STAFDA. March 2016 Economic Report

Transcription

1 STAFDA March 216 Economic Report

2 Table of Contents Economic Overview 1 Terminology & Methodology.. 2 Business Cycle 3 US Industrial Production Index 4 Canada Industrial Production Index 5 US Consumer Price Index.. 6 US Materials & Components for Construction Producer Price Index. 7 US Short-Term Interest Rates US Private Nonresidential Construction US Total Residential Construction... 1 US Total Federal Government Construction. 11 Appendix 12 Management Objectives ITR Economics All Rights Reserved

3 overview US Industrial Production is in decline. The average level of Production during the fourth quarter was.9% below the same time period in 214. The rate of decline is typical; a look at past declining trends shows that it would be normal for the quarterly Production level to reach a low in March 216. This is consistent with our current analysis, some early leading indicator input, and our prior forecast of a stronger economy in the US in the second half of 216. US Industrial Production is made up of three components: Manufacturing (73.1% of the total), Mining (16.6%), and Utilities (1.3%). Two of these, Mining and Utilities, are under-performing our expectations and have pulled down the total. Manufacturing Production for the 12 months ending in December is up 2.2% over last year. We expect that Manufacturing Production in 216 will expand 1.4% from the 215 level. This forecast is reflective of the challenges currently facing US manufacturers, including a strong US dollar, pricing pressure from low commodity prices, and weaker-than-expected demand from abroad. The impact from these headwinds is expected to abate towards the end of 216. Utilities Production has two components: Electricity Generation and Distribution and Natural Gas Distribution. Electricity Generation and Distribution is 3.9% below the prior year, and the third to fourth quarter drop was a slightly steeper-than-normal 18.7%. The drop is very similar to what occurred in 211; in that instance Industrial Production did not decline, it only slowed in its rate of rise. This time around, less electricity was generated and distributed for two reasons: a warmer winter (thank you, El Niño) and a slight lessening in demand. We think the warmer weather was the larger component in the decline in the normal electricity load. Natural Gas Distribution increased in the fourth quarter by the mildest amount since 21 with demand coming in a sharp 14.2% below the year-ago level. Warmer weather reduced demand for natural gas, and this pulled the utilities figure lower. It was good news for the consumer, but this put downward pressure on the economic indicator. The sharp decline in demand was likely weather related and not an economic event. Mining in the last quarter of 215 came in 8.4% below the year-ago level. The rate of decline is reminiscent of the 28-1 decline through a similar time period. Mining is having a very noticeable negative impact on the overall Industrial Production trend. The mining sector has been hurt by still-soft commodity prices. However, low prices will not last forever and the recession in Mining will come to an end. It would be normal for industry participants to start seeing some improvement in RFQs, and then order activity, in the second half of 216. Pricing pressure on quotes will likely remain intense in 216. ITR Economics 1 March 216

4 Terminology & Methodology ITR Economics 2 March 216

5 Business Cycle Order Industry Phase Current US Industrial Production Index C 1.3%.2% 2.7% 1.1% 2 Canada Industrial Production D -1.5% -2.2% 3.8%.2% 3 US Consumer Price Index B.2% 1.% 3.1% 2.8% 4 US Materials and Components for Construction Producer Price Index C.5%.4% 1.9%.6% 5 US Short-Term Interest Rates B 2.1% 23.7%.% 2.8% 6 US Private Nonresidential Construction B.1% 6.3% 2.7% 7.9% 7 US Total Residential Construction C.1%.%.%.% 8 US Total Federal Government Construction C.%.%.%.% ITR Economics 3 March 216

