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State of the Economy: January 2018

We are off to a positive, yet demure start to 2018. Leading economies are exhibiting slower, but stable growth and the U.S. has followed a similar trend with many manufacturing companies excited for growth due to new tax laws.

The state of the economy can often dictate how much growth certain industries are experiencing which can influence their business decisions and modernization requirements. January’s state of the economy report from Ultra Consultants, with special focus on the U.S. manufacturing and distribution Industry,  includes recent facts and figures, as well as details about events that have major sway over the economy.

January: Clean Slate in International Markets

The cyclical upswing that is underway since mid-2016 has continued to strengthen. Some 120 economies, accounting for three quarters of world GDP, have seen a pickup in growth in year-on-year terms throughout 2017.

Among advanced economies, growth in the third quarter of 2017 was higher than projected in the fall, notably in Germany, Japan, Korea, and the United States. Key emerging market and developing economies, including Brazil, China, and South Africa, also posted third-quarter growth stronger than the fall forecasts.

 An improving global growth outlook, weather events in the United States, the extension of the OPEC+ agreement to limit oil production, and geopolitical tensions in the Middle East have supported crude oil prices.

These have risen by about 20% between August 2017 and mid-December 2017, to over $60 per barrel, with some further increase as of early January 2018. Markets expect prices to gradually decline over the next 4–5 years—as of mid-December, medium-term price futures stood at about $54 per barrel, modestly higher than in August. The increase in fuel prices raised headline inflation in advanced economies, but wage and core-price inflation remain weak.

For the two-year forecast horizon, the upward revisions to the global outlook result mainly from advanced economies, where growth is now expected to exceed 2% in 2018 and 2019. This forecast reflects the expectation that favorable global financial conditions and strong sentiment will help maintain the recent acceleration in demand.

Manufacturing activity in December reached all-time highs in a number of markets, including Austria, Germany, and Ireland. In addition, the headline index was at or near a 17-year high in both France and the Netherlands, and Greek manufacturers cited their strongest conditions since June 2008. Beyond those markets, manufacturing activity remained strong despite decelerating at year’s end from multiyear highs in the November survey in the following markets: Italy, Spain, and the United Real GDP in the Eurozone rose 0.6% in the third quarter, off slightly from a gain of 0.7% in the second quarter.

That translated into 2.6% growth year-over-year, the quickest pace since the first quarter of 2011. In addition, industrial production increased 1.0% in November, led by strong gains in output for capital, durable consumer and intermediate goods. On a year-over-year basis, industrial production has risen 3.2%.

The Chinese economy grew 6.8% year-over-year in the third quarter, edging down slightly from 6.9% in the first and second quarters. Industrial production has decelerated over the past few months, down from 6.6% year-over-year in September, to 6.2% in October, to 6.1% in November. Similar trends have occurred for fixed asset investment, which has slowed to 7.2% in November, and for retail sales, which have eased to 10.2% in November. With that said, retail spending picked up slightly in the latest release, up from 10.0% year-over-year in October.

Mixed News in North America

The IHS Markit Canada Manufacturing PMI inched up from 54.4 in November to 54.7 in December, a three-month high. In December, new orders, output, and exports accelerated, with the latter expanding for the first time since September.

Hiring remained decent despite easing somewhat for the month Real GDP growth eased from 1.0% in the second quarter to 0.4% in the third quarter, largely on weaker export data. That translated into 1.7% growth at the annual rate, down from 4.3% in the second quarter. Moreover, manufacturing sales decreased 0.4% in October, mostly on reduced chemical, machinery and motor vehicles and parts orders.

The IHS Markit Mexico Manufacturing PMI decreased from 52.4 in November to 51.7 in December. The mild contraction in October had been the first decline since July 2013. Despite expanding in the latest survey, respondents noted slowing new orders, output, exports and employment.

This easing extended to the future output index, which decelerated to an 11-month low despite continuing to suggest general optimism in the outlook for the next six months. Real GDP decelerated from 1.9% year-over-year in the second quarter to 1.5% in the third quarter, its slowest growth rate since the fourth quarter of 2013. Industrial production also edged down 0.1% in November, falling for the third straight month.

Impacts on U.S. Activity

In the U.S., real GDP grew 3.2% in the third quarter, boosted by strength in consumer and business spending and net exports and extending the 3.1% gain in the second quarter. Manufacturing added 0.24 percentage points to top-line growth in the third quarter, with mixed results for the sector.

