Engineered Recession in 2019?


Miles’ Letter Q-1 2019

Posted by Jim Miles, Director – Engineering and Research

2019 is off with a thud. I must admit, I could not have imagined that in six weeks the general business sentiment could have gone from one of guarded optimism, with virtually all segments banging away robustly, to the current environment of uncertainty and skepticism. It feels almost as if someone or some group is trying to engineer an economic downturn. The worst part about it is that it is 90% smoke and mirrors. Almost all of the manufacturing sectors remain in a positive growth mode (the automotive market finished the year with fairly flat sales, but recall, these are compared to the previous year’s near record sales). Once again “the Street,” always driven by emotion, has focused on things like customer confidence in data security, the tariff issues (which, by the way, have a much more profound impact on the intended targets, trading partners with long standing disparities in trade practices with the United States, than with the US), and Apple’s cell phone sales.

Yes, Brexit is going to have an impact on European economics and many US based manufacturers have close ties with Europe. Yes, the Chinese divisions of many US companies are feeling the tariff pinch. But, the Chinese are blinking, as I said in the Q-4 letter of 2018. Need I remind you that economists have predicted the last 9 out of 5 economic down turns? I wish the C-suites could all take the advice of our favorite economic advisors from the Wells Fargo Investment Institute:

We still see a solid U.S. economic outlook, but concerns about a global growth slowdown are pulling down strong U.S. growth and investor sentiment. Still, the bottom line, in our opinion, is that an economic recession is not imminent – even as many areas of financial markets are pricing like we are heading for one.

Don’t Panic!

The management challenge in this type of circumstance, where emotionally there is a feeling of a slowdown, but empirically the orderbook is still strong, will focus on making sure the headcount stays low and pushing hard with existing resources. The fallout from not adding human capital when the situation demands it can be trouble. A great example is GM’s current problem in Indiana where they are being sued by the UAW for allegedly using a large group of temporary workers when there are laid-off hourly staff who could apply for those roles. It’s difficult, but we can’t let emotion win over the evidence.

Employment Outlook Remains Tight

On the employment front, we are still hearing consistent complaints about not enough hourly workers available for the floor jobs that need to be done. On the salaried side, we continue to see full employment. The demand is spotty only because some employers are being cautious. I call it 401(k)-itis (although I’m sure it’s more about shareholder equity and quarterly EBIT numbers). The urgency to fill a role seems to be tied directly to two issues: first, if there is a looming headcount issue; and second if the role is related to a technically very active field (e.g. autonomy, electrification, battery technology). Budgets in those areas seem to be completely unaffected by the turbulence in the markets.

Wait for it…

In general, we see a solid economic outlook going into this year. We also know that public and corporate opinions and attitudes are subject to factors that have nothing to do with economic facts. This may cause continued volatility and uncertainty going forward. Ultimately, cooler heads should prevail; the government shut-down will end; new trade deals will be forged with China; and the EU will come to terms with Brexit. Once the dust settles, we should have a decent year.

Happy New Year.

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