6 Market Segments US Industrial Production Index Annual Trend: 17.1 Phase: C Year-over-Year: 1.3% US Industrial Production Index 12-Month Moving Average Year-over-Year Growth Rate 12/12 Rate-of-Change '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 ' '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 '19-15 Industry Outlook 216 : 217 :.2% 2.7% 218 : 1.1% US Industrial Production in 215 rose 1.3% above the 214 level; however, it has contracted for the second consecutive month in December. The Mining and Utilities segments are in Phase D, Recession, while Manufacturing is expanding at a slowing rate (12MMA basis). The weakness in Mining and Utilities prompted us to downward revise our Industrial Production forecast. The particularly weak quarterly trend is also factored into our updated outlook. Cyclical decline in Industrial Production will persist into the third quarter of this year and recovery will take place in 4Q16. Production will expand by.2% during 216, but growth will accelerate to 2.7% on a year-over-year basis in 217. ITR Economics 4 March 216

7 Market Segments Canada Industrial Production Annual Trend: C$ billion Phase: D Year-over-Year: -1.5% Canada Industrial Production 12-Month Moving Average Year-over-Year Growth Rate 12/12 Rate-of-Change '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 ' '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 '19-15 Industry Outlook 216 : 217 : 218 : -2.2% 3.8%.2% Canadian Industrial Production has declined 1.5% during the 12 months ending in December, and Production has contracted for the ninth straight month (12MMA basis). Canadian Manufacturing has outperformed Industrial Production as a whole, with year-over-year growth of.3% as of December. However, growth in manufacturing is slowing as total annual exports to the US fell to their lowest level since 211. Negative quarterly trends indicate that Manufacturing will enter Production is contracting at an accelerating rate. Canadian Industrial production will decline by 2.2% in 216, but Production will recover and grow 3.8% on a year-over-year basis in 217. Phase D, Recession, imminently. Mining and Utilities ITR Economics 5 March 216

8 Market Segments US Consumer Price Index Annual Trend: Phase: B Year-over-Year:.2% US Consumer Price Index 12-Month Moving Average Year-over-Year Growth Rate 12/12 Rate-of-Change '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 ' '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 '19-4 Industry Outlook 216 : 1.% 217 : 3.1% 218 : 2.8% The US Consumer Price Index (CPI) is.2% above the year-ago level. Quarterly trends are rising and indicate that the CPI will enter a period of accelerating inflation imminently. The recent ease in inflation is due in part to declining oil prices, which translated to lower prices for fuel, heating, and food for consumers. Additionally, the recent strength of the US dollar has driven down the cost of imports, which benefits consumers in a country with a widening trade deficit. The average US Consumer Price Index in 216 will be 1.% above the 215 level. Inflation, as measured by the CPI, will increase by 3.1% on a year-over-year basis in 217. ITR Economics 6 March 216

9 US Materials & Components for Construction Producer Price Index Market Segments Annual Trend: Phase: C Year-over-Year:.5% US Materials & Components for Construction Producer Price Index 12-Month Moving Average Year-over-Year Growth Rate 12/12 Rate-of-Change '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 ' '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 '19-4 Industry Outlook 216 :.4% 217 : 1.9% 218 :.6% The US Materials and Components for Construction Producer Price Index was.3% above the year-ago level in December. The Price Index is in Phase C, Slower Growth, but will enter Phase D, Recession, in 2Q16, and Prices will decline until 4Q16. The recession will be mild, and prices will begin to recover at the end of the year. STAFDA members should focus on minimizing costs and taking advantage of operational efficiencies in order to maintain profit margins in anticipation of declining prices. The Producer Price Index will grow by.4% on a yearover-year basis in 216, despite the decline in prices in the middle of the year. Inflation will accelerate in 217 with Prices in 217 rising 1.9% compared to the 216 level. ITR Economics 7 March 216

