The equipment manufacturing sector stands to enjoy a steady uptick in business activity as the calendar turns from 2017 to 2018, according to IHS Markit Chief Economist Jim Diffley, as long as a shortage of skilled workers and political uncertainty over infrastructure spending don’t bog down growth.
Millions of workers in construction, the trades and manufacturing either retired or found new work after job cuts that followed the 2008 recession, Diffley told the Association of Equipment Manufacturers’ recent Thinking Forward summit in Wichita. But with the recovery in full swing and unemployment rates dropping below five percent, new workers have yet to fill the gap, leaving the economy dependent on efforts to address the issue.
“We just don’t have the influx of skilled labor ready to come join your company,” Diffley says. “They’re either employed elsewhere, or they just don’t have the skills needed. So it seems prudent, particularly for large corporations that have the wherewithal, to do what was done in past generations and train the existing workers to better adapt.”
If the American economy can address its workforce issues, Diffley sees indications that more growth is on the horizon.
“Demand in the economy has turned up from relatively slow rates of growth in the last few years, and is generally looking positive going forward,” he says. “Basically, four factors that have been holding this sector back have now been relaxed, and we saw an acceleration in orders in the first quarter of the year.”
Until recently, Diffley says that slow growth in the U.S., global economic stagnation, an “inventory correction” on the part of construction firms and declining exports due to a strengthening U.S. dollar all combined to dampen business for equipment manufacturers. But as those trends improve in 2018, Diffley predicts a four percent uptick in orders for industrial equipment and a six percent jump in orders for transportation equipment.
Things are currently a little bleaker in the agricultural equipment sector, Diffley says, where a glut of harvested crops has created a trough in farm income that will continue to hamper equipment sales. But Diffley is hopeful that declining agriculture acreage will push commodity prices higher again, leading to steady growth into 2019.
As with any set of predictions, Diffley admits there is a certain amount of educated guesswork at play, and the results depend heavily on assumptions about President Donald Trump, his newly-installed administration and its upcoming policy decisions. Diffley stakes his projections on the expectation that the Trump administration will usher through some tax cuts, but will abandon promises for a border adjustment tax due to “political headwinds.”
Most important to equipment manufacturers, Diffley says, is the Trump Administration’s fulfillment of the president’s promise to invest in infrastructure projects across the country. While President Trump campaigned on a trillion-dollar investment in public infrastructure, Diffley says the administration has not yet put forward a specific plan. The political realities of paying for a massive infrastructure build-out lead Diffley to believe that a more realistic figure of $250 billion over 10 years is not only achievable, but would still spur notable economic growth.
“That’s about a quarter of the campaign proposal,” Diffley says. “That’s our assumption of what actually gets through Congress and the administration, and even that is uncertain right now.”
Diffley points to five-year projections that show worldwide investment in infrastructure growing at nearly five times that in the U.S. as a warning sign. He says if political leaders cannot agree on a way to finance infrastructure improvements, the nation risks falling into a competitive disadvantage in the worldwide economy.
“Political deadlock of anti-government spending pushed the problem down the road, and it’s tough for the political process to actually get together and do the right spending,” Diffley says. “With the Trump administration agreeing with some of the things the Obama administration was trying to do as well, maybe now the time is right to actually get some spending, because certainly the problem in the U.S. is just getting worse.”
Jim Diffley was one of several speakers at AEM’s Thinking Forward conference in Wichita, KS at Textron Aviation. The next free event will be Aug. 15 in Redmond, WA, featuring a presentation from Microsoft’s D’Arcy Salzmann on how HoloLens is using Augmented Reality to change the way construction projects and sites operate. Hear how embracing the 3D world can impact project speed and accuracy as well as the potential applications to manufacturing. LEARN MORE