Growing or Not, Here Comes Next Year

ISE Magazine Volume : 49 Number: 10
By Danielle Marceau

After three years of weak industrial health, industrial production has turned in the right direction for the first time since 2013. Based on the activity we’ve seen so far this year, will the economy’s industrial side continue its positive trend into 2018? Executives in this space will need to plan resources accordingly based on increasing or declining activity during the next few months. To determine the future of the industry for demand planning, we must examine what the most predictive leading indicators are telling us, so let’s take a look.

Economy keeps looking better

The first step is understanding which indicators, or “business drivers,” are suggesting future demand for industrial production activities. Once identified, manufacturers, miners, construction companies and more can monitor these leading indicators to prepare their businesses for success over the next few quarters. The three key leading indicators signaling future strength in the industrial production economic outlook include:

  • The Institute for Supply Management manufacturing purchasing manager’s composite index is a five-month leading indicator that gauges future manufacturing activity. The index showed continued rise and strength through the first half of this year, signaling growth in industrial production through at least the end of this year.
  • The Organization for Economic Cooperation and Development business confidence indicator is a five-month leading indicator gauging future business-to-business activity, business spending on capital goods, labor and wages. Confidence is much higher than last year, signaling a better business climate and more optimistic business decisionmakers during the latter half of this year.
  • The trade-weighted U.S. dollar index is a six-month leading indicator that affects future global market activity, import/export activity and manufacturing. In 2016, the dollar stopped appreciating and remained relatively constant, signaling a more favorable export environment for U.S. businesses than had been the case with the rapid appreciation faced in 2015. The stability of the greenback may help multinationals with their export activity as we head through the remainder of 2017.
  • Late last year, these leading indicators pointed toward an optimistic economic outlook for 2017, which have held true thus far. Consumers are spending more, wages are finally increasing and employment continues to rise. Based on this economic outlook, businesses would be smart to leverage this insight in demand planning, while still arming themselves against other growth barriers.

The second step is knowing which indicators could curtail the growth trends, signaling potential events and challenges with the economic outlook ahead. Issues facing industrial production growth include labor and inflation.

Labor is a good gauge of the health of the U.S. economy. The more people who are employed means more people are able to spend and create demand for companies to produce. Currently, the unemployment rate has remained steady at just less than 5 percent, a healthy number.

Inflation is a six-month leading indicator gauging the spending ability of the U.S. consumer. Currently, inflation is rising faster than wages can increase, creating an earnings-inflation gap that could hurt U.S. consumers’ spending ability.

Global economic policy uncertainty

The other major external driver challenging industrial industries is the global economic environment. While the economic climate in the United States has moved in a positive direction in the first half of 2017, uncertainty remains concerning potential changes in U.S. and European economic policies.

President Trump’s administration has ushered in a new wave of uncertainty as it seeks to progress tax reform, tighten trade restrictions in certain sectors, renegotiate NAFTA and crack down on immigration. From these events, trust and confidence from longtime allies and trade partners, like the United Kingdom, France and Germany, among others, have dropped 15 percent from 2016.

Meanwhile, in the year since Brexit, growth in the United Kingdom has been slow. Britain posted gross domestic product (GDP) growth of just 0.2 percent in the first quarter of 2017, while the Eurozone rose 0.5 percent in the same period. Brexit, not surprising, hit the nation especially hard as compared to the rest of the European Union, as British exports to European nations make up 13 percent of its GDP, while European exports to Britain make up only 4 percent of European GDP.

Currently, none of these global risks are suggesting that negativity will return to the U.S. industrial sector. They are, however, likely to keep the ongoing growth trend in check and more subdued than otherwise likely as we head throughout the year.

While the risk of such global economic changes no doubt leaves industries on edge, companies can stay ahead of the competition by understanding how leading indicators and economic events affect the future of their businesses. With millions of data sources to consider, the biggest challenge is often knowing where to look, but the resources listed here are a good starting point. From there, the future becomes much clearer and growth becomes much more achievable. With accurate foresight, executives can now improve mission critical demand planning and better prepare for best- and worse-case scenarios.