Real value-added output grew 2.0% for manufacturers in the third quarter, buoyed by a 7.5% growth rate for durable goods firms but weighed down by a 4.1% decline for nondurable goods businesses.

Recent hurricanes hit the latter hard, especially in chemical and energy markets.

A Look at Manufacturing

Overall, manufacturing gross output increased to $6.031 trillion in the third quarter, rising to its highest point since the fourth quarter of 2014. Those findings closely mirrored the value-added data for manufacturing, which rose to $2.252 trillion in the third quarter, another new all-time high. Value-added output for durable goods increased to $1.224 trillion, with nondurable goods value-added output rising to $1.028 trillion.

The bottom line is that manufacturing accounted for 11.5% of real GDP in the third quarter, which remained the same from the prior report. Adjusting for inflation, there was also a new all-time high for real value-added output in manufacturing, up to $1.958 trillion in the third quarter. Those figures are in chained 2009 dollars, and the latest number edged out the previous peak of $1.955 trillion recorded in the third quarter of 2007, or just before the start of the Great Recession.

Technology & Investment

The 2018 forecast shows that enterprise software will continue to exhibit strong growth, with worldwide software spending increasing by 9.5% in 2018 and by 8.4% in 2019 to reach a total of $421bn.

Overall, reports from Gartner forecasts a 4.5% increase in IT spending in 2018 compared with 2017, to reach $3.7tn. The forecast also shows a slight increase of 0.6% in data center spending in 2018 compared with 2017, but predicted a decline of 0.2% in 2019. Other reports indicate that 60% of medium sized companies and 70% of large companies say their IT budgets will increase in 2018.

The lion’s share of the budget bounty will be spent on hardware (31%), with software (26%), hosted/cloud-based services (21%), and managed services (15%) rounding out the tech haul this coming year.

In the hardware space, desktops (17%), laptops (15%), servers (13%), and networking (8%) fill up the biggest portion of IT budgets. Projected growth for PC’s is flat in 2018 and there is a marginal increase predicted in spending on mobile devices due to average selling price rises for these devices.  It was also noted that the impact of the iPhone 8 and iPhone X was minimal in 2017, as expected. However, it expected iOS shipments to grow by 9.1% in 2018.

Lastly, the availability of new SaaS products is encouraging new adoption and spending across many subcategories, such as financial management systems, human capital management and analytic applications. For leading companies, spending patterns are likely to shift towards projects in digital business, blockchain, the internet of things and progression from big data to algorithms to machine learning and artificial intelligence (AI).

Ultra’s Take

International markets were mixed to start off the year, but most continue to show steady progress. The Eurozone continues to display the strongest growth, and while China’s growth has slowed, it has demonstrated unwavering consistency in the last few months. U.S. regional indexes were all positive but growth slowed down significantly in most regions.

Moreover, according to select Fidelity portfolios, year to date returns in numerous industries have been similarly cautious, demonstrating modest growth so far in 2018. On the other hand, U.S. trade policy has multiple items up on the docket that could cause changes. The Trump administration has several upcoming deadlines on actions begun in 2017, including investigations on steel and aluminum, solar cells, and Chinese intellectual property and transfer issues. The administration also still has several finalized reports awaiting publication regarding the trade deficit, trade agreement implementation, and violations and reciprocal government procurement agreements.

If any of these reports are issued publicly, they may set the stage for further administration trade enforcement or negotiation activity. Furthermore, NAFTA negotiators hold December technical discussions in Washington, D.C., in advance of the sixth round of talks in Canada in January.

It seems we are off to a positive, yet demure start to 2018. Leading economies are exhibiting slower, but stable growth and the U.S. has followed a similar trend with many manufacturing companies excited for growth due to new tax laws. According to the IMF, growth is on the horizon, but we may have a while still to go before noting any spectacular upswings.

Melina Moussetis is a Business Consultant with Ultra Consultants. She helps Ultra’s manufacturing and distribution clients realize technology-driven business transformations that deliver measurable and impactful business and technology improvements. Her knowledge of industry best practices and ERP enables companies to realize their transformation goals. A graduate of Pepperdine University, she graduated summa cum laude with a Bachelors of Arts in Economics.

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