Scott Hazelton of IHS Markit gave an overview of the industrial markets for hydraulics at this week’s National Fluid Power Association IEOC event. The IEOC (International Economic Outlook Conference), an annual must-attend industry conference, was held this year at the Hilton Chicago/Oak Brook Hills Resort.
Hazelton’s outlook wasn’t a sunny one (“not a lot of roses,” he said), dovetailing with many of the other economic speakers at the conference — with indications that a coming recession in the United States would be small in size, hitting just before mid-2020.
He told the audience to look for a deceleration in manufacturing with risks on the upswing. After growing 2.7% in 2018, the stage is set for manufacturing output to expand a mere 0.3% this year. The annual growth will remain modest — roughly 1% — in both 2020‒21.
The total manufacturing orders rose 7% last year, but this year, the story is different, with a less than 1% rate through May. Orders of durable goods were up 8% in 2018, but only 1% through May. Similarly, nondurables orders were up 7% in 2018, but just 0.9% through May.
As far as total industrial production and manufacturing, that output actually declined from Q4 2018 to Q1 2019, and Q2 2019 appears to be headed for another decline.
Hazelton listed various indexes and news reports that he felt showed signs of this coming manufacturing slowdown, including:
• The ISM, PMI: May 52.1, June 51.7.
• The ISM, New Orders Index: May 52.7, June 50.0.
• The U.S. dollar is expected to average 3% higher against its major trading partners during 2019 and remain generally strong through 2023.
• Over the next five years, U.S. imports of goods should grow at a 3.4% average annual rate while exports are expected to grow 2.9%.
• Domestic WTI oil prices should be down 9% this year and then rebound approximately 3% annually through 2023.
• Natural gas prices should decline 16% during 2019 and another 7% in 2020.
Touching on industrial machinery, Hazleton said that tariffs are almost exclusively hitting manufacturers at this point. He noted that consumers are not yet seeing the effects here. Exports to Asia are now down 28%, reflecting the manufacturing slowdown there. Hazleton said that we seem on track for a forecasted 5% decline in 2019, with no growth next year and 1% growth in 2021.
Some specific industry outlooks:
• Industry shipments in engine, transmission & power equipment are on track to increase 8% in 2019. This is surprisingly stronger than was originally anticipated — but Fall 2019 orders have been weak.
• Within oil & gas field machinery, shipments are on track to decrease 6% in 2019 and orders are off 9%. Mining support activities are on track to decline 2% in 2019, then increase 3% next year and be flat from 2021 through 2023.
• Aerospace supply chains are backing up with production adjustments being forced on suppliers. Nondefense orders are off 39% through May. Defense up 20%, but that represents only 25-30% of the commercial business.
The bottom line?
Hazelton said that the influence of the tax cut stimulus on the industrial markets has now ended. And he noted that it had a very limited impact on business investment. The ongoing uncertainty on trade, tariffs and other policy issues has reduced business confidence — and as a result, this has put many business investment plans on hold.
Tariffs on aluminum and steel have made U.S. manufacturing less competitive compared to the rest of the world, he said. And the Chinese trade talks remain uncertain, as neither the Trump Administration nor Xi Jinping seem to want to budge on their stances.
Hazelton expects the U.S. dollar to strengthen further, creating a major headwind for export growth and a stimulus for import penetration. Many U.S. manufacturers have lost business to foreign competition, and that will likely to continue into next year.