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System Integrators Receive Optimistic Message

system integrators

On February 1, 2022, expert economist Alan Beaulieu from ITR Economics was a keynote speaker at the A3 Business Forum hosted by A3, Association for Advancing Automation.Alan Beaulieu ITR Economics

As usual, ITR Economics’ Alan Beaulieu was full of information and recommendations in his keynote presentation given to system integrators at the 2022 A3 Business Forum in Orlando.  Before delving into the details, Alan gave a high-level overview of what to expect from the next few quarters to the next several years.

Overview

Alan told the at-capacity crowd that the economy will continue to grow, but there will be some softness coming in late 2022 and in the first half of 2023.  This normalization will give manufacturers a chance to catch up after the frenzied pace of late.  Expect demand to slow in 2025 and a “good-sized” recession in 2026.  Alan urged businesses to have plenty of cash on hand for 2026, and if looking to sell the business, 2024 and 2025 are favorable years.

Looking at the 12/12 and 3/12 rates of change, the data show that it’s a mathematical certainty that production will be slowing. Demand will be easing and the downward pressure on demand will last through 2022.  Stated another way, there is a decelerating rise ahead.

Magic Money Tree and B2B Spending

Modern Monetary Theory (MMT), or deficit spending, is in vogue right now with the U.S. government, and creates inflation.  Because in MMT spending is decoupled from rising government debt, some call it the “magic money tree.”

Alan shares that business-to-business (B2B) spending is going to slow, citing that currently capital expenditure (CapEx) spending is at record high levels and 6.4% is the growth forecast.

Industrial production will slow as well, but the decline is just a slowdown and industrial production will rise over time.  Businesses should budget for decelerated growth in the second half of 2022 and into 2023.

Stock Market

“The ITR Optimizer is concerned about the stock market,” Alan cautioned. “It’s a good time to be thinking defensively.” He warned that the January 2022 stock market turbulence could easily continue.

Outlook for Specific Industries

For the automotive industry, the auto chip problem will slowly improve through 2022. Alan quips that listeners should buy their next pickup truck in 2023 or 2024.  Additionally, three new chip plants will be coming online in the U.S. in 2025, which will help the U.S. economy going forward.

New orders in the material handling industry will have a slowing rate of rise.  Alan noted that the aerospace industry is signaling promise right now, currently operating in business cycle phase B (Alan’s shorthand is B = best). Non-residential construction is doing well, and Alan advised businesses to use the negative interest rates to “leverage the future.”

Alan’s question to the audience was “What should you be spending on your business right now to achieve greater efficiency in the future?”  He said one surefire way to find out where there is waste in your business is to ask a Millennial employee what the company is doing that they shouldn’t be doing anymore.  Ask them, “What shouldn’t we be spending our time or money on?”  This helps companies identify and get rid of the wasteful vestiges of the past, what he terms “basset hounds.”

Labor and the Global Economy

Today’s businesses are spending increasing amounts of money on hiring and retention.  The data demonstrate that the employer cost of health care as a percentage of compensation is going down, but the personal consumption index is rising, meaning that employees are shouldering more of the healthcare cost burden.  One way to gain an advantage in the competition for talent may be to have the company pay an increased portion of healthcare costs. Alan pointed out, “Gen Xers will understand the importance of this.”

Looking overseas, the U.S. competitive position will improve as troubles befall trade competitor, China.  Alan discussed many signs of China’s weakening economy, including: the labor force is in decline, the cost of labor is rising, the labor participation rate is declining, the cost of goods is rising, and the cost of environmental cleanup is rising.  Additionally, China is making it more difficult on foreign businesses, which is driving reshoring.  Nationalism and cost are also reasons to reshore and globalism is in decline.  Reshoring will continue as it was already in play before COVID, and Alan emphasized that “many products made in the U.S. are more climate friendly.”

Alan indicated that the rest of the world is slowing down along with the U.S., and some of Europe’s economies are in decline.  Alan noted that the US labor participation rate had been declining, but new business starts since COVID have skyrocketed and the entrepreneurial spirit is thriving in the US.

Staffing On the Rise

Speaking of Millennials in particular, Alan’s advice to Gen Xers (who are today’s managers) is “you need Millennials on your staff.”  Alan mentioned that Millennials are looking for three specific things from their employers, which is different from previous generations. They want to:

  • Do well (receive enough pay)
  • Do good (care about the world)
  • Be involved

Recent years have posted an unprecedented “quit rate,” which will be coming to an end as the U.S. economy slows.  Alan’s data reveal that the savings rate is declining, meaning that it’s becoming harder to quit without having sufficient savings.  He says as the pressure on businesses begins to ease, the rate of rise in employment cost will ease as well.

Pricing

Alan provided extensive information on pricing for materials used in the manufacturing industry, noting that the price of copper leads the trends, steel scrap prices are moving lower, and steel prices will stabilize.

With the cost of raw materials reaching ever higher in recent quarters, manufacturers have had to pass along increased costs to their customers.  Alan notes that with stabilizing material prices, the window to pass along price increases will be closing in the next few months and after that, “your customers may not tolerate it.”

Exports and Imports

Speaking specifically to the industrial automation industry, Alan said the industrial robot sector is in business cycle phase B (best), but as the rest of the world softens, exports will not be strong.  He reiterates that the onshoring and near-shoring trends are real, and “it’s good to be in North America.”

Alan notes that imports were at record levels at three of the five largest ports in the US in recent years, but supply chain pressure will start to ease.

Looking AheadRivergate Marketing Quote Alan Beaulieu ITR Economics

Alan predicts that inflation will come back after the next few quarters because MMT creates inflation.  He explains that as the deficit gets larger, it weakens the dollar which in turn creates inflation and higher interest rates and eventually is one of the causes of the next Great Depression.  Alan indicated that the 2026 recession is “the band warming up; the 2030s will be a lot worse.”

In 2022, the interest rate hikes will not change anything, and he urges owners, “Invest in your business.  How much should you invest? Borrow until you can’t sleep at night.  Do not spend your cash!”  He urges owners to invest by making acquisitions or investing in their products.

Alan’s final thought to the audience was inspirational. “You are the people that create the jobs of the future. Without you, there is no tomorrow.”

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