Ultra State of the Economy Update – Proceed with Caution?

As an independent ERP consulting firm, the health of the overall economy is a topic that comes up often as project teams look to Ultra to understand how to effectively leverage enterprise technology to improve business performance.

We understand that the role of an ERP consultant can add clarity. As part of the regular series of economic post, see the following  wrap up of recent economic data and events that have major sway over the economy.

2019 – Proceed with Caution

Global growth in 2019 is estimated to be 3.7 percent, but signs of a slowdown in the second half of 2018 have led to downward revisions for several economies. Weakness in the second half of 2018 will carry over to coming quarters, with global growth projected to decline to 3.5 percent in 2019 before picking up slightly to 3.6 percent in 2020.

This growth pattern reflects a persistent decline in the growth rate of advanced economies from above-trend levels—occurring more rapidly than previously anticipated—together with a temporary decline in the growth rate for emerging market and developing economies in 2019, reflecting contractions in Argentina and Turkey, as well as the impact of trade actions on China and other Asian economies. Specifically, growth in advanced economies is projected to slow from an estimated 2.3 percent in 2018 to 2.0 percent in 2019 and 1.7 percent in 2020.

This baseline forecast does incorporate the US tariffs announced through September 2018 and retaliatory measures. For the United States, these include tariffs on solar panels, washing machines, aluminum, and steel announced in the first half of 2018; a 25 percent tariff on $50 billion worth of imports from China, and a 10 percent tariff on an additional $200 billion of imports from China, with the latter rising to 25 percent after the current 90-day “truce” ends on March 1, 2019. For China, the forecast incorporates tariffs ranging from 5 to 10 percent on $60 billion of imports from the United States.

Average oil prices are projected at just below $60 per barrel in 2019 and 2020. Metals prices are expected to decrease 7.4 percent year-over-year in 2019 (a deeper decline than anticipated last October), and to remain roughly unchanged in 2020. Price forecasts for most major agricultural commodities have been revised modestly downwards.

Manufacturing Activity

The global manufacturing sector continued to register a subdued performance at the close of 2018. Output growth remained weak, while rates of expansion in new orders and employment both slowed. The trend in international trade flows also remained weak, with new export business declining for the fourth straight month.

The J.P.Morgan Global Manufacturing PMI™ fell to a 27-month low of 51.5 in December, down from 52.0 in November. The average reading over the fourth quarter was the lowest since quarter three of 2016. The consumer goods sector was the brightest spot for the global manufacturing industry, with its PMI rising to an eight month high following a solid acceleration in output growth. In contrast, PMI readings at intermediate and investment goods producers fell to 28- and 27-month lows respectively and levels consistent with only mild growth. Investment goods output stagnated as new order inflows decreased for the second time in the past three months.

Developed nations (on average) outperformed emerging markets in December, although growth eased in both cases. PMI readings were above 50.0 for 20 out of the 30 nations for which December data were available, including the US, the euro area, Japan, the UK, India, Brazil and Australia. Countries with PMI figures below the neutral 50.0 mark included China, France, Italy, Taiwan and South Korea.

The rate of expansion in global manufacturing production stayed close to October’s 28-month low in December. New order growth was the weakest since August 2016, while new export business fell for the fourth month in a row. This filtered through to the labor market and business confidence. The pace of job creation slipped to its lowest in over two years, while the degree of optimism among firms was the weakest in the series history. Price inflationary pressures eased further at the end of 2018. Input costs rose at the slowest rate in 17 months, while the pace of increase in output charges was the weakest since May 2017. Selling price inflation eased in developed nations, while charges fell in emerging markets for the first time in almost three years.

Mixed News in North America

Growth is projected to slow in the U.S., in the coming two years as macroeconomic policy becomes less supportive. While employment growth slows, consumption growth remains solid, supported by wage growth picking up as the labor market tightens further. Strong business investment in 2019 and 2020 is underpinned by the recent tax reform and supportive financial conditions. A weaker global outlook and already introduced trade measures weigh on activity.

