Dr. Alan Beaulieu, ITR Economics
Dr. Alan Beaulieu, ITR Economics
The U.S. and global economies are not what they were last year. In a wide-ranging interview with FDMC magazine Editor in Chief  Will Sampson, Dr. Alan Beaulieu provides an overview of his forthcoming keynote presentation, to be delivered at the April 14-16 Executive Briefing Conference in San Jose. One of the country’s most informed economists, Dr. Beaulieu is President and a principal of ITR Economics. Since 1990, he has consulted across North America, Europe, and Asia, optimizing companies’ forecasts and planning to increase profits through his mastery of business-cycle trend analysis.  
 
Click here to learn more about the 2019 Executive Briefing Conference. You can view this preview webinar in it's entirety on demand, during which Dr Beaulieu discusses: 
  • Policy pressures/benefits on business | Consumer behavior | Business spending
  • Labor market | Commodity prices  |  Interest Rates  | Impact on wood manufacturing markets
Will Sampson
 
Will SampsonHi Alan. I’d like to get started right away with a little bit of a broad brush. Our publications and others have reported quite a few predictions for a fairly positive 2019. Now that we are at the end of the first month of the year, have you revised your forecast any? Are you still positive? 
 
Alan Beaulieu – No. Well, let me put it this way, that’s a broad question and I shouldn’t give a one-word answer: The forecast for 2019 has not changed in substance – since 2016 we have been saying that 2019 would be an off year; that there would be a decline in demand. Not to below year-ago levels for most industries, but it would certainly qualify this as an off year, and we are still on track with that. 
 
So, in terms of being bullish, no; but in terms of being bearish, no – this is where people need to be really careful in terms of expectations. If you had a gangbuster 2018, you do not want to straight-line forecast that for 2019. You will be misappropriating resources, you will have more inventory than you need, and you will have less cash than you want – and you will be out of step in terms of getting ready for the next turn in the cycle. 
 
It’s best to just dial back on the expectations, as best as you can, so you can get everything you need in place for the busy time that is coming in the second half of 2020 and in 2021. For the next 12 months the whole global economy is just winding down, my friend. 
 

"Housing and consumer spending has slowed noticeably"

Will SampsonSo no major recession or anything like that but be careful and don’t plan on gangbuster positive.
 
Alan Beaulieu:  That’s right. A lot of folks are seeing that in different industries. As I look at the data for things that we care about here there is still a lot of growth, there’s still a lot of good feeling.
 
But when I look a little deeper into the quarterly trends and I look a little harder at the numbers,  I can see that slowdown occurring and there is no doubt in my mind that there is a slowdown occurring in the demand pull- everything from housing to retail sales /consumer spending – which has also slowed down very noticeably.  You’re not going to read about it much in the press, but when you look at it mathematically, there is plenty of warning out there that the consumer out there is backing off. We’re not going to be buying homes, we’re not going to be remodeling as much, we not going to be spending as much money as people think we will be spending. 
 
Will Sampson: The housing numbers are ones that our readers and many people in the woodworking industry seem to look at really closely. So that is definitely something that they should be concerned about.
 
Alan Beaulieu: Existing home sales for the last 12 months are 3.5% below the previous 12 months. We call that a 12 over 12 or a 12/12/ rate of change. That’s the lowest year-over-year comparison in the 12-month figure in four years. It’s very noticeable; and existing home sales is where you get a lot of remodeling. And so I think we are going to see that pressure quickly flow through into the industry that we care about. 
 
Will Sampson: Absolutely. I’m curious about the long government shutdown, that is at least temporarily over, we see a number of weeks without the usual government economic statistical reports that we frequently pay attention to. How did that affect your predictions on the economic outlook? Will the shutdown have any lasting effects on the economy? 
 