10 Market Segments US Short-Term Interest Rates Quarterly Trend: 46.4% Phase: B Year-over-Year: 29.7% US Short-Term Interest Rates 3-Month Moving Average Year-over-Year Growth Rate 3/12 Rate-of-Change '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17-15 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17-15 Industry Outlook 1Q16:.33% 2Q16:.43% 3Q16:.56% 4Q16:.69% Short-term Interest rates grew 29.7% during the three months ending in January compared to the same period last year, to.568%. Wage growth, high employment, and strong Single Family Housing Starts all indicate a strong consumerdriven economy. Recent increases in Interest Rates are geared toward combatting consumer-side inflation as confidence in the health of the US economy grows. However, increases will most likely be modest through 216, as the Fed has expressed concerns about the current uncertainty in the global economy. Expect Short-Term Interest Rates to generally rise through 216. ITR Economics 8 March 216

11 Market Segments US Private Nonresidential Construction Annual Trend: $389.3 billion Phase: B Year-over-Year: 12.% US Private Nonresidential Construction 12-Month Moving Total Year-over-Year Growth Rate 12/12 Rate-of-Change '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 ' '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 '19-3 Industry Outlook 216 : 6.3% 217 : 2.7% 218 : 7.9% US Private Nonresidential Construction totaled $389.3 billion during the 12 months ending in December, 12.% higher than the same period one year ago. Quarterly trends indicate that a cyclical peak in this industry is imminent, and Construction will transition into Phase C, Slower Growth. Despite the slowing rate, overall growth will persist through 217. Nonresidential Construction will provide opportunities for STAFDA members in the years to come. Members should growth, and should evaluate their ability to raise prices to capitalize on the strong market demand. Total US Private Nonresidential Construction will grow 6.3% above the 215 level. Growth will decelerate in 217, growing 2.7% compared to the 216 level. However, 218 will be a strong year, as Construction will grow 7.9% on a year-over-year basis. ensure that they have the necessary capital to sustain ITR Economics 9 March 216

12 Market Segments US Total Residential Construction Annual Trend: $423.2 million Phase: C Year-over-Year: 12.8% US Total Residential Construction 12-Month Moving Total Year-over-Year Growth Rate 12/12 Rate-of-Change '7 '8 '9 '1 '11 '12 '13 '14 '15 ' '7 '8 '9 '1 '11 '12 '13 '14 '15 '16-4 Industry Overview US Total Residential Construction totaled $423.2 million over the 12 months ending in December, up 12.8% compared to the previous year. Quarterly trends indicate that a cyclical high is imminent as Construction begins to transition into Phase C, Slower Growth. Growth will persist, albeit at slower rate, into the beginning of 217. Construction will avoid recession and transition directly back to Phase B, Accelerating Growth, in 217. Single Family Housing Starts are up 9.2% on a year-overyear basis as high wages, employment, and rising Disposable Personal Income are benefitting consumers, which will lead to sustained growth in the Residential Construction segment through 217. ITR Economics 1 March 216

13 Market Segments US Total Federal Government Construction Annual Trend: $22.9 million Phase: C Year-over-Year:.7% US Total Federal Government Construction 12-Month Moving Total Year-over-Year Growth Rate 12/12 Rate-of-Change '7 '8 '9 '1 '11 '12 '13 '14 '15 ' '7 '8 '9 '1 '11 '12 '13 '14 '15 '16-2 Industry Overview US Total Federal Government Construction totaled $22.9 million during the 12 months ending in December, a.7% increase from the 214 level. However, growth is faltering as quarterly trends show early signs of deceleration. Public Educational Construction grew by 6.8% in 215 and quarterly trends indicate that growth is accelerating. Public Education Construction is a key segment which could factor into renewed growth in Federal Government Construction. Public Office Construction grew 4.2% over the 12 months ending in December. Sustained growth in Public Office Construction will bolster Total Federal Government Construction. ITR Economics 11 March 216

