

Along with these developments have been scores of headlines about the slowing global economy and worries regarding the effects of tariffs and the ongoing trade war with China. Also, after a record economic expansion of 124 months — over twice as long as the average length of 60 months — isn’t the economy overdue for a recession anyway?

Come in from the ledge. The good news is that, while acknowledging definite headwinds, industry prognosticators nonetheless see a solid if not stellar year ahead for manufacturing.

“The Fed is anticipating that 2020 is going to be similar to what we’re experiencing right now — about a 2% growing economy,” said William Strauss, senior economist and economic adviser at the Federal Reserve Bank of Chicago. “Which will be decent but not impressive, kind of trendlike. It’s like getting a B on your report card.”

He said the contraction needs to be viewed in context of what’s come before, namely huge growth. The 2% growth rate in 2019 is quite a step down from 2.9% in 2018, he said. However, 2018 benefited from the tax reform stimulus passed at the end of 2017.

The stimulus “kind of gave a sugar high hit to the economy that got us growing a bit more rapidly,” Strauss said. “But like all sugar highs, we came off of it. And we’re heading back down to the more trendlike rate of growth.”

Eli S. Lustgarten, president of ESL Consultants Inc., St. Louis, said the impact of the 2018 boom was so strong that almost every industrial sector built up a backlog of orders.

“They couldn’t ramp up production fast enough” to meet the jump in demand, he said, meaning that orders will trail shipments in most markets heading into 2020. “They’re shipping to fulfill backlogged orders, but new orders have softened. Therefore, we’re looking at a peak of production. Production cuts are coming, and (production) will continue to decline into 2020. Next year will be a softer year in manufacturing. There’s little debate about that. But not terrible.”

Current data puts manufacturing output growth at slightly below zero. Image courtesy of Federal Reserve Bank of Chicago

With industrial production probably continuing to be sluggish for the foreseeable future, cutting tool demand will weaken in response, Lustgarten said.

“Month-over-month demand has been volatile through most of 2019 but has trended downward since January,” he said. “We can expect cutting tool activity to continue to decelerate if not actually contract for the remainder of 2019 and likely into next year.”

Automotive and Aerospace

“Not terrible” isn’t exactly high praise, Lustgarten acknowledged, so he elaborated using the automotive sector as an example. Year-to-date sales of light vehicles in the U.S. have been 17 million.

“It’s been running at very high levels for the last couple of years,” he said. “The industry expectation is that over 17 million is above normal. So now it will trend downward to a more normal rate. The forecast for 2020 is in the 16.5 million range for sales and production, which is down but still mighty good.”

The aerospace market, despite distressing headlines about Chicago-based Boeing Co.’s 737 Max airplane, is also solid, said Richard Aboulafia, vice president of Teal Group Corp., Fairfax, Virginia. As of mid-2019, both Boeing and Airbus Group, Leiden, Netherlands, had backlogs of firm orders: $444 billion for Airbus and $393.6 billion for Boeing. The industry is enjoying low interest rates, as well as a sweet spot for fuel prices.

“When fuel prices are high, ticket prices go up and/or airlines lose money,” he said. “On the other hand, when fuel is cheap, airlines will tend to hang on to older planes. They don’t have as much incentive to invest in lighter, more fuel-efficient models.”

Besides the industry being in a Goldilocks zone of “just right” for interest rates and fuel prices, Aboulafia said strong defense spending is helping.

Regarding the 737 Max, he pointed out that although deliveries are stalled while a safety investigation plays out, production of the plane has slowed but not stopped. He expects any technical issues to be resolved within about a year, though political complications may linger longer. More importantly, he doesn’t anticipate the issue to result in further major cancellations or deferrals.

“The Max is still a 12- to 14-year program,” Aboulafia said.

Global Headwinds

In addition to the tax stimulus wearing off, Strauss said the big change to the economy has been “a ramped-up headwind coming from the trade story. We began seeing tariffs put on the economy in early 2018 — steel, aluminum and appliances — but the economy largely seemed to absorb the initial jolt. But as we moved into 2019, there was a lot of stepped-up rhetoric of additional tariffs coming.”