Borrow, invest, expand, grow: Advice for system integrators

Manufacturing economics: System integrators should borrow until it hurts, invest in good employees and systems, and use this time of prosperity to expand, advised Alan Beaulieu, president, Institute for Trend Research, at the CSIA Executive Conference in April in San Diego.
By Mark T. Hoske May 23, 2014

Alan Beaulieu, president, Institute for Trend Research, at the 2014 CSIA Executive Conference in April in San Diego, said leaders of control system integration firms should borrow and invest, now because it’s better to pay back in inflated dollars than toControl system integration firms should be full of optimism and action; 2014 can work to the advantage of firms proactive to larger economic expansion anticipated for 2015 and beyond, according to Alan Beaulieu, president, Institute for Trend Research, at the CSIA Executive Conference in April in San Diego.

What are the megatrends we will all have to contend with? What will be the impact of the Affordable Care Act? 

Do the math

ITR prognosticates economic trends with 94.7% accuracy, Beaulieu said, not to boast, but because:

"I want you to have confidence in what I present; it’s not just based on ‘I hope’ and ‘I think.’"

The comments that follow are paraphrased from Beaulieu’s presentation.

The U.S. is accelerating in its economic growth, with record levels of gross domestic product (GDP) and consumer spending. The U.S. is in a strong position. The worst that will happen is that the rate of growth will slow later this year and early in 2015, to perhaps 1.4% growth rate. The growth in 2013 will be hard to duplicate through the next couple of years. But the economy is healthy and vibrant, and there are opportunities. About every 10 years, we will have a recession. That will arrive 2018 in the third quarter and last until 2019 mid-year. I can add 10. I am an economist. Expand your opportunities before then.

The recession will bring a credit crunch. Contraction is painful. If you’re in the right position, consider selling your business in 2017 for cash. Who should you sell it to? Someone you don’t like. If it is a family business, leave it to your kids, which also can be emotionally rewarding. With a glass-half-full attitude, a recession provides opportunity. Cash is king. Amass a large war chest now. During the recession, buy a competitor, buy market share, buy equipment, or buy good personnel from companies circling the drain.

U.S. industrial production is strong. We raised our forecast from OK to "Wow." We predict industrial production growth at 2.7% for 2014, 1.9% in 2015, and 2016-2018 are also positive.

GDP is forecast at 1.9% for 2014 and 3.3% in 2015. Despite what politicians tell you, we cannot do four simple things and grow at 4.5%. Perhaps we could grow 3%-3.5% at the most because of our sheer size. We need to incorporate growth into our lexicon. We have to believe and know that we’re in growth.

At home, our friends, who know what I do for a living, asked my wife, "When will the recession end?" It’s over. Sometimes I think people are watching "Family Guy" and thinking it’s a documentary. As business leaders, you need to ensure you know where we’re going and why. 

Key opportunities in manufacturing

  • Light vehicle production will see less growth to mid-2015, and then faster growth.
  • Medical industry growth will continue at a high 4.7% and will level out.
  • Fabricated metals industry has room to grow.
  • Chemicals will growth more slowly.
  • Food won’t see a recession until 2019.
  • Consumer durable goods new orders are at 9.2%; growth will be slower.
  • Semiconductor chips growth is still increasing, with slower growth in the third quarter.

In general, leading indicators are pointing up, and the world is in relative calm. Employment is rising and companies are right sized, banks are lending, retail sales are rising, nonresidential construction is improving, deficit spending continues with no fear of austerity.

Our industries want more people. We cannot find enough people with the right skills and right attitude who can pass the drug test. Anyone here from Colorado? Some locations there have done away with drug testing, which may help workplace attitudes, but we still need skills. More money is needed for training and partnering with local community colleges. Wage inflation competing for the best talent will lead to real inflation eventually. Higher wages are among major trends. We will have to pay people more. Our standard of living will fall if we don’t pay them more. Poach as you can. Start training. Or move to Denver, the mile-high city in more ways than one.