"You are not going to catch a break on wage pressure for a long time"

Alan Beaulieu: It had no impact on our forecast and on how things are tracking – I just saw an email from the BEA that they expect to be caught p sometime in February. The whole shutdown is fascinating – and this is where I can sound like the cold-hearted economist that I am – but the press concentrated on individual stories -we talk about industry and the economy, which are two different things – the shutdown had no noticeable impact and no serous economist thought this was really going to ding GDP.
 
Government spending continued and 75% of the government continued to spend and up to 80% depending on who you ask, and so there was some government spending that did not occur, there was some payroll that did not occur  – and while  it may shave a little of GDP off the first quarter, it is non-sensical to believe that it would bring GDP to 0%  growth. By and large unless you were selling cabinets or furniture to somebody who was working for the government, of if they didn’t have anything in savings, or they were on the cusp of getting a mortgage, it was a non-event.
 
Will Sampson: The reality is that the percentage of the government that was shut down was pretty small.
 
Alan Beaulieu: Indeed. It was more annoying than anything else. And you’re right on it being temporarily over. It will be fun to see what happens – a lot of discussion about that as I’m sure you are very well aware.
 
Will Sampson: What do you think the Federal Reserve Board will do about interest rates?
 
Alan Beaulieu: I think we are going to find the Fed nudge them up one time. As the economy slows, [Federal Reserve Board Chairman] Mr. Powell and company will be taking a hard look and they will see the disinflationary pressure that are already in place, the fact that commodity prices are down below year-ago levels and they are not going to be able to raise interest rates as much as they want. It’s a situation where they need to and that’s why they want to raise interest rates.
 
Central banks around the world are hungry to raise interest rates. But this won’t give them the environment where they can do much more than probably a 25 basis points rise [a quarter of a percent]. And then they will have to back off for the rest of the year. 
 
There is a downside business pressure on long term bond yields, which tends to be what the Fed and the banks and everybody, mortgage rates tend to move in that direction. As interest rates don’t go up it’s easier on consumers, and as mortgage rates go down a little bit, it will help the housing industry in 2020.
 
Will Sampson: Why are central banks interest in raising rates? 
 
Alan Beaulieu: Central banks need to raise interest rates because at the next financial crisis they will have no room to move. You can’t all go to negative interest rates. They need to come up, so they can come down again next time they need to spur the economy.  It’s pretty straightforward.
 
Will Sampson: I gather a big concern in the background is inflation, but we haven’t seen big inflation numbers or anything like that yet, have we?
 
Alan Beaulieu: We’ve seen more than is generally recognized. The Producer Price Indices were up. Commodity Price were up. Tariffs tend to produce some inflation. Wages gaining strength produces some inflation. So, everything was there.
 
This global slowdown will take the pressure off everything except wages. Wage pressure, for everyone listening, is still going to be there throughout 2019. You are not going to catch a break there for a long time.  
 

"We see a tendency toward tariffs"

Will Sampson: You mentioned tariffs. Anything predictions about the current battle over tariffs and international trade as it might affect the North American woodworking industry?
 
 Alan Beaulieu: You know forecasting politics is a fool’s game. But let me tell you what I see and in discussions I have had with people on both sides on the tariffs both here and in China. We are in a very difficult dance, in that the most important thing is often forgotten in the U.S., in that the Chinese will not accept an outcome where they lose face on the international scene.
 
If they are bullied into subjection by the United States it is totally unacceptable. And they will go to extreme measure if that should be the case. They will say No. They will refuse what may be reasonable deals if it is put to them in such a way that they must bow to Washington.  
 
So, to answer your question with a question: Do you think we are capable of doing that, and when do you think we are capable of doing that?  At ITR Economics, as we discuss it among all the economists, we’re not going back to where we were with the rest of the world, and the rest of the world is not either. 
 
So much of the planet seems to have moved toward nationalism, as we have seen in Italy, Brazil, the United States, England, etc. What we see is a tendency toward tariffs: Protect my people, protect my jobs, protect my industries, and to heck with you guys. And a move away from globalism in those countries I mentioned and others. So nationism means we are not going back to the old day. We are going to see new agreements – tariffs will become a fact of life, just not at today’s levels, and not today’s current levels anyway.
 