14 Appendix Market Definitions US Industrial Production - Industrial production index for the United States, 212 = 1, NSA. Canada Industrial Production - Industrial production index for Canada, 2 = 1, SA. Consumer Price Index - Price Index for all items, urban population sample, = 1, NSA. Materials & Components for Construction Producer Price Index - Index of Producer Prices, 1982 = 1, NSA. Short-Term Interest Rates - Dealer commercial paper, financial, 9 day. Private Nonresidential Construction - Value of private nonresidential building, including additions to existing buildings, in billions of dollars, NSA. Residential Construction - Total residential construction spending, in billions of dollars, NSA. Government Construction - Total federal government construction spending, in billions of dollars, NSA. ITR Economics 12 March 216

15 Management Objectives 1 Model Positive leadership (culture turns to behavior) Phase 2 Establish tactical goals which lead to strategic achievement 3 Develop a system for measurement and accountability re:#2 4 Align compensation plans with #2 and #3 5 Be keenly aware of the BE (Break Even) point and check it regularly 6 Judiciously expand credit 7 Check distributions systems for readiness to accommodate increased activity 8 Review and uncover competitive advantages 9 Invest in customer market research (know what they value) 1 Improve efficiencies with investment in technology and software 11 Start to phase out marginal opportunities 12 Add sales staff A 13 Build inventories (consider lead time and turn rate) 14 Introduce new product lines 15 Determine capital equipment needs and place orders 16 Begin advertising and sales promotions 17 Hire "top" people 18 Implement plans for facilities expansion 19 Implement training programs ITR Economics 13 March 216

16 Management Objectives 1 Accelerate training 2 Check the process flow for possible future bottlenecks 3 Continue to build inventory 4 Increase prices 5 Consider outside manufacturing sources if internal pressures becoming tight 6 Find the answer to What next? 7 Open distribution centers 8 Use improved cash flow to improve corporate governance 9 Use cash to create new competitive advantages 1 Watch your debt-to-equity ratio and ROI 11 Maintain/pursue quality don t let complacency set in 12 Stay in stock on A items, be careful with C items 13 Consider selling the business in a climate of maximum goodwill 14 Penetrate new selected accounts 15 Develop plan for lower activity in traditional, mature markets 16 Freeze all expansion plans (unless related to what is next ) 17 Spin off undesirable operations 18 Consider taking on subcontract work if the backside of the cycle looks recessionary 19 Stay realistic beware of linear budgets 2 Begin missionary efforts into new markets 21 Communicate competitive advantages to maintain margins Phase B ITR Economics 14 March 216

17 Management Objectives 1 Begin workforce reductions Phase 2 Set budget reduction goals by department 3 Avoid long-term purchase commitments late in the price cycle 4 Concentrate on cash and balance sheet 5 Reduce advertising and inventories 6 De-emphasize commodity/services in anticipation of diminishing margins 7 Weed out inferior products (lose the losers) 8 Encourage distributors to decrease inventory 9 Identify and overcome any competitive disadvantages 1 Make sure you and the management team are not in denial C 11 Cross-train key people 12 Watch Accounts Receivable aging 13 Increase the requirements for justifiying capital expenditures Evaluate vendors for strength (don t get caught honoring their warranties with no 14 one to accept returned goods) 15 Manage the backlog through pricing and delivery; try to fill the funnel ITR Economics 15 March 216

18 Management Objectives 1 Continue force reduction 2 Reduce advertising be very selective 3 Continue to avoid long-term purchase commitments 4 Review all lease agreements 5 Increase the requirements for justifying capital equipment 6 Eliminate all overtime 7 Reduce overhead labor 8 Combine departments with like capabilities and reduce management 9 Select targets of opportunity where price will get the business 1 Tighten credit policies increase scrutiny 11 Look for opportunistic purchases 12 Grab market share as your competitor dies 13 Prepare training programs 14 Renegotiate union contracts if possible 15 Develop advertising and marketing programs 16 Enter or renegotiate long-term leases 17 Look for additional vendors 18 Consider capital expenditures and acquisitions in light of market-by-market potential Phase D 19 Make acquisitions use pessimism to your advantage 2 People will be scared lead with optimism and can do attitude ITR Economics 16 March 216