Borrow now, until it hurts

Mortgage rates are increasing. Take advantage of them now. Borrow now. Grow. Do not spend cash. Pay back your loans later with inflated dollars, and you win all around. Government regulations will tighten credit in the future. In 15-20 years interest rates will be going up, to Carter-like years, where we had 20% interest rates. Next year they will increase a little, up to 4%; we’ll have 7.6% mortgages in a few years. This would be bad if it were not for wage inflation. You can take advantage now and borrow. Borrow until you cannot sleep and invest in real estate rental property. Younger people should buy property now if they can. Also note that 61% of baby boomers support their children monthly in some way; there is a large amount of college student debt upon graduation.

In 2013, 84.5% of U.S. energy was produced here. We are doing things here in this country again because of a stable energy base. We now produce more oil and gas than Russia. North Dakota now has reason to exist.

Less expensive energy is revitalizing industries. Jobs and manufacturing are coming back. Many companies are moving back to the U.S. with manufacturing, including Apple, Yamaha, Michelin, Wham-O, Bayer Chemical, Caterpillar, GE, NCR, Rolls Royce, Honda, Lenovo, Airbus, Toshiba, Toyota, Flextronics, Siemens, and others. You don’t want to miss out on these opportunities.

And, though Washington hasn’t mentioned this, our CO2 footprint at the end of 2012 is equal to end of October 1995. We are doing things right.

Panama Canal’s expansion will open late in 2015, adding economy activity to the U.S. East Coast in warehouses and shipping. 

See the next page for global perspectives in manufacturing, other concerns, a list of recommendations, and another photo …

Alan Beaulieu, president, Institute for Trend Research, at the 2014 CSIA Executive Conference, in April in San Diego, said leaders of control system integration firms should be full of optimism and action; 2014 can work to the advantage of firms proactiveGlobal perspectives, manufacturing

As a matter of economic perspective, the European Union is about the size of the U.S.; China’s economy is still a lot smaller than the U.S…. and won’t overtake us in the next seven years.

Japan has problems related to a low birth rate and lack of immigration.

Global leading indicators growth is ready to increase in many areas.

A healthier Europe is good for us. Canada is speeding up, but they have a manufacturing problem because they’re not as aggressive in pursuing productivity enhancements as they should be. When you’re more worried about keeping jobs than keeping the factory, it makes it hard to be globally competitive. They need to learn that factory growth creates other jobs. Economic pressure will help Canada come around. On the upside, the Canadian banking system is the best in world. Canada is good place to invest. They have 30 million people, about the same size as California.

Mexico will rise again; they’re growing in engineering and have middle-class growth. Yes, there is still crime and violence. Colombia fixed it. Mexico can too and will see more growth in the next 15-20 years.

In South America, Brazil is driving things down with a 50-year record drought and tough government policies for investors.

India is soft, though leading indicators are positive for 2014. It’s a long, slow process. It’s hard to keep 1.3 billion people down. They will slowly figure it out. Better infrastructure and less bureaucracy would help. Things move slowly there.

Australia is good. Move there for the pending U.S. depression of the 2030s. It’s a low-debt nation, and you can borrow at reasonable prices.

For the Ukraine situation, sanctions from the U.S. are meaningless. European Union sanctions mean everything. Russia is too dependent on oil and gas. Be very careful if you do business in Russia. The freedom index there is really low. Laws often do not apply; 62 is the average rate of death for men. Ukraine will continue to sell food no matter who owns them. Neither Russia nor Europe can afford conflict.

China in 10-15 years will see greater challenges because of an unhealthy fertility situation. Numbers are working against them. This could be a danger to the U.S. if they no longer want to buy U.S. treasuries.

U.K. has some significant issues long-term: demographics and energy. They’re slow to frack. If they could get energy independent, they would do better, longer; debt per capita will create a significant drag in the long term.

