Dr. Alan Beaulieu of ITR Economics gave his usual entertaining and fact-filled talk at the National Fluid Power Association’s annual International Economic Outlook Conference this month. Beaulieu stressed that despite all the fervor, the economy unfolded in a predictable manner — and the economy is bigger than Washington, D.C. He pointed out that the average rate of growth in the U.S. economy since World War II has not shown any benefit to having one party in the White House over the other.
Here are some interesting takeaways from his presentation.
1. Next year will be an “off year” but not too scary. He said we’re going to see some softness in the second half of this year for industrial numbers.
“GDP has essentially been flat now,” he said. “People are wondering what’s going on. As industrial production goes negative, some of your markets are going to go negative with it. In general, this industrial production is telling you to be careful of 2019. Make sure your marketing plans, your messaging, your focus, and your cash are addressing the fact that next year 2019 is an off year, if you will. We’re avoiding the use of the word recession because of the connotation of that … but think ‘off year’ as we go forward.”
2. Tariffs are bad, especially in the long run, and they have consequences. Beaulieu noted that he’s against the concept of dumping.
“I’m a free market, fair market guy. I believe in free markets and fair markets, and they both have to be present. So, dumping is against treaties. It’s in violation of good business practice. It’s not a good neighbor policy,” he said.
But Beaulieu also warned that there is a Law of Unintended Consequences.
“You can think of the economy as a gigantic bush,” he said. “As you grab a lower branch and shake it, you’ll notice that there is movement throughout the bush; that whenever you shake it here, there are all these tremors felt over there. You only meant to move one branch, but you can’t help but move the whole thing. So that’s what’s going on now with these tariffs.”
Beaulieu said one premise behind the tariffs is that it will encourage the steel industry to invest in itself, to open up new facilities or new plants.
“But really, would you do that?” he asked. “I mean, if you had an opportunity to spend $5 million or $50 million to buy a new piece of equipment to update the equipment to open up a second and a third shift, would you spend the millions of dollars to do that under the auspice of a tariff protection that could go away in a month? It could go away in six months. It could go away in three years. Would you do that? What we find when I talk to the people in the industry is that they’re not doing that.”
“All of the stuff that’s going on in the steel industry was planned before the tariffs. Nothing new has been planned because of the tariffs that I’ve been able to find. So, the reason for this is certainly suspect.”
3. Defense is a good bet. Beaulieu said that when you look at defense spending, you’re going to see opportunity.
“If you’re aligned with people in the defense sector, you are likely to find that you’re going to see an increase market potential as we go through the rest of this year into 2019. It is on the way up. I also want to dispel a myth that is it has much to do with presidential politics. You can see that it’s irrelevant whether somebody’s a Democrat or a Republican that the defense spending goes up or down,” he said. “It started to go up under President Obama. It’s continuing to go up under President Trump. It went down under President Reagan. He’s certainly not a Democrat, and it went up under Bill Clinton. He was certainly not a Republican.”
Beaulieu said the reality is that the world is such an unstable place. We’ve spent a lot of our hardware around the world and we’re often rebuilding, modernizing, and competing.
“It’s a fascinating place as we go forward. There are some really interesting capabilities going on in China, so we’re rushing to combat that,” he said. “The Russians have developed a missile that they claim can shoot down our Cruise Missiles. As they’re coming in, they can knock them all out of the sky. We have successfully combated that, but obviously taken millions and millions of dollars to do. Remember the Cold War, the Arms Race? It’s got that kind of feeling to it, so that means that some of you in this room are going to benefit from that.”
4. Don’t hate too much on the Millennials. Our workforce is close to 67% millennials. Beaulieu said they are planners and budgeters much more than generations before them were at that age.
“The fact that they’re saving is really important for the future. They’re buying homes. The theory was they’re all going to live in the city, and they’re not going to be buying homes in suburbia. They’re leaving cities as they started having children because they want to raise children with fences and backyards,” he said.
“We were told they’re not going to have children. They’re having children. We were told they’re not going to buy cars. They’re going to be using nothing but Uber and Lyft and Zip cars. They’re actually the largest single auto leasing group in America, and they’re leasing SUVs to hold all their stuff as they move to suburbia.”
Beaulieu noted that there are six million more of them than there are of his generation.
“My generation is dying every day, 10,000 of us retiring every day, and if you’re a millennial, you’re going to see all kinds of blue sky because as we old trees fall away, there is plenty of room for new growth,” he said. “All of that keeps the economy going, which keeps the NFPA going. If it wasn’t for the millennials, there would be no NFPA in another generation, because there wouldn’t be people to buy the stuff that goes into making the stuff that they buy. Every millennial in this room is the key to our economic success as we go forward.”