Growth In Store for Material Handling in 2017

January 1, 2017

ITR Economics President Alan Beaulieu will be presenting at the MHEDA Convention on Monday, May 1, 2017 at the Grand America Hotel in Salt Lake City, Utah. Alan, and his company ITR Economics, have been mainstays at MHEDA Conventions for years and the economic advice that he has given in these presentations has been indispensable. This year, MHEDA and ITR Economics have partnered on a new and exciting program designed to bring you timely economic forecasting information. The goal is to provide MHEDA members with a usable tool to assist in business planning. The MHEDA Forecast Advisory will be sent to all member companies each quarter beginning in January 2017. Alan was gracious enough to discuss his upcoming presentation with The MHEDA Journal for this issue of the magazine.

The MHEDA Journal: What is the general economic outlook for 2017?

Alan Beaulieu: Up. Better. Stronger. Lots of good reasons for that.

TMJ: What are some of the contributing factors for that?

AB: The leading indicators, except for one, are saying that 2017 is going to be a better year. So when I have 5 or 6 indicators telling me one thing and one that is kind of neutral on it, it would be kind of silly to not go with the 5 or 6 saying things are going to be better. They’re all prepared by different people with different methodologies looking at the world a little differently and yet they all come to the same conclusion. On that list would be our own ITR Leading Indicator, the Institute for Supply Management Purchasers Managing Index, an index put out by the Federal Reserve Board, Manufacturing Capacity Utilization Rate and Mining Rate of Change, which has begun to rise. Consumer activity is very healthy. Those are all things that speak very well for the future. Wages are going up too.

TMJ: I know it’s hard, at least for me, to look past the general hysterics that always seem to be going on on the news. With all the craziness going on in Washington and with the election, will that affect your forecast at all?

AB: No. Best thing to do is not to listen to it. We all love good theatre. It seems like it should matter. It seems like it’s important. But it’s really not.

TMJ: Things like Brexit as well, are those overblown?

AB: Very much so. Some companies win off of those deals and others lose. So when you have the exchequer saying, “It’s going to cause systematic recession,” it’s like, why? Others say it’s going to cause this tremendous boost in economic activity and again, I ask, why? At the end of the day, the UK is just going to cut a deal that works for them with Europe and with the U.S. and Japan and Korea. It will just be a slightly different tune on a different day. At the end of the day, it’s the trading of goods that are wanted that the UK produces or not.

TMJ: So you went through a bunch of the indicators that you monitor that indicate things are going to be better next year. And you’ve mentioned in the past, the material handling industry is generally in line with those rates of growth. But is there anything specific to material handling that members should be monitoring?

AB: Material handling responds well to whatever is causing improvement in non-defense capital goods new orders. B-to-B stuff. And B-to-B in August did very well. It was a steeper than normal rise from July to August. And we’re going to be watching the September number very closely when it comes out. And we’ll see what happens in September. So that will be something to watch, something I will certainly be watching. But the manufacturing capacity utilization rate serves as a good leading indicator for that whole capital goods new orders section. And, that would suggest that, while it may not be the smoothest turn in the world, we can expect upside activity as we head into 2017 and certainly in 2017 for at least the first half of the year. I’m going to watch the new orders trend.

TMJ: Every year, the MHEDA Board of Directors puts out their Critical Impact Factors. One of those CIFs has to do with the Federal Reserve forecasting growth to remain in the 2% range over the long haul. Do you agree with that assessment from the Fed and, if so, how should members be preparing to deal with that reality?

AB: I don’t agree. I think, probably what the Fed is doing is taking an approach that says “Don’t expect a lot.” The Fed are good folks. They do a good job, don’t get me wrong. But they’re neither omniscient nor omnipotent. And so that’s just their best view of the future. And their forecast accuracy is not as good as ours. I think what they’re really trying to say is, “Don’t believe the stuff you hear out there about 4, 5, 6% growth because that’s not going to happen.” And they’re right, that’s not going to happen. But it’s as much mathematical as it is the economy. As your denominator keeps growing, it’s hard to keep that numerator at the same size. So I think that the things the Board came up with as far as things to do, absolutely. Every one of those. And to the extent that you can minimize head count by doing all of those things, do it. Spend the money. Borrow the money. Just do it. But I don’t think 2% is a reasonable expectation. History may show in the longer run that it’s closer to 3. And that doesn’t sound like a big deal. But my concern is that people think there’s a magic pill out there that will get us to 4.5% on a regular basis and that really irritates me because there is no such thing.

