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Quick Look at the Economy

2016 isn’t off to the greatest economic start if you’re anywhere but the United States. China’s stock market has flirted with free fall, the Middle East has Shia-Sunni outright war in the tea leaves, and commodity prices have all but collapsed. The EU and Japan still pass the mirror test to see if they’re breathing – but barely.

With clients in agriculture, financial services, and construction on the agenda for the first half of the year I’m asked to weigh in. Generally, I’m optimistic.

There are problem areas. Commodity prices in the low range means crop farmers see the end of their 6-7 year run of record returns. Not a lot of new pickups in the shed these days. It’s a return to eking out profit from slim margins. Livestock producers benefit from lower feed prices. A lot of eyes are on the presidential election where a Republican win could affect biofuel policy that’s been buoying up grain prices – with corn as the leader. Plus the El Nino introduces even more weather and moisture uncertainty than usual. The dollar is expected to remain strong, working against exports. Huge amounts of US grains are sold overseas and the competition is stiff.

Financial service companies – banks, insurance, credit unions – depend on a stable to rising economy to produce loan demand. A GDP performance for the US economy usually points to a reasonably good year but it’s not quite that simple. The Fed is raising interest rates, albeit tentatively. The rest of the world is not. It makes for difficult decision-making. I’ll be in the room for about a dozen strategic planning meetings in this sector this year and the discussions will be “interesting.”

No sector deserves a better environment than construction and the outlook is fairly good this year after nearly a decade of abysmal to bad news. Commercial construction for 2016 should be up. One of the key indicators, billings at architectural firms, were up significantly for all of 2015 which should translate to buildings coming out of the ground in ’16. The home building sector is also looking positive. The National Association of Home Builders is projecting about a 25% increase in 2016 year on year despite some nagging worries about labor availability and costs. Job creation is a big driver in this sector.

But the question about whether the US economy can stand up to a world slowdown still stands. There are several factors that work in the country’s favor:

  • The US is so much better an investment destination than other global regions that it stands to attract more capital.
  • US consumers, as long as the job outlook remains strong and fuel prices remain low, will spend.
  • China is a totalitarian state. Don’t overlook the possibility that it can do almost anything it wants to get growth back up to a 5% GDP range. Plus it still possesses huge cash reserves.
  • The EU and Japan don’t have a great recent track record for growth but neither do they stand to take a deep dive into recession.

April, 2014 - Long Overdue Update to Our Scanning

It’s economic forecast month for me. Several ongoing clients have me addressing a range of industries with a look specifically at macroeconomic cycles and impact. I always start with a disclaimer that I’m not a predictor but a forecaster and the difference.

Forecasters look into the future and express their views with a reading on relative certainty and change those forecasts with time and new information.

Right now the US economy, the topic I’ve been addressing this month looks generally favorable with a 75% to greater chance of working through 2014 with slow growth in GDP. Probably (over 50%) in the 2% range. In other words, without “escape velocity” that would allow robust growth, a rise in interest rates, a spike in consumer confidence, and a greater demand for credit.

In short, for my clients in banking and construction, it’s OK news but we’re probably not too excited about it.

2015 looks better fundamentally. I’d move my forecast up to a 2.5 to 3% GDP growth rate in the year with a 75% probability and I think I’ll be elevating probability by year-end.

Agriculture is one of my key client segments. I’ve been privileged to work with North America’s smartest agriculture leaders, commodity associations, agribusiness companies, and farmers. I love them. And the business in this sector has been extremely good for a run of about 6 years. Unfortunately that may be ending.

Due to a combination of factors crop prices will almost certainly be falling and the bloom is off the rose for a number of players in the field. The counter-cyclical beneficiaries may be the animal protein sector where lower commodity prices translate to lower feed prices. Cattle might benefit particularly if its prices haven’t gone so high in the supermarket that consumers will further reduce their consumption.

Nobody deserved a good run more than the farmer. In my opinion they’re the most misunderstood business executives in North America today. While some critics of “production agriculture” whinge about “millionaire corn farmers” and “corporate farms” they completely ignore the statistics that over 90% of US farms are family-owned. And what family that runs a business doesn’t have that business incorporated? Only the naive.

I’ll have more to say on the agriculture outlook in later posts. Thanks to those of you who reminded me to stay at the blog. The workload has been a bit heavy but I’m about to take some time away from the road to get an overhaul of a bum ankle soon and I’ll have more time to share what I’ve learned from my smart clients in the months ahead.