Eaton economist predicts slow growth in manufacturing

FAIRLAWN, Ohio—Prospects for global economic growth are bleak for 2016, according to a senior economist from Eaton Corp.

“When we look at the economy, we look at it from a manufacturing and machinery point of view,” said Jordan Vickers, an economist for Eaton. “Frankly, there's not a whole lot of good news. ... When you look at the global economy, growth around the world is disappointing.”

Vickers broke down the global economy into regions and sectors of the industry during an address at the Hose Manufacturers Conference, held Nov. 11-12 in Fairlawn, Ohio.

“In Europe, we see the central bank there lowering interest rates to negative rates—kind of unprecedented,” he added. “Meanwhile, here in the U.S., with the economy a little better than the rest of the world, our reserve is on the verge of raising interest rates, possibly as soon as December.”

That has created a lot of volatility in currency markets, he said. For example, the U.S. dollar has strengthened, which reduces competitiveness of U.S. exports. It also hurts large multinational companies, such as Eaton, that report revenues and profits in U.S. dollars.

The U.S. economy is faring a bit better than other geographic markets.

“Looking around the world in terms of other developed markets, growth is OK in the U.S. in terms of the overall economy,” Vickers said. “We've seen growth at 2.5 percent in the first three quarters, which is OK. It's not great, but we are growing.”

The oil and gas market has seen changes in the U.S. with a decrease in gasoline prices. “You see just the huge decline over the last 18 months,” he said. “The oil has gone from a pretty consistent $100 a barrel for the last five years, all the way down into the $40-50 range. And gasoline prices have followed as well.”

While this should be a positive for the U.S. economy because it is the biggest net importer of oil and the biggest consumer of oil, this has yet to be seen.

“The savings should be good for the economy,” he said. “We haven't seen it, that savings being spent by consumers yet. We think that over time, once they realize that gas prices are going to be low for a while ... they'll start to go out and spend that savings.”

Vickers referenced a few reasons why the U.S. is suffering economically. One, the 2009-15 growth period in the U.S. economy is “by far the weakest expansion in the last 50 years.”

He said there are a lot of reasons for that. First, the nation came out of the biggest financial collapse since the Great Depression, and coming out of the downturn people started paying down debt and saving rather than going out and spending.

Second, there has been no “game-changing innovation that has spurred productivity,” such as PCs and the Internet did in the 1990s and 2000s.

Lastly, Vickers said demographics are changing and as the U.S. gets an older population, younger generations have to support that, which hurts growth.

“However, because growth has been so weak in this recovery, there's a good chance that this recovery will last longer than most recoveries,” he added.

Vickers noted some positives in the U.S. market.

“The light vehicle market in the U.S. is very strong,” he said.

In the last two months, the U.S. sold at an annual rate of 18.1 million cars and light trucks, nearing all-time highs. If this rate continues in 2016, it will hit all-time highs. However, he expects the market to peak at around a rate of 18 million to 19 million light vehicles a year.

“There (are) a lot of trends going on in the economy where cars are lasting longer,” Vickers said. “People are driving less, and there's a move more toward urbanization, which means you need fewer cars as well.”

U.S. employment has been a positive, adding 237,000 jobs in October. He said the U.S. has consistently added between 180,000 and 190,000 jobs monthly.

Much of the weakness in the global economy stems from China because the Chinese economy is slowing down significantly. In the 2000s, China was at 15-17 percent annual growth, but according to the China Statistic Bureau, Vickers said it's down to about 5-6 percent.

“That has had significant ramifications on everything, such as global commodity prices,” he said. “And we don't really see a way in which the Chinese government can speed up growth in the near term without creating some type of bubble in the economy.”

While the China Statistic Bureau reported manufacturing is slowing, Vickers noted Eaton does not believe all the data and has created its own index of analyzing manufacturing in China.

“We think over the last few months, industrial production manufacturing activity in China actually contracted,” he said. “There's a lot of reasons why things are going the way they are in China.”

China is trying to move away from “a manufacturing export investment driven economy into a consumption middle-class economy,” Vickers said, but it is facing challenges with the shift.

The country created so much supply in terms of housing, manufacturing capacity and non-residential construction and infrastructure “that they don't really need all that,” he said. “So any industry that we sell into that's tied to the construction market is seeing massive declines.”

The Eaton economist projects a continuation of the trend toward slower growth in China, both for its overall economy and for manufacturing.

“And there is some small risk ... that you could have a significant collapse in China,” he said. “I don't want to scare everyone, but it is a small risk, and it's something that's continually on our radar.”

In the 2000s, China was one of four emerging markets known as BRIC. It and the three other countries—Brazil, Russia and India—were “real stalwarts” of the world for that time, but Vickers said it's a different story now.

In Russia, “Vladimir Putin doesn't really seem to care that his economy continues to decline,” he said.

Western economies have put sanctions on Russia, Vickers said, and its economy definitely is hurting because of it.

“And India is doing a little bit better, but there is still a lot of hope around fixing the government bureaucracy there,” he said. “All four are quite weak looking forward.”

He added that manufacturing in Brazil is almost below the bottom of the recession in 2009. “Brazil is really suffering from very high inflation, which has caused them to raise interest rates to double digit levels.”

When there is high inflation and double digit rates, people do not invest and will not spend. “Couple that with the fact that government is under a corruption scandal, and you can see why the economy there is in so much hurt,” Vickers said.

The upside for Brazil is that it is hosting the Olympics next year, so it should have some short-term consumption growth, but “we're not very positive on Brazil,” he added.

The European economy is showing modest activity, coming back slowly.

“The European economy went through a double dip recession, two recessions in the past six, seven years,” Vickers said. “And so they're kind of coming out of that, and they are showing some growth, but the manufacturing side of their economy is still susceptible to global manufacturing trends that we're seeing both in the U.S., China and other emerging markets. So we're seeing lackluster growth, but some growth.”

However, opposite of the U.S., a weak currency is helping Europe. “They're getting a lot of competitive advantage, especially in Germany, by having a weaker currency, and you see that in economic activity,” he said.

Exports are growing in the Eurozone 6-8 percent, he said, while imports are only growing 1-3 percent. “In total,” he said, “the European economy is doing OK. It's kind of put the issues of the fiscal problems, such as Greece, behind it.”

Looking to 2016, Vickers sees more of the same, with slow manufacturing activity, slow economic growth and an atmosphere where the upside likely will be modest but the downside potentially severe.

On the upside, the U.S. housing market could get stronger, which could boost manufacturing. Low energy and raw material costs also can help manufacturers.

On the downside are geopolitical tensions in the Middle East, Russia, Ukraine and elsewhere. While it hasn't hurt economic growth other than in Russia, Vickers said it is a possibility.

The vehicle market also is likely close to its peak in the U.S., so he said there's not a lot of upside. “And then we have a tremendous amount of declining activity both in mining and energy extraction, both in the U.S. and abroad,” he said.