TMJ: The biggest thing that people are dealing with, not only in this industry, but I’m sure in every industry, is the escalation of health care costs and the “exploding” costs they’re dealing with. Do you think that the law as it is written will continue to impact businesses in a negative way?

AB: Not so much businesses as people. I have a chart that shows that the amount that businesses are paying as a percent of compensation and on a dollar basis is pretty flat. Because, what a lot of businesses have done, and I can’t imagine why anybody would not have done this, is a couple of years ago said “This is what we’re paying. And anything above that, you’re paying.” And they’ve put a lot of the pain over onto the employee side. And it can be reflected in raises but when you look at the personal consumption expenditure for health care insurance, that’s up 9.1% in 2016. And when you’re look at what we’re paying out of pocket for things, that’s up a lot year-over-year.

TMJ: Do you expect any significant restructuring of this law, given that reality? (Editor’s note: This interview took place before the Presidential Election. The question was posed to Alan as a theoretical that looked at possibilities under either a Trump or Clinton administration.)

AB: Not in the near-term. That would take a couple of years to get hammered out. Not in the near-term, no. There’s no magic wand to fix this thing. Whatever happens, it’s going to be a long, slow process. Nothing better or worse anytime soon.

TMJ: Another Critical Impact Factor for 2017, and it’s actually been on the list for three or four years, deals with the increase in consolidation. It started off being among the suppliers but now, even the dealers are starting to consolidate. Is that a business-wide trend or is there something about material handling that is unique in that regard?

AB: Definitely not unique. It’s business-wide.

TMJ: And is it something you expect to continue?

AB: Yes. I do. I’m not sure at the same pace. There are 10,000 Baby Boomers per day retiring. I’m not sure what percentage of them own a business, but a portion of business owners are retiring. And the easiest thing to do is to sell your business so that you can cash out and retire. There will be no lack of supply. Today, the multiples are incredible to say the least because money doesn’t have a lot of places to go. So multiples are high as investors are willing to pay those multiples for some sort of return that beats what you can get by getting a CD. As interest rates go up in the future, that changes that paradigm. It changes things on the multiples. So, I think a lot of people know that, so now is a good time to sell. You’re going to get your multiples, there’s not a whole lot to do. But in a few years, it could be a different situation where multiples are not going to be quite as exciting as they are today?

TMJ: Are there any especially strong industries that our members should be getting involved in?

AB: Automobiles are at record high levels. They’re going to be showing some good growth. Industrial activity in general is going to be doing well. Chemical is going to be doing well. Food doesn’t post a lot of big numbers but it tends to do well consistently over time. The standard day in and day out should be showing more increased activity but there’s no new superstars. Whoever lands the Tesla account will be happy. But there only so many of those, the home runs. It’s not like waste management is going to suddenly balloon up to great levels again. We don’t see anything that is going to be a bubble or a technology that would be an easy answer to that question.

TMJ: In the past, when you’ve presented, you had a pretty long-term view. I think it was a soft spot last year, good times in ’17 and ’18 and then a dip in 2019. Do I have my dates right?

AB: Yes.

TMJ: Is that still the expectation?

AB: Yes

TMJ: The 2019 dip wasn’t going to be a big catastrophic event, though, correct?

AB: We use the word dip. And dip is good, dip is different than drop?

TMJ: But you did predict the next large recession in your last presentation. When was that?

AB: 2030.

TMJ: Anything members should be doing in 2017 and 2018 to get ready for that dip in 2019?

AB: Make sure they have enough cash. Cash is king. That’s why it’s better to borrow the money now to invest in yourself than it is to spend your cash. Because 2019 will be here before we know it.