"Labor shortages are great for people who sell robots"

Will Sampson: We constantly hear woodworking manufacturers complaining of the difficulty finding qualified employees – you mentioned wage pressures -what are your thoughts about the labor skills shortage in manufacturing. 
 
Alan Beaulieu: My thought is that it’s great for people who sell robots. And great for people who sell automated processes and better ways of doing things. And everybody who is listening who is part of your industry has to be thinking of ways that they can throw capital at a labor problem. And if you can find a way to do that, then do it. That will be your answer. That will be your out. There is nothing on the horizon to suggests the labor shortage ends anytime in the next decade. There are a couple years where it will get noticeably a little easier but that’s not going to last more than a year or so. You need to be thinking long-term, strategically, how to I do this without people. 
 
And the other thing listeners need to do, and they are probably already doing that, but if you are not focused on how to hire a millennial, you’re going out of business. You have to find out what lights them up. How will you attract the A-players to your facility? And by the way the first thing an A-player millennial looks at when they come into this industry is your website, so if your website turns them off they are not coming in for the interview.  

"If you are not focused on how to hire a millenial you are going out of business."

And the second thing is, if you are an old guy like me or like you, Will, and people come in and you have an adversarial interview, where you seem to be making them jump through hoops and you have this attitude about you that they are lucky to have a job, they are not going to the job,  or you are only going to be able to hire C players. 
 
So it's all about adjusting how we view the hiring field - and adjusting ourselves to it. And if we do that, we can get more labor than our competitors, and we'll gain an advantage. And then you have to keep them, which is a whole other issue. But at least you can get them if you know how to play the game. 
 
And your place has to look the part from the outside. I was talking to a manufacturer a couple months ago about some of this, and I told him he had to get social media going and he had to be on LinkedIn, and he said, "I need to do what?"
 
Will Sampson: And they have many more choices these days, so it's not like we're in the driver's seat in making our choices for who we hire, too. 
 
Alan Beaulieu: No, we are not. And everybody listening will be paying more, there is no doubt about it. Your labor component in whatever you do is going to be going up. One thing people can do that is a little different is to focus on hiring immigrants. Until we back away from letting good, qualified immigrants in, which we do with H1 abd B1 visas, they are a pool.  
 
Beaulieu answers questions submitted online: 
  • How will commercial construction do in 2019? The good news is that commercial construction is ramping up in 2019. It lags the macro-economic environment, and our ITR Leading Indicator ias signalling the pedal to the metal for commercial construction and for non-residential construction in general as we go through 2019. 
     
  •  In 2012 you predicted at EBC there would be a major turndown in 2019. What has changed? What has changed is the oil and gas industry in this country. We have become essentially energy self sufficient, fracking has made all the difference. We are exporting oil and will be exporting liquid natural gas. That may not impact this indsutry diretly but it hasa a huge impact on the U.S. economy.  And as we become the number 1 producer of oil and gas in the world, it has really added a lot of strength to our economy, and at the same time it has brought more businesses into the U.S. One of the five reasons that peple give for moving their businesses to the U.S. is the low cost stable energy source in the U.S. And taht means jo s, it means taxes, it mean more economic growth. 
     
  • What about the impacts of disruptive technologies on forecasts? Take something like Carvana: they will give you a price for you car online, and if you agree, they will send a truck to pick it up. That has a disruptive effect on the auto industry. That can happen in this industry, too. There can be dramatic changes in technology in the woodworking industry that can impact people listening to this webinar. That means you have to be forever in tune with those technological changes and enhancements. You have to be on the cutting edge; you have to be adaptive to what is going on. The other thing that comes to mind when thinking of disruptive technology is  that those big items you can't see coming. You have to be carefull with any kind of straight-line thinking, because that can happen. 
You can watch this preview webinar in its entirety on demand. Click here to learn more about the 2019 Executive Briefing Conference
 

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