NACD: Looking longer term

03 December 2013 11:09 Source:ICIS Chemical Business

The key to success in business is knowing how to make the right decisions, and that requires knowledge – of the company, the industry, the supplier and customer bases and, of course, economic trends. Truly understanding the latter is critical if business executives are to make decisions based on what is actually taking place, rather than what the media is reporting. Finding the right information can be a real challenge.

 

The government shutdown could be damaging to the housing market and manufacturing

Rex Features

That is where ITR Economics comes in, says president Alan Beaulieu. ITR Economics does not track many of the popular economic indicators, such as unemployment, which is a lagging indicator, and the consumer price index. In fact, according to Beaulieu, such indicators don’t correlate especially well with economic performance.

ITR Economics does track leading indicators, such as the Purchasing Managers Index issued by the Institute for Supply Management (ISM), the US Leading Indicators index published by the Conference Board, corporate bond prices and the stock market, as well as industry statistics, the inflation rate, tax policies, interest rates, the state of the housing market, the remodeling industry, unusual events/natural disasters, and other economic performance numbers and secondary data points that other forecasters may overlook, discredit or misunderstand.

“All of this data is meaningless in isolation, but using this critical information and the experience we have garnered over the last 65 years, we are able to identify key economic trends, determine when changes will occur, and suggest what actions companies should take to position themselves for future growth. In addition, because our forecasts are highly accurate 12 months out into the future, businesses have ample time to properly prepare for cyclical downturns or to build on rising industry trends,” Beaulieu notes.

Understanding the potential impact of the government shutdown is a good example. At the time of writing, the US had just moved into the second week of the government shutdown, and daily press reports highlight the significant, negative impacts that the partial shutdown will have on the economy, from a slowing of the housing market to reduced investment in manufacturing.

“If the economic fundamentals underpinning the ascent in housing are real and durable, temporary delays in mortgage approvals would not hamper a housing recovery. In fact, the data has been indicating for some time that there has been downward business cycle pressure in the housing industry since March 2013. The same is true about delays in permitting for new petrochemical plants. They will be an inconvenience in this case, but not have a notable impact on this sector,” he asserts.

SLOWDOWN LIES AHEAD
That leads to a key point about current economic trends. “The economy will slow down very noticeably in 2014, not due to the government shutdown, but to key trends that have been occurring for some time. ITR Economics has, in fact, been predicting this slowdown in 2014 for several years. The real contributors are implementation of the Affordable Care Act, the Dodd–Frank Wall Street Reform and Consumer Protection Act, and the fact that consumer wages continue to fail to keep pace with the rising cost of living.

The new healthcare law is of particular concern. The Congressional Budget Office recently reported that the cost to taxpayers will be $1.8 trillion – double the original price tag – over the first 10 years. That will lead to higher taxes – which is one of the megatrends ITR has been following.

“There is also the fact that many of the people the Act was intended to help may be overlooked by the law, and some employers may elect to stop offering insurance, leading to a shift from private insurance to healthcare exchanges, whose success is dependent upon the vast majority of people staying with private insurance programs.”

That is the near-term bad news. The longer-term news is much better. Beaulieu expects the downturn will be limited, and from 2015, the economy will grow strongly for three years: “Despite a slow 2014, there is much that chemical distributors can look forward to in the subsequent years. There are many positive factors that will drive economic growth in the US, and many of them will have a direct impact on the chemical industry.”

 

The economy is likely to slow in 2014 - but not soley because of the recent political stalemate

Copyright: Rex Features

Most notable is the energy industry, and the availability of cheap natural gas from the extensive shale deposits that lie beneath the country.

“Lower natural gas prices mean lower manufacturing costs. That is very good for US producers, and particularly chemical companies, and it is also attracting significant investment in manufacturing. As a result, the manufacturing sector is experiencing growth,” Beaulieu adds. He doesn’t expect the trend to reverse any time soon.

What lies behind the turnaround from 2014-2015? For one thing, the negative factors behind the slowdown are mildly negative, while the positive factors are strongly positive, he says. “Importantly, Americans do not tend to focus on ‘doom and gloom’ scenarios. Rather, they adapt to the new conditions and move on,” he adds. “It is very difficult to quantify what exactly is different, so they adapt and get on with business. In the coming years, 2014 will be the adjustment period. After that, we expect to see wages rise and spending increase, which will drive up demand. Manufacturers will increase production and distributors will build their stocks. That will lead to further wage increases, and the cycle will build.”

Chemical distributors should, therefore, use 2014 as a time in which to prepare for the growth period that will follow. “It is really important that chemical distributors do not get bogged down by the fact that 2013 has not been that great a year with only a minor improvement in production compared to 2012, and that 2014 will be slow,” says Beaulieu. “They really need to look beyond the slowdown to the growth that is coming in 2015-2017 and get set up for that time and ensure that they can meet their customers’ needs. In other words, they need to believe in the strong future of the chemical industry,” he asserts.

With respect to preparation, distributors should have reasonable expectations for 2014 and budget accordingly. Importantly, they should take time to evaluate their businesses and identify any weaknesses that need to be addressed. “Company leaders should think about what they will need to be able to meet the greater demand that is expected and make sure that they have it, whether in terms of skilled employees, capacity, supplier relationships, or other aspects of their businesses,” Beaulieu notes. Chemical distributors need to resolve any shortcomings so they can optimize their operations and maximize their growth opportunities. The slow period should not be viewed as a terrible situation, but as a time to get ready for growth.

Preparation is particularly important for chemical distributors, specifically because of the growth in manufacturing that is taking place and the increase in investment that will be coming into the US because of access to cheap natural gas.

Having access to skilled labor is also critical. There is a shortage of qualified people in many industrial sectors, and this is a particular problem for the oil, gas and petrochemical industries as one of the few negative consequences of the shale gas boom. “Companies need to take action to ensure that they will have in place the talent they will need to meet the growth in demand beginning in 2015. Companies that don’t take action now will be forced to pay more later or manage without, which will create challenges from a cost or operations standpoint, respectively.”

The key takeaway: top managers at chemical distribution firms must be prepared for a rise in demand beginning in 2015. Those that do will be able to both anticipate and meet, and possibly exceed their customers’ expectations and thus have a true competitive advantage in the marketplace.

By Cynthia Challener