The state of the economy can often dictate how much growth certain industries are experiencing which can influence their business decisions and modernization requirements. December’s state of the economy report from Ultra Consultants, with special focus on U.S. manufacturing and distribution, includes facts and figures captured in November, as well as details about events that have major sway over the economy.
December: Holiday Spending brings Economic Good Cheer
Among advanced economies, domestic demand and output grew faster in the first half of 2017 than in the second half of 2016. In the United States, weakness in consumption in the first quarter turned out to be temporary, while business investment continued to strengthen, partly reflecting a recovery in the energy sector. In the euro area and Japan, stronger private consumption, investment, and external demand bolstered overall growth momentum in the first half of the year. Growth in most of the other advanced economies, with the notable exception of the United Kingdom, picked up in the first half of 2017 from its pace in the second half of 2016, with both domestic and external demand contributing.
The pickup in global activity that started in 2016 gathered steam in the first half of 2017, reflecting firmer domestic demand growth in advanced economies and China and improved performance in other large emerging market economies. The continued recovery in global investment spurred stronger manufacturing activity. World trade growth moderated in the second quarter after expanding very briskly in the first. Global purchasing manager indices and other high-frequency indicators for July and August suggest that global growth momentum continued into the third quarter of 2017
Europe continued to be a bright spot. The IHS Markit Eurozone Manufacturing PMI increased to 60.1 in November, its best reading since April 2000. The pace of hiring grew once again at an all-time high. Multiyear highs occurred in a number of European markets, including Austria, France, Germany, Ireland, Italy, Spain and the United Kingdom. Real GDP in the Eurozone increased 2.6% year-over-year in the third quarter, the quickest pace since the first quarter of 2011, and industrial production has increased a rather robust 3.7% over the past 12 months. The unemployment rate fell in October to 8.8%, its lowest level since November 2008, and economic sentiment increased in November to its highest point since October 2000.
The Caixin China General Manufacturing PMI edged down from 51.0 in October to 50.8 in November, its slowest pace since June. The underlying data were mixed but mostly lower. The Chinese economy grew 6.8% year-over-year in the third quarter. In addition, industrial production has decelerated somewhat over the past few months, down from 6.6% year-over-year in September, 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 has eased to 10.2% in November.
Mixed News in North America:
In Canada, 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. Meanwhile, the unemployment rate fell to 5.9% in November, its lowest level since February 2008. Manufacturers added 30,400 workers for the month, with year-over-year growth of 91,200 employees.
The IHS Markit Mexico Manufacturing PMI increased from 49.2 in October to 52.4 in November. The rebound in activity from the first decline since July 2013 included improvements for new orders, output, exports and employment. In addition, manufacturers in Mexico remained very upbeat about future output, which should bode well for strong gains in production over the next six months. However, Mexico also continued to underperform. Along those lines, 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.
In the U.S., manufacturing production rose for the third straight month in November, up 0.2%. This extended a 1.4% gain in October, which jumped significantly on rebounds related to recent hurricanes. The data have seesawed from month to month since the spring, but it is hoped the sector can build from recent momentum. Indeed, manufacturing production has risen 2.4% over the past 12 months, matching the rate in October, with both being the best year-over-year pace since July 2014. In a similar manner, manufacturing capacity utilization inched up from 76.3% in October to 76.4% in November, a reading not seen since May 2008.
Meanwhile, similar to manufacturing, total industrial production, which also includes mining and utilities, also increased 0.2% in November, or 3.4% over the past 12 months, its best year-over-year pace in three years. In addition, the data indicate continued strength in the labor market. Full-time employment is expected to rise 2.6% over the next year, up from 2.2% in the previous survey. This is just shy of the 2.7% pace recorded in June, which was the fastest rate in the survey’s history. Nearly 62% of manufacturers anticipate an increase in employment over the next year, with 22.8% predicting a jump of at least 5%. Manufacturers are optimistic about the chance that long-sought-after comprehensive business tax reform will be enacted into law. Just more than three-quarters of respondents said they supported the current tax proposals being debated in Congress, with 16.4% unsure.
Technology & Investment (2017 Report)
Most companies across the globe will be keeping IT budgets steady, or giving them a boost over the next 12 months. In fact, close to half of companies (44%) expect budgets to increase while 43% anticipate no change at all. Only 11% expect to see their budgets decrease. Companies that expect budgetary gains foresee a 19% jump in IT budgets, on average. Why such a positive outlook? An ever-increasing dependence on technology in the workplace could be one explanation for these sudden favorable winds. More IT departments will swell in size than shrink. The larger companies forecast the biggest boost in staffing. More than 60% of companies with 500+ employees expect to increase IT staff while 70% of large enterprises (5000+) report they’ll hire more IT pros in 2018.
Technology trends have been focusing on certain challenges to increase their growth. First of all, many companies are concentrating on deeper workflow automation. In order to drive deeper organizational adoption of digitalization and the resulting improved efficiency, many CIOs plan to shift new investment to building apps that automate workflows and coordinate resources around them. Investors should look to companies that plug into those goals.
Engaging in secular and cyclical security obstacles will be a differentiating factor for technology companies moving forward as well. Software companies that are positioned to consolidate various functions into broader security platforms to drive more effective and efficient spending on cybersecurity, as well as vendors who can secure new threat vectors, such as cloud and mobile, to perform better than the overall group.
Finally, there is a refocus effort on small and midsized businesses, which are still a well under-penetrated market opportunity for software. Software providers that can help customers in this niche market solve their business challenges with easy-to-use, but effective solutions—and efficient distribution models—could sustain outsized growth in the software sector.
Ultra’s Take:
International markets were more mixed this month but most continue to show steady progress. The Eurozone also continues to display the strongest growth and China continues to demonstrate its economic strength and stability. U.S. regional indexes were mixed this past month with some regions experiencing strong growth from the holiday season. Moreover, according to select Fidelity portfolios, year to date returns in numerous industries have been overwhelmingly positive from last month, which shows that most large companies are still stable and growing despite any uncertainty. On the other hand, trade policy is in flux with the fifth round of NAFTA negotiations underway, putting consistent strain on the U.S. relationship with its bordering countries. The U.S. has also been conducting consistent commerce talks with countries around the world but so far nothing tangible has come of these discussions. Even though numbers were a little bit demure compared to last month, it seems that despite any policy uncertainty and natural disasters that caused instability in 2017 did not truly permeate the markets and most everyone can count this past year as a year of solid economic growth.
