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Recession could be on 12- to 18-month horizon

Trade wars and protectionist measures wearing on overall economy and manufacturing sector.

The U.S. economy – which often serves as a beacon for the global economy – is currently in the midst of the longest expansionary period in the nation’s history, but the question that seems to be on everyone’s mind today is whether or not another recession is imminent. While there’s no reason for Association of Equipment Manufacturers (AEM) director of market intelligence Benjamin Duyck to suggest that one is on tap for this coming year, economic indicators lead him to believe that a recession could take place as soon as 2021.

“While we have a strong labor market and consumer spending, the biggest impediment to the market right now is the fear that consumer confidence might deteriorate,” Duyck said when speaking at AEM’s Thinking Forward event at the Milwaukee School of Engineering (MSOE) in Milwaukee, Wis. “Right now, global trade wars and strong protectionism are grinding on both the overall economy and the manufacturing sector. They are really having a negative impact.”

The consensus right now is that, because of the inversion of yield curves, which are widely considered to be a decent indicator, a recession could be on the horizon 12-18 months into the future.

AEM said global economic growth has slowed considerably this year. Gross domestic product growth currently sits at 2.3% but is expected to increase to 2.5% in the short term and 2.7% in the long run – the average growth rate for the last few decades.

Zeroing in on the U.S. economy, employment is strong, and consumers are spending right now. However, industrial production was down earlier this year (before rebounding as of late).

“It’s a little bit of a canary-in-the-coal-mine scenario, and while things have picked up a bit over the last several months, the decline in industrial production – along with a weakening of the ISM PMI – has raised questions regarding how well the U.S. economy is actually doing,” Duyck said.

Since the U.S. has experienced economic expansion for so long, Duyck said some manufacturers are looking at points or reversal and are acting more conservatively in this market as a result. However, he noted, real income wages have increased for U.S. workers over the last several months -- “and that’s always a good sign.”

Ag outlook

The agriculture industry saw significant growth for several years leading up to 2013 or 2014, primarily driven by an uptick in farmland values and commodity prices. However, as commodity prices increased, so did global production. When that occurs, Duyck said, prices have nowhere to go but down.

“The commodity prices increased because of natural events, and since prices were higher, other countries began to produce more because it’s so profitable. All of a sudden, the natural event is no longer a factor, and production levels in the U.S. are still high,” Duyck explained. “There’s overproduction and commodity prices fell.”

“At this point, it just comes down to production outrunning demand, and it’s important to remember that, in economics, without too much interference from the government, that will automatically correct itself,” Duyck said.

According to Duyck, the biggest driver behind the agriculture market is farm income. Net cash farm income is expected to increase about 7.3% in 2019. Adjusted for inflation, he said, it’s an increase of about 5.4% compared to the last two decades. 

"We need to start thinking about what happened with the major jump from 2011 through 2013 as a bubble," Duyck said. "There's every reason to believe that our current scenario will continue.”

AEM noted that 2019 has been a solid year for the economy overall as well as for the agriculture and construction sectors. A number of factors – global trade wars and protectionism being chief among them – are leading to increased concern that a recession is right around the corner. While that likely isn’t the case, it’s not unreasonable to suggest that one may arrive by 2021.

Source: Association of Equipment Manufacturers.

TAGS: Business
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