Cover Story: Inevitable Uncertainty

January 17, 2017 No Comments
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Economic Outlook For 2017

by B Kyle

As we pause to reflect on 2016 and look to what we can anticipate in 2017, what do we see and what do we know?

2017: INEVITABLE UNCERTAINTY

toc_features50pxIt is worthwhile to pause for a moment to discuss the impact of the November 2016 Presidential election outcomes. Certainly, the results were a surprise to forecasters and pundits, most of whom were anticipating a Democratic victory both in the presidency and Congress.

That said, early market response has been very positive. Thus far, post-election, the Dow is up, long-term interest rates are up, and both bet on economic growth ahead. President-elect Donald Trump is proposing a clearly expansionary fiscal policy, in defense and infrastructure, and certainly a more pro-business attitude. In the near term, we also can anticipate that regulatory agencies may switch from “prevent defense” to focusing more squarely on growing the economy.

John E. Silvia, Wells Fargo’s Chief Economist within the Wells Fargo Securities Economics Group, had this to say about the near-term markets: “We look for the financial markets to sync with Trump’s economic policies of lower taxes, infrastructure and defense spending, regulatory reform, and a new deal on international trade.”

US_RealGDP

The uncertainty lies in the key question: to what extent will campaign statements become policy? Trump made some strong statements on trade, renegotiating the North American Free Trade Agreement (NAFTA), proposed increased tariffs, commitment to significant infrastructure investment … some of which are at odds with traditional GOP policies. Trump will have two years with a Republican-controlled Congress, at least. The “Great Dealmaker” is sure to face less opposition focusing on areas of common ground with the rest of the GOP, such as rolling back the Affordable Care Act, cutting taxes, reducing regulations, and infrastructure spending.

There are other open questions: Will there be an increase in the minimum wage, proposed cuts in taxes, and expansion of a social safety net? Reasonable minds can disagree on all, and the near-term future is uncertain in determining how any of these issues shake out.

All that said, the message for 2017 remains largely favorable. The banks and economic analysts alike seem to be projecting 2017 to be another stable year of lethargic growth: Continued slow upward climb in Gross Domestic Product (GDP), broadly stable inflation, continued job gains, and the Federal Open Market Committee’s (FOMC) continued cautionary approach to raising interest rates.

Janet C. Yellen, Chair of the Board of Governors of the Federal Reserve System, in presenting before a World Affairs Council in Philadelphia, Penn., in mid-2016, summed it up nicely: “Speaking for myself, … I expect the economic expansion to continue, with the labor market improving further, and GDP growing moderately. (And) I expect to see inflation moving up to 2 percent over the next couple of years.”

RealGDP

2016: HOW DID WE DO?

How did we do in 2016? Going back to January of 2016, what was predicted? We talked about the Great Divide being observed in emerging markets, in the changing structure of GDP, and even across domestic geographies. The Midwest states, which are driven more by agriculture/energy/mining, had been seeing a dramatic slowdown in income growth. That was anticipated to continue into 2016 and, from where we sit today, economic growth in 2016 most certainly has been inconsistent – and very different across sectors.

So, let’s take a look at how we are closing out 2016 on a national level. Individual experience aside, through the third quarter of 2016, the U.S. was producing generally positive economic indicators. The recovery has not always been smooth but, overall, the economic gains over the last seven years have been impressive. Specifically, according to the U.S. Department of Commerce, the U.S. Department of Labor, and a Wells Fargo Economics Group October 2016 Special Report:

  • Economic activity in the manufacturing sector is expanding in 2016 through October;
  • GDP continues to grow;
  • Unemployment continues to be low.

INDUSTRIAL PRODUCTION AND GDP

GDP rose 2.9 percent in the third quarter, after averaging just 1.1 percent over the first two quarters of 2016. This growth marks the 89th consecutive month of economic expansion. Slow, maybe, but growing to be sure.

In manufacturing, the October Purchasing Managers’ Index (PMI®) registered 51.9 percent, an increase of 0.4 percentage point from the September reading of 51.5 percent, adding further evidence to the case that manufacturing activity continues to improve, albeit slowly. According to Silvia, “the increase was driven by improvement in production, supplier deliveries, and employment. New orders, on the other hand, rose at a slower pace, while backlogs of orders contracted for a fourth straight month.”

According to Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management® Managing Business Survey Committee, a PMI® above 43.2 percent, over a period of time, generally is reflective of economic expansion. “The past relationship between the PMI® and the overall economy indicates that the average PMI® for January through October (51 percent) corresponds to a 2.5 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI® for October is annualized, it corresponds to a 2.8 percent increase in real GDP annually,” said Holcomb.

ManufacturingAtAGlance

UNEMPLOYMENT REMAINS LOW

ManufacturingLastTwelveMonthsPer the U.S. Bureau of Labor Statistics, the national unemployment rate is at 4.9 percent through October of 2016, considered “full employment” by the Federal Open Markets Committee.  Minnesota began 2016 at a 3.7 percent unemployment rate. As of October 2016, that rate had increased slightly to 4.0 percent.
Minnesota’s Management and Budget (MMB) Office predict that both employment growth and total wage income growth will remain modest into 2017, constrained as we are by the impact of an aging population and very slow population growth.  Indeed, Minnesota’s employment numbers were quite volatile as we closed out 2016, with a steep drop in employment numbers in October slowing year-over-year job growth to 1.1 percent.
For manufacturing in particular, by comparison, “manufacturing payrolls were down 9,000 in October and are down 33,000 over the past three months. The factory sector continues to face the usual headwinds, including a strong dollar, sluggish growth abroad and still-low commodity prices, and payroll declines in this space reflect these ongoing challenges,” according Silvia, in a November 2016 Economic Indicators Report.

