At the end of a year, we may be tempted to look back and reflect on the past. When looking back on 2013, we see a year of steady but mild economic growth and a government shutdown that accomplished nothing except establishing a new low in our opinion of our elected leaders. But we at ITR Economics believe as you do, that leaders look towards the future. Ignore the banter of politicians and headlines and focus on creating opportunity for your business.
We see the current expansion in the U.S. economy continuing into approximately mid-2014, but as we look at our leading economic indicators, we see weakness on the horizon for the latter portion of the year as consumers face the headwinds of higher taxes and both businesses and consumers face the burden of higher health care costs. While we expect the economy to contract slightly by the end of 2014, we view this as more of a pothole and not a cliff. This downturn will be nothing like what we saw in 2008-2009, so use it to strengthen your business and prepare for the growth that lies beyond.
To some extent the weakness has already started to develop. Housing construction, which posted strong growth over the last year, has begun to slow quite noticeably. As mortgage rates head higher in 2014, housing construction and sales will slow further. Retail sales will also weaken next year. Currently, retail sales are at record highs, fueled by automobile sales, online purchases and home improvement store sales. But as interest rates rise next year, auto purchases will slow, and home improvement sales will slow as the housing market contracts.
Business-to-business activity, as measured by nondefense capital goods orders, is rising at an accelerated pace. However, growth has not been even across the sector. Transportation and aircraft parts are growing at a slower pace than last year, but orders for construction, industrial and metalworking machinery are seeing strong growth. Expect business-to-business activity to weaken in the latter half of 2014 as macroeconomic activity softens.
This is not to say there will not be opportunity to grow your business in 2014. Unlike housing construction, nonresidential construction will grow in 2014. Office construction will be driven by data centers and the need to store data in the cloud, while school and hospital construction will pick up following years of decline. So too will construction of factories, led by companies such as Apple Inc. bringing manufacturing jobs back to the U.S. In addition, the U.S. has become the world's leader in shale gas production. This boom will continue, creating jobs and cheaper domestically produced energy.
Globally, Europe's 28-nation economy is mired in a slow and uneven recovery; Japan is rising out of its third recession in five years; and China's economy has started to accelerate. The downturn we foresee in 2014 will spread abroad, but this is the time to look deeper and find an area to expand your business. Look towards Eastern Europe, where manufacturing growth has led to a sustainable economic recovery. Here in North America, look to Mexico, where reforms to labor and energy markets make the country an attractive spot to expand, yet maintain direct access to the U.S. market.
|Stay up-to-date with economic news and trends on Alan Beaulieu's Make Your Move blog at iw.com/blog/make-your-move.|
Dwelling on the past and on a softer 2014 will lead some decision-makers to a too-conservative stance. Use the coming year to strengthen your sales team and procedures for increasing activity in 2015. This is a great time to hire key people to generate new business and streamline your operations or to upgrade your CRM or ERP to keep up with the coming pressures. If you haven't already done so, we suggest that you fund and actively pursue a program to train current and potential employees to enhance their technological prowess and to compensate for the lack of skilled labor in the marketplace. 2014 is a good time to get aggressive in preparation for better times ahead.
Contributing Editor Alan Beaulieu is an economist and president of ITR (itreconomics.com). He is co-author, with his brother Brian, of "Make Your Move," a book on spotting business-cycle trends.