Keynote economist Alex Chausovsky at the 2024 CSIA Conference.  Image courtesy of CSIA.

By Rivergate Marketing Vice President of Account Services Christine McQuilkin

In his keynote address at the 2024 CSIA Conference in Dallas, Texas, leading economist Alex Chausovsky from Bundy Group offered insights into the short- and medium-term economic outlook for manufacturing industry executives.

Always a crowd favorite, keynote speaker and economist Alex Chausovsky, Director of Analytics and Consulting at Bundy Group, offered a message of cautious optimism tempered by known challenges and uncertainties for the remainder of 2024.

Macroeconomic Update

In his macroeconomic update, Chausovsky noted a shift towards a bipolar world, “where democratic countries are facing opposition from autocratic regimes” and the friction has moved from the “shadows” to open confrontation.  Fully half of the global population will be undergoing an election cycle in 2024, with only some being democratic.  Any spikes in the various ongoing conflicts, including in the Middle East, between Russia and Ukraine, and in the China-Taiwan theater, will put upward pressure on energy prices.

Although the U.S. remains a “bright star from a global economic perspective,” with real, inflation-adjusted GDP at a record high through early 2024, there are still challenges that need to be addressed.  Driving this growth are U.S. regional “hot spots” that are outperforming the rest of the country, partly due to activity in the mining, oil, and gas industries.  The states registering the most growth for 2023 include a swath in the center of the country from North Dakota to Texas, as well as geographic outliers Alaska, Washington, West Virginia and Florida.

With the U.S. elections close at hand in 2024, Chausovsky indicated that in an election cycle, “Business leaders take a ‘wait and see’ approach,” which is reflected in the economic policy uncertainty index.  “A typical impact of a U.S. presidential election on the economy is in the area of uncertainty, and elections are some of the most uncertain periods of time in the index.”

2024 Projections

Translating this message to the current year’s financial issues for the manufacturing and industrial sector audience, Chausovsky cautions, “You are going to have a challenge with your profitability this year and you need to focus on that.  It is possible to achieve your growth targets,” he continued.  “The market isn’t going to give it to you, you have to go out and take it.”

Citing a study showing top economists estimating the chance of a 2024 recession at 50%, he said “There is a persistent pervasiveness of negativity, particularly at the top.”  With nearly 70% of consumers believing there is a recession coming, their sentiment is out of step with the Federal Reserve, who believes there is a 0% chance of a recession this year.  Additionally, despite the record-breaking economic data such as real GDP, 84% of CEOs surveyed are pessimistic about the economy and believe a recession will happen in 2024.

The positive growth from 2023 has persisted in Q1 of 2024.  “There is no danger of an imminent recession, and the economy is doing well,” said Chausovsky. There is no sign of recession in the data, which does not lie.

“These are not the numbers you hear when you read the news.  You need to consider the data on a year-over-year basis.  There is no danger of going into recession territory.”  Chausovsky urged the audience, “Go beyond the headlines and look for economic data sources that are impartial in nature.”

Consumer Debt

The overall economy depends on the financial health of the consumer, where debt plays a significant role.  Citing the New York Federal Consumer Credit Panel/Equifax data, Chausovsky noted, “The overall level of consumer debt is not a problem in and of itself right now and consumers are well positioned.  There are, however, a few red flags in auto and credit card delinquencies.

“72% of all our debt is tied up in housing,” he said. “Most of the housing debt is locked in below 5%, 4%, or 3%.  This is not a repetition of the 2006-2007 housing crisis; this will not tip us into a period of contraction.”

Broadly speaking, Chausovsky acknowledged that consumer debt delinquency is not a problem, with approximately 3% of overall debt being delinquent (below pre-pandemic levels), and the debt-to-earnings ratios normal by historic standards.  Currently, student loan repayments average $300/month, which he says is not a problem for consumers, particularly due to the graduated repayment plans the government instituted last fall.

Two areas where consumers are showing some signs of distress are in auto loans and credit card debt.  Chausovsky pointed out that the average new vehicle is now $45-50k, the average auto payment is $750/month, and that 30% of the US has a car payment above $1000/month.  “The concentration of danger in this area is with the younger generations, under age 35.  The price of a new car has almost doubled in the past five years,” he explained.  “It’s very difficult to avoid having a high payment with the current prices and high interest rates.  For some young people, their car payment represents 35-40% of their take-home pay.”

