The Art of Forecasting Often

The Art of Forecasting Often

By Stephen Metzger, Ph.D., Managing Director, International Market Solutions

In the last issue of Industrial Utility Vehicle and Mobile Equipment, I presented a forecast of the economy with the usual admonition that, “the secret of good forecasting is to forecast often”—the off-the-cuff words of a well-known economist of the times, Otto Eckstein.  These words may have been “off-the-cuff”, but they stuck with me through many years and numerous business cycles.  With a new Administration about to engage the real world of economics and finance, it is certainly appropriate to catalog a few forecast updates at this point.

The Obama Stimulus Package is Pure Keynesian

President Obama came to Washington early on in January (then as President-elect) to present a stimulus package comprised of a wide range of infrastructure construction projects and a tax cut for those families whose incomes are below $200,000.  (For those at or above, a tax increase is highly likely, as the Bush tax cuts are phased out.)  The numbers total between $675-$775 billion, with approximately 40% of the package in the form of tax cuts.  (The tax cut, however, is more aptly described as a welfare transfer payment.)

Many of the details of the plan, as well as the final package, which may have gained passage by the time of publication, are not available at the moment.  Nevertheless, a few cautionary notes are in order with respect to the effectiveness of the package, as it has been formulated so far:

One-time injections of government spending and/or tax relief have been shown to be ineffective, as the stimulus wears off rapidly when the spending or tax reductions end.  FDR’s failure to resurrect the depression era economy is a clear case study of how government spending has little long-term impact on the overall economy.

If the spending package is phased in over an extended period, say four years or more, sustainable economic growth may result and be far less disruptive of private sector incentives, as well as better assuring more efficient resource allocation.  However, the current version of the package envisions a two-year payout.

Tax increases to those earning $200,000 or more are clearly counterproductive.  As these individuals and families do most of the saving in the economy, tax increases will clearly diminish that essential function and have a negative impact on growth, as well as the efficient allocation of resources. 

These taxpayers also pay a majority of the taxes in the economy, so that the damper on saving and investment will also result in less tax revenues.  (But who cares?  As Mr. Obama has already explained, it’s not a question of budgetary planning, but rather “fairness”; i.e., how much is collected is irrelevant; what’s important is whom the government is collecting from.)

The stimulus package is not, of course, the whole story related to the fiscal side of the economic policy.  Obama inherits from the Bush Administration a bipartisan bailout of the financial system to the tune of $750 billion.  The impact of this initiative is yet to be felt, but the idea behind the whole scheme was to encourage lending and extension of credit.  (Hey, didn’t we just experience that with calamitous repercussions?  Yeah, yeah, but this is different, so we are told.)  The bailout is now being extended to non-financial institutions to some extent, notably General Motors and Chrysler.

For its part, on the monetary side, the Fed has opened the floodgates of liquidity, not only with regard to targeting a record low federal funds rate, but taking in commercial paper as collateral and engaging in other lending activities well beyond the traditional discount window.  All in all, the Fed is acting less as a central bank and more as a, well, regular bank.  Let’s hope its balance sheet holds up better than, say, Wachovia’s.

Short Run vs. Long Run Implications for the IUV Industry

The prospects for an up tick in the economy are clearly improving, beginning in the second half of 2009.  This will be engendered by government spending in infrastructure construction, which, in turn, will improve credit standings and open up the taps on the wellspring of liquidity.  I believe the gains will, in the short term, be limited to sectors and geographic where the spending actually takes place.  It should also be noted that throwing a heap of money, in a short space of time, into certain sectors of the economy will also have a direct impact on the supply chain of materials and products of industries which are non-recipients of the stimulus.

Despite what I see as limited sectoral gains, the stimulus spending may well have a positive impact on the utility vehicle and materials handling sectors, as the construction market comprises a major segment for the industry.  Thus, the short run influence of the stimulus could be beneficial.

A year later, mid-2010.  The picture may be entirely different.  Why?  Two considerations:

The stimulus and bailout packages will have to be paid for.  How?  The only two ways in which the government meets new expenses:  Raising taxes and/or floating new bond issues.

High money supply growth has long-term, delayed impacts on the economy—in particular by putting upward pressure prices.

Together, these influences could result in an inflationary spiral—an outsized money supply pursuing a diminishing level, or growth, of output. 

Thus, both the short run and long run have considerable risks, with the inherent danger that “fixing” the short run will promote even greater risk of economic turmoil in the long run.

Short Term Outlook Favors Commercial/Industrial Segments

The overall economic picture is, obviously, a risky one, but would appear to favor the commercial and industrial segments of the industrial/utility vehicle market; that is, where the buyer is essentially a business, as opposed to a consumer or a consumer-oriented activity.  This relative weighting of the outlook is predicated on the stimulus spending being directed largely to infrastructure investment.

Consumers, on the other hand, are likely to continue to belt-tighten in the face of on-going layoffs and poor job prospects.  This will certainly impact leisure activities and the leisure and recreational industries.

Needed Product Improvements:  Making the Market

If the economic situation is grim at the moment and for the foreseeable future, that does not mean that the industrial utility vehicle industry does not hold considerable power to sustain its sales levels, or at least avoid a calamitous downturn, such as what has occurred in the automotive industry.  The primary strategies to accomplish this are two-fold:

Maintain the momentum toward on-going operational efficiencies.  Green technologies incorporating operational savings will be especially welcomed.  Labor saving technologies, perhaps not so popular, will nonetheless find ready buyers.

Continue to improve manned vehicle ergonomics, especially in consumer-oriented markets.

These strategies, even in periods of low sales growth, could lead to an increasing replacement market.  Continuing regulatory measures complement this expected trend. 

With regard to vehicle ergonomics, we see a great deal of attention being directed to ergonomics where they can be tied to improved efficiency.  In the consumer oriented market segment and in recreational vehicles, however, much more needs to be, and could be, done.  Producing an NEV, golf car, or outdoor transport vehicle, such as those used in resorts and campgrounds, with adequate seasonal versatility, would be very much welcomed by the market, in my view

If All Else Fails…

Despite chilling comparisons to Weimar Germany, when the Deutschmark was devalued catastrophically to make war reparations, the U.S. economy is likely to survive, but if all else fails, you can always invest in gold.  It’s worked in the past times of dire straits, and in this age where old lessons are likely to be relearned, this may be one of them.

About the Author:

Stephen Metzger PhD, is Senior Editorial Advisor to IUV Magazine and Managing Director of International Market Solutions, LLC, an international management consulting and market research firm. Mr. Metzger and his staff have produced four major market research studies on the small, task-oriented vehicle industry, beginning in 2000.