 

KEY AREAS TO WATCH

Wells Fargo’s Economics Group published a report immediately following the election, entitled, “U.S. Economy Post-Election: Key Areas to Watch.”  To be sure, said Silvia, “Economic policy uncertainty will likely be on the rise.”

  1. Trade Policy: “Going forward, we are likely to see changes in many non-tariff barriers to trade as well as government actions to alter market-determined patterns of exchange rate and capital flows,” said Silvia. As with most indicators of economic impact, there are winners and losers on either side of the protectionism-open trade debate. Not everyone is better off with trade.
  2. Productivity, capital spending, and entrepreneurship: Productivity has been disappointing during the current economic period. Gains in productivity are associated with improvements in the quantity and quality of both capital and labor. “Trump’s proposals to lower and simplify the corporate tax system should have a positive impact on business investment and thereby productivity gains. Lower business profit taxes should improve the expected rate of return on investment. Reduced regulation should improve entrepreneurship as business start-up costs should be lowered,” said Silvia.
    “However, it is not clear how much lower taxes will wind up as productive real investment,” Silvia continued. “Moreover, productivity gains also reflect gains in the quality of the labor force, which in part reflect immigration and education reform. In the short-run, the disruption and uncertainty about policy will lead to caution on the part of both households and businesses while the rules of the road are made clear. Policy uncertainty could lead to households or businesses delaying consumption/investment.”
  3. Infrastructure Policy: “While the case for additional infrastructure spending is made in principle, our concern is the practicality and efficiency of such spending,” said Silvia. “Administrative barriers are a central issue for any project. While comments focus on how much is spent on infrastructure, very little is mentioned about how the money is spent – regulatory challenges, legal challenges, etc. Projects should add to the economy’s welfare – the focus of infrastructure is on improving productivity in the economy and national wealth – not on just creating often temporary construction jobs.”

Figure1_IndustrialSector

SNAPSHOT OF MANUFACTURING

Business conditions in the manufacturing sector continue to improve, but inconsistently across different sectors and more slowly than business leaders would like. A host of recent manufacturing outlook reports point to consistent growth through early 2017, while also pointing to headwinds such as weak business investment, hiring challenges, and continued weakness in end markets in agriculture, energy, and mining.

The Manufacturers’ Alliance for Productivity and Innovation (MAPI) lowered its 2016 forecast this fall, predicting just 0.2 percent U.S. manufacturing growth. Looking ahead, MAPI economist Dan Meckstroth predicts a swing toward modest growth of 1.6 percent and 2.5 percent in 2017 and 2018, respectively. The group also notes that manufacturing is not expected to fully recover from the 2008 – 2009 recession until the fourth quarter of 2020.

SILVER LINING?

Separately, the National Association of Manufacturers (NAM) reported in September of 2016 that “sentiment among U.S. manufacturers had stabilized following several months of decline. Sixty-one percent of manufacturers surveyed for the report said they were either somewhat positive or very positive about their company’s outlook, down slightly from 61.7 percent reported in June, but above the 56.6 percent reported at the start of the year. Survey respondents said they expect sales and production growth of roughly 2 percent over the next 12 months.”

pm_endmarkblue-e1320337140493The silver lining? The hope that the inevitable uncertainty of our new presidency “trumps” the absolute certainty of more economic challenges had the election gone a different way.


References

(1) https://www08.wellsfargomedia.com/assets/pdf/commercial/insights/economics/special-reports/post-election-20161109.pdf
(2) https://www.federalreserve.gov/newsevents/speech/yellen20160606a.htm
(3) http://www.bls.gov
(4) http://image.mail1.wf.com/lib/fe8d13727664027a7c/m/1/mn-employment-20161117.pdf?utm_source=SFMC&utm_medium=email&utm_campaign=&utm_content=&utm_term=7230679&sid=24591
(5) https://mn.gov/mmb/forecast/forecast/economic/
(6) http://image.mail1.wf.com/lib/fe8d13727664027a7c/m/1/mn-employment-20161117.pdf?utm_source=SFMC&utm_medium=email&utm_campaign=&utm_content=&utm_term=7230679&sid=24591
(7) https://www08.wellsfargomedia.com/assets/pdf/commercial/insights/economics/weekly-commentary/weekly-20161110.pdf
(8) https://www08.wellsfargomedia.com/assets/pdf/commercial/insights/economics/special-reports/post-election-20161109.pdf
(9) http://www.ttiasia.com/object/me-kickham-20161101.html
(10) https://www.mapi.net/forecasts-data/us-industrial-outlook-manufacturing-still-recovering
(11) https://www.mapi.net/forecasts-data/us-industrial-outlook-manufacturing-still-recovering
(12) http://www.ttiasia.com/object/me-kickham-20161101.html


 

B Kyle is the Senior Vice President of Strategic Development for the Saint Paul Port Authority, the president of the MPMA Board of Directors, and the editor-in-chief of Precision Manufacturing Journal. She can be reached at blk@sppa.com.
References cited in this story will be printed with the online version of this article at www.pm-mn.com.

Copyright © 2017 Minnesota Precision Manufacturing Association. For permission to use or reprint this article please contact Nancy Huddleston, publications manager for Precision Manufacturing Journal.

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