DC Velocity - December 2018

QSounds like some challenges coming up. Could you tell us a bit more about what’s in store for U.S. businesses in particular?

AI think on the U.S. side, the biggest positive thing this year has been the tailwind from the corporate tax cuts and the ability to expense equipment. These things have been very positive.

But as I noted earlier, there are some dark clouds on the horizon. For one thing, we’ve seen rising wages. That has put pressure on company profit margins and raised the risk of overall inflation, leading the Fed to raise interest rates. That poses a downside risk for housing and autos, which in turn creates a risk of a slowing or even a modest contraction in business investment in the next couple of years.

Q How does that affect the outlook for the supply chain, logistics, and material handling sectors in both the short and long term?

AIn addition to the headline, which is the downside risk from the monetary policy and the trade wars, there is also the trend line, which includes things like the growth of e-commerce and decline of brick-and-mortar stores …. That is going to be very important for logistics, supply chain, warehousing, and material handling as you continue to shorten the supply chain and cut out the storefront.

That has been going on for a number of years, but now we’re really seeing e-commerce’s share of retail sales rising. And that share is going to continue to grow. So I think that is a long-term opportunity, even in a downturn, while some of the more industrially exposed parts of material handling could face downside risks. But those that are tied to the almost-evergreen-like future of e-commerce could continue to see their business expand even if things slow a little bit in the overall economy.

Q What are some of the key metrics you track in develop- ing your forecasts? A The most important things, really, for the overall econ- omy are the purchasing manager indexes (PMIs). In the U.S., it is the ISM’s (Institute for Supply Management) PMI.

In Europe, it is the IHS Markit Eurozone Manufacturing PMI, and in China, it is the Caixin Manufacturing PMI, which is a privately compiled survey of purchasing managers at small and medium-sized manufacturing companies. So those are the main data points I watch to track the global macro economy.

For the forecast we make for material handling, we watch a number of different things: the unemployment rate;

the ISM, of course; the nonmanufacturing index; and the 30-year Treasury rate. We watch what’s going on with the dollar, the stock market, and industrial production, among other factors.

Q In your keynote, you mentioned that some of the PMIs are compiled from information provided by purchasing managers for manufacturing companies on the amount of raw material they need to fill orders they’ve booked.

A That is right. So this is really interesting. The reason that the PMIs are important are these surveys. If you are in manufacturing, you’re purchasing more this month than last month. Why are you buying more? Well, you’re buying more because you have orders to fill. When your orders get filled, those finished goods become part of the GDP [gross domestic product], and this is why the [rising] purchasing indexes are a good indicator of economic growth.

[An index rating of] 50 is a break-even point, generally speaking. The Chinese number has recently fallen to 50, which means that in September 2018, manufacturing in China was at a standstill. So production has really slowed in recent months. While that is a low risk to the downside, it does present additional downside risk to commodity prices, oil prices, and things like that.

If we look at the U.S. and the eurozone, those indexes are well above 50. That is very good. Although the eurozone index slowed in recent months, the U.S. ISM PMI As for the material handling equipment sector, Prestige Economics, my firm, produces the MHI Business Activity Index, the MHI BAI, and that is really important for getting an idea, month over month, of what’s going on within the industry. We have seen some choppy moves in shipments and orders going into the second half of 2018. That’s a little bit disconcerting going into 2019 because the survey cohort includes respondents from both the more recession-proof e-commerce automation side and the more industrial parts of the business.

Q When it comes to forecasting, there is nothing like a lit- tle hype to stir things up and throw the projections off. Here, blockchain comes to mind. As a matter of fact, you have a book out called The Promise of Blockchain. Could you share some of the book’s main points with us?