At present, by the way, the U.S. middle class is fine. In constant 2012 dollars, households earning less than $35,000 accounted for 39.9% in 1967 and 35.4% in 2012. Those earning over $200,000 were 0.9% in 1967 and were 4.5% in 2012. And those earning $35,000-$200,000 were 59.3% in 1967 and 60.3% in 2012, according to Census Bureau numbers. Fifty years ago, starting below the poverty line in the U.S., your opportunity for upward mobility was the same then as it is now. But, beware, because the culture wants taxes to go up on businesses and high-income earners.

Other concerns for 2014

Stocks could see a 30% adjustment soon, though ITR won’t predict when.

Defense spending is below year-ago levels, and it will stay down. The U.S. budget is a mess, and it could be three or four years before things improve there. It’s not Republican or Democratic; it’s economics, not politics.

Other than overspending, you and I (baby boomers) are the main problem with the budget. We go to the doctor and expect to be made well. We pay doctors a lot, and until baby boomers die, we will drain the medical system. Medicare consumes the largest part, and twice as many people will be on it in 20 years. We cannot afford it now; 40 million people will be leaving workforce in the next 20 years.

Millennials will be working longer and retire with less, but there will be a massive transfer of wealth when baby boomers die. As mentioned, businesses will pay more, because there is a growing anti-business bias in the U.S. The government will close loopholes and exemptions, and deductions will end because someone has to pay for our overspending.

However, measured by the historical size of tax reforms, Obamacare, or the "Affordable Care Act," is a middle-of-the-road tax increase; nine other major increases cost more. However, the cost to implement it is double the original estimate, now $1.8 trillion. To pay, taxes will go up or borrowing increases. Or we will print more money.

The worst that can happen?

If the U.S. doesn’t start balancing its budget by the end of this decade, the math points to the next great depression, in the 2030s. With a trillion more dollars in debt being adding on each year [and voters not seeming to care], by 2025 interest payments will be 25% of the budget.

My new book, "Prosperity in the Age of Decline," will be available in July 2014. Where can we hide from the 2030s depression? Australia, Canada, and Mexico. 

What can prevent the depression?

Among the first questions from the audience was, "What can prevent the great depression of the 2030s?" Budgetary corrections before the end of this decade, Beaulieu said, but we don’t seem to have the will for that. He continued on that point:

Aside from that, the only way would be an Avian-type flu that decimates elderly, a war only involving old people, or regenerative medicine that keeps us healthy at low cost until we die, but it’s likely too late for that too; it would need to be applied within 10 years to make any difference.

The U.S. should cut federal spending, with phased-in austerity measures over 10 years, perhaps a 1% decrease in the federal budget per year in nonessential areas. Lighten up on taxes to attract businesses. Ease the regulatory burden to ease capital to increase jobs and opportunities. 

Prepare for 2014-2015

His advice for the coming year follows.

  1. Develop growth strategies
  2. Find and eliminate bottlenecks
  3. Invest in customer market research (what are customers thinking; change business to fit that)
  4. People, process, metrics, and training
  5. Plan for higher wages
  6. Borrow now while rates are low
  7. Invest in efficiencies
  8. Prepare for 2019. In the 2020s many baby boomers will be looking to sell their businesses, which will drive the price of businesses down.

8 must-watch items

Advice for indicators to watch follows.

  1. ITR leading indicator
  2. Housing starts
  3. Bond market
  4. U.S. leading indicator
  5. Purchasing manager index
  6. Retail sales
  7. Employment
  8. Nondefense capital goods new orders.

Get the right information and share it with your team; get buy-in. Do the right things, Beaulieu said.

– Edited by Mark T. Hoske, content manager, CFE Media, Control Engineering, mhoske@cfemedia.com.

ONLINE extras

www.ITReconomics.com 

www.controlsys.org is the CSIA website

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