Cover Story: 2018 Economic Outlook

January 3, 2018 No Comments
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Slow, Steady Pace Expected to Continue

By Nancy Huddleston

toc_features50pxAs we enter 2018, economic indicators are all pointing upward: the U.S. manufacturing sector continues to grow, Minnesota’s unemployment rate is at a 17-year low, and the U.S. economy expanded an annualized 3 percent on quarter in the third quarter of 2017, exceeding expectations and posting the strongest growth rate since the first three months of 2015.

What’s more, consumer confidence is up. “Perhaps one of the most important developments for the consumer this year has been the strong increase in consumer confidence since the presidential election,” according to a special commentary, “Update on Consumer Spending and Income Trends,” from the Wells Fargo Economic Group.

“However, such confidence has not translated into stronger growth in consumer spending. The economy continues to grow at a rate that has been ‘normal’ since the recovery from the Great Recession, which started more than eight years ago,” the report states.

Jim Paulsen, Chief Investment Strategist for Leuthold Group in Minneapolis, told business leaders who gathered for the Minnesota Chamber of Commerce’s annual Business Conference in November that the growth rate for the current economy has been “abnormally slow.”

“We’re in the ninth year of the economic recovery – it’s been miserably slow – and we have a good shot of it being the slowest economic recovery ever,” he said during his presentation, “An Economic and Financial Market Outlook.”

Why has it been so slow?

Paulsen points to the lack of resource growth – specifically the dwindling labor pool – and productivity, which has not returned to pre-2008 levels. “The economy is only growing by about a half percent per year,” he said.

As far as the economic outlook in 2018, economists are predicting more of the same – slow and steady.

“This has been a fear-based recovery,” Paulsen said, “The result is that there’s nothing out over the skis – no extra staffing, no drawdown in savings, and no run on the Stock Market. But, if there are no excesses, there’s no recession.”

Here is a look at some economic measurements to consider as 2018 begins:

The Institute for Supply Management (ISM) October 2017 “Manufacturing ISM® Report on Business®” said the manufacturing sector expanded and grew for the 101st consecutive month.

Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute’s Manufacturing Business Survey Committee concluded: “Manufacturing expanded in October as the PMI® (Purchasing Managers Index) registered 58.7 percent, a decrease of 2.1 percentage points from the September reading of 60.8 percent. This indicates growth in manufacturing for the 14th consecutive month and continues expansion consistent with pre-hurricane levels.”

The McKinsey Global Institute (MGI) recently released “Making it in America: Revitalizing U.S. Manufacturing,” which outlines opportunities to boost manufacturing by up to $530 billion, or 20 percent, over current trends by 2025.

“The decade ahead will reshape global manufacturing as demand grows, technology unlocks productivity gains, and companies find growth in new parts of the value chain – all of which creates an opening for U.S. manufacturing to turn things around,” the report states, “Given the importance of manufacturing to the broader economy, capturing these opportunities should be a national priority. Rather than attempting to re-create the past or preserve the status quo, the United States will need to focus on positioning its manufacturing sector to compete in the future.”

In order to do this, the report cites three key opportunities:

  1. 1. A wave of change that presents manufacturers with new opportunities and imperatives.

“Manufacturing is being reshaped by three major trends: rising demand, the convergence of multiple new technologies, and shifting global value chains,” according to the MGI report. The U.S. is still one of the most lucrative markets in the world, and access remains a powerful force for domestic and foreign manufacturers.

But, the report cautions, “the uneven nature of regional income growth translates into wide market variations. U.S. consumers are more diverse and tech savvy than in the past—and they have high expectations for quality, low prices, and variety.”

  1. 2. The U.S. has the opportunity to boost manufacturing GDP by up to $530 billion over current trends.

What’s the biggest opportunity? Advanced manufacturing industries — “areas in which the United States should have a competitive advantage, but instead runs a large trade deficit.”

Aerospace is another industry with significant potential, the McKinsey report states, and computer and electronics industries could also make contributions, given that domestic content has stabilized recently and demand is expected to stay strong.

  1. 3. Scaling up efforts on multiple fronts to compete in the future.

The relatively slow pace of digital adoption in the U.S. has been a drag on its productivity performance, according to the MGI report. “The intensity of industrial robot usage remains lower in the United States than in countries such as Germany, Japan, and South Korea.”

To turn this around, companies have to capture, integrate, and analyze data that flows across their operations and ecosystems. “Manufacturers will need to identify strategic use cases, link their digital initiatives to their broader business strategy, and consider how to begin working alongside machines in a more automated and data-driven environment.”

Next, develop the manufacturing workforce of the future. “Tomorrow’s manufacturing jobs may have very different and more digital skill requirements.” And, finally, invest for the long term. U.S. manufacturers have deferred investment and focused on cutting costs, the MGI report points out, which impacts production.

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Minnesota’s unemployment rate was 3.3 percent in October, according to the Minnesota Department of Employment and Economic Development (DEED). That rate is the lowest Minnesota has seen in 17 years.

Nationwide, the U.S. seasonally-adjusted unemployment rate ticked down one-tenth of a percentage point in October to 4.1 percent. And, 156,000 workers have been added in the U.S. since Donald Trump was elected president in November 2016, according to government data.

In the manufacturing sector, both durable and non-durable goods gained jobs over the month, continuing a positive job growth trend, the report stated. October’s adjusted employment number of 322,400 was the highest for the sector since January 2009. Over the year growth rate for this sector was 1.2 percent, the highest since July 2015.