The large fiscal stimulus enacted in 2017 and 2018 is continuing, albeit more weakly, in 2019; the budget will have a broadly neutral impact on activity in 2020. Monetary policy will tighten to ensure that inflation remains near the target of 2% and that inflation expectations stay well anchored. Further restraints on imports should be avoided as this would weaken domestic growth. Risks to financial stability from elevated asset prices and non-financial corporate sector debt should raise macro-prudential concerns; implementing counter-cyclical capital buffer provisions should be considered if these trends continue.

Growth could be sustained by measures to improve the job opportunities of those still on the margins of the labor market, and by product market reforms that strengthen productivity growth. The employment-to-population ratio is low in comparison with many other OECD countries. Policies such as greater assistance in job search and training would boost job opportunities and reduce inequality. Reducing regulatory burdens and increasing investment in infrastructure would mitigate bottlenecks that have emerged. Strengthening competitive pressures, such as by reducing restrictions that hinder businesses in tradeable services, easing occupational licensing and restricting the use of non-compete contracts, would lift productivity.

Trade growth has recovered from the past appreciation of the dollar, but the outlook is uncertain as external demand is weak and the possibility exists of further trade measures being introduced. In these projections, already implemented tariff measures are assumed to remain in place, but no additional actions are taken. The existing measures have a small upward impact on inflation and create a small drag on growth. Significant further import restraints, including raising tariffs to 25% on imports from China, would raise prices and lower GDP growth further.

Trade growth recovered from past appreciation of the dollar, yet the outlook is uncertain as external demand is weak and further trade measures will have impact.

On a more positive note, the recent United States-Mexico-Canada Agreement reduces uncertainty for North American supply chains.

Supply Chain Changes

During 2018 the manufacturing industry experienced a number of changes that rippled across the entire supply chain. Most significantly, were tariffs and trade agreements changes that were implemented by the current U.S. administration. Steel and aluminum tariffs along with the China retaliatory tariffs forced many manufacturers to adjust business strategies or incur unplanned production costs.

Looking forward  several open issues cause  longer-term concerns for manufacturers. The United States-Mexico-Canada Agreement (USMCA) still needs to be ratified by U.S., Canada and Mexico, and many predict that this will be an arduous task in the U.S. Although NAFTA will remain in place until the new agreement is ratified, it is hard to predict the impact this agreement may have on the industry.

Additionally, trade negotiations with China are underway and may result in an evolving tariff landscape for U.S.-based businesses. Finally, the Department of Commerce is still investigating the potential national security threat of auto parts and vehicles. The DoC has until mid-February to submit the final report to the President. Once submitted, the President has 90 days to decide on imposing tariffs. The DoC submitted draft recommendations last month implying that the tariff recommendations may be confined to auto parts and exclude fully assembled automobiles. All of these unanswered factors make it difficult for companies to develop sound cost and sourcing strategies for 2019.

Special Report: State of IT 2019 Predictions

With business technology rapidly advancing, companies stand to gain a competitive edge if they can stay current on IT trends that drive efficiencies. By 2020, it is expected that 61% of organizations plan to use gigabit Wi-Fi networking technology, 57% expect to use some form of IT automation, 48% plan to adopt IoT devices, 39% expect to use converged or hyperconverged infrastructure, and 38% plan to utilize application-isolating container technology.

Although many companies intended to adopt AI, VR, and 3D printers last year, the schematics have changed, or at least plans have been delayed. Current adoption rates for VR and AI technology haven’t budged much year over year, particularly in small companies. This could be the result of some businesses initially being overly optimistic about future tech adoption, but later opting to focus on updating their infrastructure and software instead.

This year, we also looked at emerging trends like edge computing, serverless computing, and blockchain. Adoption currently stands at 15% for both edge computing and serverless computing, but fewer organizations have adopted blockchain-enabled technology (9%).

