27 September 2012 10:52 [Source: ICB]
US business is being buffeted on all sides as the eurozone crisis impacts confidence and growth not only in Europe but globally. Although the vibrant US economy is still expanding and shows many signs of resilience, it is forecast to suffer a mild recession, according to analysis by ITR Economics.
"The Healthcare Reform Act will have a negative impact on the economy. It's expensive and a new, significant tax on the headcount"
Economist Brian Beaulieu, CEO of ITR Economics, says that businesses are currently hesitating about making investments because of uncertainty about the future of the US and global economy. "This comes from Europe and Washington politicians. Nobody knows what will happen with the mandatory US budget cuts and changes in tax law. That uncertainty is never healthy for business: if it's bad news, we'd rather know about it. There are businesses not hiring and not spending CAPEX [capital expenditure]."
Apart from the general feeling of unease about the future, some specific factors are impacting sentiment. "The Healthcare Reform Act will have a negative impact on the economy. It's expensive and a new, significant tax on the headcount which might make a lot of employers think twice about hiring. The direct cost will be around $1 trillion (€800bn) over 10 years but indirectly it could cost a lot more."
Pressures from Europe will also not be cured in 2013 or 2014, continuing to weigh on global growth. ITR also forecasts some mild inflation from higher energy costs in 2013 and from higher food costs because of the drought affecting the US. There are underlying signs of strength in the US economy which should bode well for recovery from the downturn. "On a positive note, American consumers continue to spend nicely. We see record high retail sales going on that are still improving year-over-year. American consumer delinquency rates are below the 10-year average."
Beaulieu also points to the consumer savings rate, which is a healthy 4.3%. And business-to-business spending is rising by a healthy 7.1% at the moment. "That's a healthy clip."
Leading indicators are all positive for the next six months, indicating continued strength in the near term. The ITR's own index looks positive for the next 11 months and the Federal Reserve Board's National Activity Index is positive for the next 2-3 quarters. The Leading Economic Index put out by the US Conference Board is positive for 6-9 months. Housing starts also indicate the economy will be positive for the next 6-9 months.
"The big positive is the abundance of cheap feedstocks from natural gas, which is really helping the chemical industry; everyone we talk to is benefitting. We also have plenty of liquid energy and the oil and gas sectors will stay positive for many years to come giving the chemical industry a solid base."
He says the 2008-2009 recession reduced the chemical industry's cost base, meaning it is much more globally competitive than before. Manufacturing as a whole is on the rebound, and as a percentage of GDP has been growing in the US for several quarters. At the moment it stands at 12.2% of GDP, up from a low point at the end of the recession of 11%.
Beaulieu does not take a bearish stance on the impact of demographics on the US economy. US fertility rates have increased and returned to balance, he says, so in the longer term there will not be a problem with an aging population. "We're seeing a nice shift and it can and will correct itself: the demographic problem is worse in Europe and China than the US."
In the meantime, however, the aging population will become an incredible tax burden on those who are working because of entitlement programmes, he says. "The current healthcare system is not sustainable. We supply more healthcare to people over 60 than any other country on earth and it's enough to bankrupt a generation. One of the answers is immigration: allow more people in to pay taxes."
Beaulieu says older people in mature economies do not spend less than the young, but have different spending patterns. "As a population that is quite wealthy ages, instead of buying a new refrigerator or home we'll be buying trips, clothes, things to make us independent and happy at home for much longer. People will spend as much, but spend it differently."
To thrive in this period of uncertainty chemical companies should drive efficiency and think long term, argues Beaulieu. "Sure there is a recession coming but it won't be deep. How can I make my business more efficient for the long haul? What marketing directions do I need to go into now to start building that base so that I won't be playing catch-up when the economy becomes more vibrant? Take a more aggressive long-term view and ignore the quarter-to-quarter Wall Street view."
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