Chilling Uncertainty

While growth is expected to continue at least in the short term, the U.S. economy may finally be shifting into neutral — and supply management organizations must be prepared for ‘terra incognita.’

By Dan Zeiger

In early December, Timothy R. Fiore, CPSM, C.P.M, was on a conference call with reporters, discussing a just-released Manufacturing ISM® Report On Business® that revealed a fourth consecutive month of contraction for U.S. factories.

The Chair of the Institute for Supply Management® Manufacturing Business Survey Committee took questions on the state of the manufacturing sector, one of which could apply to the overall economy: “The big picture sounds like there was not much progress (from the previous month), but things are not much worse. Is that accurate?”

Fiore’s answer focused on the PMI® data: He said factory-activity conditions dictate a composite index reading between 48 percent and 52 percent for the immediate future. That PMI® range corresponds to annualized real gross domestic product (GDP) growth of 1.5 percent to 2.5 percent. For a manufacturing sector that was churning out PMI® readings at or near 60 percent for much of 2018 — and an overall economy said to be in cruise control just two years ago — that’s not much worse on a month-to-month basis, but also not much progress.

The good news: No economy-crashing dynamics — such as the dot-com and subprime real-estate bubble bursts that precipitated the last two recessions — appear to be hiding under the waterline. However, the juice the economy received from the Tax Cuts and Jobs Act of 2017 has worn off. Economies of Europe, Asia and Latin America are slowing, and global trade uncertainty continues. Amid decreasing demand, many businesses, particularly in the manufacturing sector, are evaluating their staffing levels. And business investment is expected to slow, contrary to what normally happens in in a presidential election year.

The U.S. economy remains in its longest expansion (127 consecutive months) in history. However, is it frozen in place? “There was some cooling as the year came to an end,” says Robert A. Dye, Ph.D., chief economist at Comerica Bank in Dallas, who projects 2-percent GDP growth this year, down from 2.3 percent in 2019. “The fourth-quarter growth forecast was weak, and that sets up for a likely weaker 2020. It’s a challenging time for the U.S. economy. Even though momentum remains positive, we’re getting close to what I would say is stall speed.”

In its October World Economic Outlook report, the International Monetary Fund (IMF) projected 2.1-percent growth in the U.S. economy this year. Its forecast for the world economy was more optimistic — a 3.4-percent growth projection. However, IMF chief economist Gita Gopinath, Ph.D., wrote in the Outlook’s foreword: “Downside risks to the outlook are elevated. Trade barriers and heightened geopolitical tensions, including Brexit-related risks, could further disrupt supply chains and hamper confidence, investment and growth.”

The GDP growth projections are a sign of economic resilience, especially amid persistent expectations of a recession by the end of this year. However, it’s still an environment of “terra incognita” — unknown territory — says Koray Kose, senior director analyst at Gartner, the Stamford, Connecticut-based global business research and advisory firm. Accordingly, he says, 2020 should be the year that supply management organizations increase their risk-capacity appetites.

“Waiting for something to happen is a really bad situation to be in,” Kose says. “You should be looking for those triggers of an (economic) deterioration, but it’s also an opportunity to understand the supply chain deeper, going beyond (primary) partnerships and into the second and third tiers. If you have a high risk capacity through strong funding, strong routes and good relationships, then you can manage where other organizations can’t. That’s what it means to have a good risk appetite, which is as important as a strategic vision.”

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