NACD: Economy back from the brink?

30 November 2012 17:54  [Source: ICB]

As tax breaks end and spending cuts kick in, US distributors must negotiate the "fiscal cliff" and ensure they don't go over the edge

The US economy should see slow but steady growth next year, and chemical distributors could see solid gains - assuming that the nation doesn't fall off the "fiscal cliff" and business isn't smothered under an avalanche of new regulations and taxes.


The so-called "fiscal cliff" could be extremely damaging to the US economy

Copyright: RexFeatures

Brian Beaulieu, executive director at the Institute for Trend Research (ITR), forecasts that the US economy should continue to expand, albeit slowly, into 2013 but that late next year "consumers' ability to continue to carry the load in keeping the economy going will fade."

He notes that US employment is improving, also at a snail's pace, and that consumer spending and other leading economic indicators are mostly showing improvement in recent months, although with some downturns.

"Banks are lending, retail sales are up, non-residential construction is improving," Beaulieu says, adding: "And residential construction, which is 9% of the nation's economy and was dead in the water a year ago, now is improving."

He also notes that new construction by US chemicals producers is up by 50% from a year earlier.

However, because of some fundamental structural problems in the US economy - including the highest level of national debt since the Second World War - Beaulieu says ITR is forecasting that the slow upward momentum of growth will likely peak in mid-2013, then turn down in the second half of next year before falling into recession for full year 2014.

He says he expects US stock markets to peak in June 2013 before going into decline.

Beaulieu says the US economy will begin to recover in 2015 and beyond, but that another recession looms in 2018-2019.

He says there are three "mega-trends" that chemicals producers, distributors and other businesses should anticipate and prepare to meet.

"The first is demographics. If you live and work in a country whose population is growing, you and your company win," he says. "If you're doing business in a country, such as Japan, where population is declining, you lose."

Second, he says, inflation will rise and later interest rates will climb sharply as the US Federal Reserve Board moves to confront the inflationary gain.

"Your business planning should anticipate this and model to meet it," he says.

Third, he adds, taxes are going to go up, and they would have risen even if Mitt Romney had won the White House.

But before the US economy gets to 2013, there is the considerable question of whether the nation can manage the widely heralded "fiscal cliff" that casts a doomsday shadow over the New Year.

The "fiscal cliff" refers to automatic US income tax increases and federal budget cuts that will be triggered at year end, unless Congress and the White House can strike a government-spending deal.

Depending on which estimates are selected, the cliff could suck as much at $650bn (€511bn) or even $800bn out of the US economy in the new year.

Those additional taxes and spending reductions could cause a new downturn in the US economy.

According to the Congressional Budget Office (CBO), if the US economic train plunges over the cliff, the nation's economy will slip into a new recession in the first half of 2013.

The CBO holds that the economy would pick up some in the second half of next year, but full-year US GDP for 2013 likely will be little more than 0.5%.

But Chris Jahn, NACD president and chief executive, suggests that the White House and Congress ultimately will do something to avoid the fiscal cliff.

"Conventional wisdom says that Congress and the administration will simply kick the can down the road for six or twelve months, chiefly so that the new Congress can look at the bigger picture of tax reform and entitlement reform," Jahn says.

The US Congress that returns to Washington this month and will be in session off and on until the Christmas holiday in December will be a "lame duck" legislature, so named because some of its members will not be part of the 113th Congress that convenes in January 2013.

Many argue that such a lame-duck Congress should not act on major issues confronting the nation because some of its members necessarily will not be responsible to the public for the outcome of their decisions.

That philosophy lends strength to the argument that Congress should simply extend into next year the personal income tax cuts and similarly negate the federal spending reductions so that the new body of legislators can give the matter more deliberate consideration.

Roger Harris, president and chief executive of Producers Chemical and vice chairman of the NACD board, argues that federal policymakers simply will not allow the country to go over the cliff.

Harris, who also serves as chairman of the NACD annual meeting in San Diego, says: "They're not going to let us go over the cliff."

"They'll do an extension of some sort, and then in the New Year I hope they deal with the spending side of the equation and not just revenue," he says.

Next year, Congress is expected to cope with a major piece of legislation to reform the complex US tax code and, in the same measure, make long-term adjustments to entitlement programs - Medicaid, Medicare, Social Security - that otherwise threaten to collapse the nation's economy in years to come.

But Doug Brown, chief executive of Brown Chemical and incoming NACD treasurer, worries that Congress and the White House might well fail to come to terms in time to avoid the cliff.

"I am not really sanguine that cooler heads will prevail," he says. "I at least hope that they would pass a stop-gap measure to allow the government and economy to run past this immediate problem, but I'm not convinced."

Brown is also concerned that if the US dives over the fiscal cliff, there will be no near-term recovery, either for this country or the global system.

"There is no economy in the world that could help us out," Brown says, referring to ongoing European efforts to bail-out the economies of Greece, Spain or Italy.

"We could be that last breach in the wall that pulls everyone else down with us," Brown says.

Still, NACD vice chairman Harris sees a more positive near-term future - assuming the fiscal nose-dive is averted. He notes that the newly abundant supplies of natural gas from shale formations will prove beneficial for US chemical distributors and chemical producers.

"US methanol production is expected to double in the next couple of years, and that will be good for distribution," he says.

"I think the next couple of years for distributors will be good regardless of what happens in Washington - unless taxes are raised substantially," he adds.

ITR's Beaulieu agrees, arguing that the abundant and cheap supplies of natural gas from shale plays will prove a major boon to the US chemicals industry, up and down the supply chain.

He predicts that the availability of voluminous and low-cost natgas feedstocks could overcome short-term challenges posed by regulators and tax collectors.

"Chemical manufacturers and distributors really will be able to take advantage of new in-sourcing or near-sourcing that is already under way to US shores or to Mexico," he says.

Also known as "re-shoring", the return to US or other North American sites for various chemicals production streams is well under way and driven by low-cost shale gas supplies.

"Part of that equation," says Beaulieu, "is that not only does some offshore capacity come back to NAFTA [North American Free Trade Agreement, comprised of Canada, the US and Mexico], but we'll also see less capacity leave NAFTA for offshore locations."

"If I were a NACD member, I think this would be a good trend that I can take advantage of over the next five years," Beaulieu says.

"Stop worrying about the fiscal cliff," he adds. "Instead, ask yourself if you are well equipped to handle that sort of rise in market activity."

By: Joe Kamalick
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