However, adoption rates vary dramatically by company size. For example, 25% of large enterprises with 5,000+ employees are already using blockchain-enabled tech and an additional 31% plan to by 2020. Additionally, 32% of large enterprises with 5,000+ employees are using edge computing, and an additional 33% plan to adopt it by 2020.

Similar to the emerging tech trends, large enterprises are adopting most emerging security solutions at a higher rate than other organizations. In fact, we know from our State of IT Budgets report that increased security concerns is the top reason enterprises with 5,000+ employees are boosting budgets in 2019. Currently, these large enterprises have the highest adoption rates for deception technology (29%), cloud workload protection (39%), browser isolation (43%), and IoT security solutions (40%). And an additional 27% of large enterprises plan to adopt IoT security solutions in the next two years, which makes sense considering 86% of large enterprises (5,000+ employees) plan to use IoT tech by 2020.

It’s pretty clear from current trends that small businesses are slower to adopt emerging tech than their larger counterparts. For example, with AI, blockchain, and edge computing, the big guys are poised to hop on new tech first. But that’s not the only group looking to take advantage of the latest tech advances. Organizations in the highly-regulated financial industry are rapidly adopting emerging tech and newer security solutions to reinforce networks and protect data.

Ultra Indicators

Below is a chart representing the most recent performances of investment portfolios within Ultra’s largest industry sectors.

Each portfolio is represented by major businesses within each industry and Ultra tracks the year to date high, and year to date low for each portfolio. The dot on each line represents where the portfolio stood as of this publication.

The blue arrows indicate whether the closing number was above or below our previous publication.

*Aerospace & Defense –Indicated by Boeing, Northrup, General Dynamics, etc.
Industrial Goods – Caterpillar, United Tech, Honeywell, GE, Raytheon, etc.
Construction/Housing – Home Depot, Lowes, Avalonbay, Vulcan Materials, etc.
Software & IT Services – Microsoft, Alphabet, Salesforce
Consumer Goods – Indicated by CVS, Coca Cola, Kroger, Colgate, etc.

Ultra Perspectives

2019 is off to a rickety start as it tries to gain momentum after a lackluster end to the previous year. Predictions of growth have retreated to much slower, more cautious figures.

This growth pattern reflects a persistent decline in the growth rate of advanced economies from above-trend levels—occurring more rapidly than previously anticipated—together with a temporary decline in the growth rate for emerging market and developing economies in 2019, reflecting contractions in Argentina and Turkey, as well as the impact of trade actions on China and other Asian economies. Specifically, growth in advanced economies is projected to slow from an estimated 2.3 percent in 2018 to 2.0 percent in 2019 and 1.7 percent in 2020.

Even the U.S. can’t escape the current slump. Growth is projected to slow in the in the coming two years as macroeconomic policy becomes less supportive. While employment growth slows, consumption growth remains solid, supported by wage growth picking up as the labor market tightens further.

The recent government shutdown also put strain on U.S. businesses as federal agencies were unable to complete their jobs as normal through the end of last year. It will be a little while to make up for the backlog created by an uncharacteristic event.

With all the issues that plagued 2018, it is tough to see such cautious numbers fill the 2019 forecast. The U.S. had even been performing strong through most of the year, but trade issues, and the shutdown finally beat down our growth in the end.

Right now, it looks as though the best we can hope for in the coming year is to recover from current issues, focus on smaller, doable, improvements such as in technology or in the labor market, and make sure that we don’t slip backwards into the same causes for our 2018 misfortunes.

  • As you evaluate business activity impacts, see additional resources for ERP education to get deeper insight.
  • Contact Ultra for the best way to get started on your business performance improvement project.
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Jeff is the founder of Ultra Consultants, a well-known voice in the ERP consulting industry and an expert on ERP solutions for discrete and process manufacturers. Over the last 40-plus years, his companies have helped more than 2,000 organizations improve their business processes, select ERP software and implement advanced solutions.

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