“With the release of October 2017 employment numbers, there is much to be optimistic about for Minnesota’s economy. For one, Minnesota now has experienced 87 months or more than seven years of over the year (unadjusted) employment expansion, and October is the start of the ninth year of recovery from the recessionary low point in September 2009,” according to DEED’s Labor Market Information Office.

Labor market growth is a key economic factor that impacts the unemployment rate and labor demands. Susan Brower, Minnesota State Demographer at the Minnesota Department of Administration, said future growth in the labor market is expected to be slow over the next 10 – 15 years because it is driven by growth patterns. In the labor market, the largest group is Baby Boomers, who are moving toward retirement, followed by the Gen Xers, with Millennials pulling up the rear, and Gen Z now entering the job market.

Another impact to the potential talent pool is migration patterns. In the 1990s, Minnesota gained people from other states and countries, but since the early 2000s, the state is losing more workers than gaining them.

Why? Overall, international immigration is down, Brower pointed out, and policies at the federal level impact the flow of workers into the country. As well, Minnesotans are moving out of the state – primarily to neighboring states such as North Dakota and Wisconsin, and high-growth states, like Arizona, Florida, and Texas.

What are the opportunities for employers in this economy?

“There’s not one silver bullet,” said Brower, “It’s a different era, so employers need to start thinking about how to find someone who is not in the labor market yet and how to incorporate them into your hiring practices.” She suggests:

  • Grow your own talent (train, retrain, and retrain your own).
  • Better alignment of preparation (and retooling).
  • Pull (or keep) additional folks in the labor force, such as older workers, people with disabilities, parents, especially mothers, discouraged workers, people with less education/skills that align poorly with available jobs.
  • Attract new workers (domestic and international migration).

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Although the U.S. recovery has been slow, it has not gone into a recession, which is especially important when compared to other global markets. The International Monetary Fund report, “World Economic Outlook October 2017, Seeking Sustainable Growth: Short-Term Recovery, Long-Term Challenges” points out:

“The global upswing in economic activity is strengthening, with global growth projected to rise to 3.6 percent in 2017 and 3.7 percent in 2018. Broad-based upward revisions in the Euro area, Japan, emerging Asia, emerging Europe, and Russia more than offset downward revisions for the United States and the United Kingdom.

“But the recovery is not complete: while the baseline outlook is strengthening, growth remains weak in many countries, and inflation is below target in most advanced economies. Commodity exporters, especially of fuel, are particularly hard hit as their adjustment to a sharp stepdown in foreign earnings continues. And while short-term risks are broadly balanced, medium-term risks are still tilted to the downside.”

The Manufacturers Alliance for Productivity and Innovation (MAPI) Foundation, reports that “the acceleration in global economic growth that began in late 2016 looks increasingly sustainable. A marked improvement in economic activity is becoming apparent in regions that matter to U.S. manufacturing prospects, including East Asia, the Eurozone, and Canada.”

Signs of encouragement, according to the MAPI Foundation include:

  • In spite of two devastating hurricanes, U.S. economic growth has accelerated in recent months. U.S. GDP growth has averaged 3.1 percent in the second and third quarters of 2017, up from a 2 percent average over the prior four quarters. There has been a significant acceleration in the pace of business equipment spending growth since the early months of 2017.
  • In spite of a range of political instabilities, from the difficult process of negotiating the United Kingdom’s exit from the Eurozone to the independence movement in Catalonia, economic growth continues to improve in the Eurozone. Eurozone GDP growth has strengthened persistently since the third quarter of 2016 and has averaged a relatively strong 2.4 percent for the second and third quarters of 2017.

But, MAPI reports, there are still uncertainties to consider:

  • The escalation of political and policy risk in Washington creates an ongoing uncertainty for the U.S. economic growth picture and by extension for the global growth picture.
  • Nuclear tensions with North Korea and Iran could have dampening effects on global capital expenditure activity.
  • Growing threats of protectionist policies in North America could have negative impacts on manufacturing on a global scale.
  • The Federal Reserve is experiencing one of its most significant leadership transitions of modern times, and thus U.S. monetary policy is currently a risk for both the U.S. and global economies. Jay Powell has been nominated to succeed Janet Yellen as the new Fed Chair. William Dudley, the long-time President of the powerful New York Fed, will be stepping down. New board members will soon be appointed. Collectively, all of this creates a high level of institutional turmoil at a time when difficult decisions are needed about balance sheet normalization and policy interest rate adjustments.

“In spite of a range of political and geopolitical risks, the moderate but durable and widening world economic recovery is propelling a modest rebound in U.S. manufacturing growth after years of virtual stagnation,” the report concluded.

Although all the experts bemoan the speed at which the economy is recovering, they all agree that it’s better than being back in a recession. “What’s better, a four or five-year fast recovery, or a slow recovery lasting 10 – 12 years?” asked Paulsen. “Slow has gotten us back on track and although it’s slow, it’s steady.”

What’s more, manufacturing has picked up the pace over the last year, which is attributable to steady global economic growth, a rise in energy and other commodity prices, and increased business confidence.pm_endmarkblue-e1320337140493


NANCY HUDDLESTON is the editor and publications manager of Precision Manufacturing Journal. She can be reached at or 952-564-3041.

Copyright © 2018 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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