Chausovsky highlighted that while the overall consumer debt delinquency of 3% does not raise red flags, the current credit card delinquency rate of 8% is higher than pre-pandemic levels, which is a sign of consumer distress.

Industrial Economy

Chausovsky said to expect mild contraction in the industrial economy, concentrated in quarters two and three of 2024 before seeing the emergence of a new rising trend in 2025. The growth rate has slowed although CapEx spending is at a record high, largely due to inflation-driven higher prices. “Unlike GDP, the industrial economy is not growing.  It has essentially been flat for the past 12-15 months; the industrial economy is under pressure. If your business is flat or slightly down, that’s a reflection of the greater market. The amount of business you are doing, depending on your vertical market exposure, might be facing significant headwinds.” 

Chausovsky reminds attendees, “You are not in business to grow your revenues; you are in business to make a profit.  Customers are going to push back on pricing increases right now, so be aware of and actively protect your margins.  Focus on your profitability during 2024.

“Business valuations move up or down over the economic cycle, which is also true in manufacturing.  Your job is to run your business as if you were trying to sell it; this is how you get optimal performance overall.”  He continued, “Talent retention is a key element, and the four legs of the ‘valuation stool’ are growth, stability, profitability, and scale. Diversification is also critical, both for your customer base and your management team.”

Opportunities

Despite the forecast of mild contraction expected for 2024 in the industrial sector, there are pockets of opportunity.  Chausovsky explained, “Action and targeted performance are what it’s going to take to get you above the zero line this year. Follow the money – where the investment is happening, go there.” 

He offered these sectors as examples that may outperform industry averages:

• EV/battery
• Semiconductors
• Food & Bev (snack, protein, and agribusiness)
• Life sciences (personalized medicine)
• Energy transition (renewables)

In other sectors, Chausovsky cautioned that non-residential construction (mainly manufacturing construction) is already peaking and will see slower growth this year as there is a one-year lag compared to industrial production.  The growth that does exist in this sector has mainly been concentrated in the computer/electronic/electrical areas.

Credit and Interest Rates

Chausovsky’s data on bank involvement in commercial real estate (CRE) illustrates that some smaller regional banks are very exposed and are subsequently at risk due to post-pandemic low occupancy and high interest rates.  Should these smaller banks become insolvent, the larger banks should have enough resources to claim the distressed assets, preventing a financial meltdown. 

“We are slowly but surely getting used to the notion that we may not see lower interest rates.  The 3-5% range is the new normal for inflation,” he noted. “I think the market overestimated how quickly inflation will come down. As a result, you need to temper your expectations on lowering interest rates.  The current consensus is for only one or two cuts this year.”

High energy, housing, and insurance prices are much stickier than anticipated and are contributing to inflation staying high, and Chausovsky expects long-term inflation rates to stay near 2.5-3%.  Because of this, he advised, “Be cognizant of borrowing costs.  Decision makers have to go through a mental shift in doing business in this environment.  Accept that inflation and interest rates will be higher in the foreseeable future.”

Labor Market Performance

Despite some economic headwinds, Chausovsky acknowledged that the labor market has been more resilient than most people expected.  “There have been good job gains, low unemployment by historic standards, and average hourly earnings are up.  The labor market remains tight and management roles and accounting represent some of the most difficult roles to fill.  Certain roles are more in demand than others.”

Speaking to the audience of system integrators, Chausovsky reported, “Manufacturing added essentially no jobs in 2023 and relatively few positions were added in the business and professional sectors.”

Due to these circumstances, “People are more likely to stay where they are, which is reflected in the fact that quits are back to pre-covid levels.  Very few people are now willing to relocate across the country for a new job.  The pendulum remains with the candidate but not with the same ‘exploitation’ of compensation as seen in 2021-22.”

In terms of wages, Chausovsky pointed out that the “new hire” premium still exists.  “A ‘job stayer’ gets a salary increase of 5%, but a ‘job changer’ sees a nearly 10% increase in salary.  You need to devote resources to retaining your people.”

Conclusion

Alex Chausovsky’s keynote at the 2024 CSIA Conference offered a comprehensive overview of the current economic landscape, sharing cautious optimism amid ongoing challenges. He discussed key factors such as geopolitical instability, the potential for mild industrial contraction, and the resilience of the U.S. economy. Chausovsky reminded attendees to focus on profitability, targeted investments in high-growth sectors, and effective talent retention strategies.

Read more about Alex Chausovsky’s keynote address at the 2023 CSIA Executive Conference.