It’s been a banner year so far for the industrial sector, but will manufacturing continue to help carry the U.S. economy and drive solid growth through the remainder of 2018?
The short answer is yes. However, according to economist Eli Lustgarten of ESL Consulting, while the near-term outlook for both manufacturing and the overall economy is strong, there is growing concern about 2019 and beyond.
“There are a lot of underlying issues that make economists and businesspeople nervous,” said Lustgarten, who outlined his thoughts on the latest manufacturing, agriculture and construction market data at last week’s AEM Thinking Forward event in Chicago. “Not for 2018, but for 2019.”
Overall Economic Outlook
A number of warning signs suggest significant economic growth will not continue into next year. According to Lustgarten, consumer spending appears unsustainable and underlying data suggests many Americans are currently living beyond their means. Other prevalent factors Lustgarten and fellow economists believe could hinder future growth include:
- Higher inflation
- Rising borrowing costs
- More stringent immigration policies, which could limit labor availability
- The rising fear of trade protectionism due to recent tariff announcements
- The uncertain future of NAFTA
Economic growth abroad is also poised for a slowdown in 2019. According to Lustgarten, the latest data suggests China’s outlook isn’t as promising as hoped, monetary changes indicate future tightening, oil prices are rising, and trade issues are becoming problematic.
Agriculture Outlook
2018 looks to be a good year for the farm equipment sector, which is especially welcome news on the heels of a solid 2017. Last year farm equipment sales began to stabilize after a lengthy period of decline.
“We’re in the position where the farm equipment sector is sort of stable, and in fact, is even improving this year,” said Lustgarten.
Unfortunately, the same can't be said for commodities markets. The supply of U.S. crops far exceeds demand right now, and it’s leading to significant year-to-year carryovers and depressed prices. Cutting production will be key for ag markets in the short term, as is finding ways to raise demand.
Construction Outlook
The U.S. construction equipment market is currently experiencing a solid upturn, largely driven by the rise of rental. According to Lustgarten, percentage of sales from rental has risen from 35 percent at the beginning of the decade to more than 55 percent today.
Other economic data related to construction is mixed. Housing has seen slow to recover from the collapse proceeding the Great Recession last decade, as has non-residential construction spending. However, there is reason for optimism to be found in the fact that spending on new construction machinery has accelerated greatly, and overall construction expenditures have recovered as well. According to Lustgarten, in 2008 and 2009 construction equipment spending fell by 70 percent, but gains of 38 percent in 2011 and 25 percent in 2012 have helped the sector bounce back over time.
The Bottom Line
2018 looks quite good, but economic growth in the U.S. is poised to slow as soon as next year. However, according to Lustgarten, the passage of a timely infrastructure bill would certainly help to improve the long-term outlook for the manufacturing, ag and construction sectors.
“Policies matter, and an infrastructure bill would actually create a mini-boom,” he added.
For More Information
For more information on “Thinking Forward” membership events, please contact Paul Flemming, AEM senior director, membership and engagement (pflemming@aem.org, tel: 414-298-4150) or visit https://www.aem.org/think/.
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