As the president of Prestige Economics, an Austin, Texas-based financial market research and consulting firm, Jason Schenker acts as a sort of professional fortune-teller. By digging deep into government reports, federal statistics, and policy papers, Schenker charts the numbers that drive our stock prices, trading trends, interest rates, and economic booms ... or recessions.
Schenker also has a knack for bringing these dull spreadsheets to life, pointing out the specific figures that can move markets and pulling back the curtain on the way it works. His predictions hit their target so often that the firm is consistently ranked as one of the most accurate economic forecasters in the world. He also runs The Futurist Institute, which trains analysts to predict the future based on current trends and view business opportunities, risk management, markets, and the economy from a long-term perspective.
DC Velocity Senior News Editor Ben Ames caught up with Schenker in October at MHI's 2018 Conference and Executive Summit in Orlando, Fla., just after he delivered a keynote address about the economic prospects for the material handling, logistics, and supply chain sectors. The following is an edited version of his remarks; for the full version of the interview, check out the video on our website.
Q: What are some of the main themes that you've been sharing with attendees here at the MHI show?
A: Well, the main theme is that 2018 was a good year, and we see 2019 as a little bit slower. There are rising downside risks from tighter monetary policy and the ongoing trade war between the U.S. and China, and there are even more risks to the downside for 2020.
Q: Sounds like some challenges coming up. Could you tell us a bit more about what's in store for U.S. businesses in particular?
A: I 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?
A: In 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 developing your forecasts?
A: The most important things, really, for the overall economy 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 remains very strong. So these numbers are really important to watch because they provide a leading indicator of what's going to happen next.
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 little 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?
A: Sure. The full title is The Promise of Blockchain: Hope and Hype for an Emerging Disruptive Technology. So it is about the hope and the hype. The hype is really tied to what happened with bitcoin and other cryptocurrencies—the ability to move this money backed by nothing, supported by no one. It became a very big bubble that had implications beyond financial markets. There were nefarious bad actors and third parties using the money to do different illegal things, politically subversive things, and this is a really big problem. Regulators started clamping down at the end of last year and through this year, and that is likely to continue. So cryptos that want to work outside of the banking system, outside of regulation, are likely to wither on the vine and come under further pressure, whereas those that work within the SWIFT (Society for Worldwide Interbank Financial Telecommunications) banking system [a secure network used by financial institutions to exchange information about transactions] will have more potential to continue. But the hype bubble has very likely burst.
Now, in stark contrast to the bubble of the anonymous, subversive, and mobster-ish use of some of the cryptocurrencies, there is also the hope for blockchain. And that's as a factor for reducing the risk of a "central point of failure," something that in a supply chain is critical. It's also something that can add transparency of transactions, which is really, really good.
The Futurist Institute recently did an analysis that looked at different industries and their use cases. Freight transportation and logistics stood out as one of the areas that could most benefit from the use of blockchain because it involves high-volume transactions, you can have a closed blockchain [one that's restricted to parties that have been invited], and you can share more detail. That is really important because sometimes in the supply chain, you've got conflict minerals or chemicals restrictions or you might need to show the chain of custody. These are really important things to do... and that is the promise of it. That is the hope, against the hype that we see on the crypto side.
To put it in more simplistic terms, what this means is it's a more detailed kind of accounting software. It is database technology. It's actually not that exciting, right? In general, this is like, you know, when Lotus 123 was first introduced—that was a huge deal for folks in accounting. This is like SAP [a much more sophisticated type of enterprise software]—this level of data enhancing the richness, enhancing the transparency. That is all very good, but the hype makes it seem like a lot more than that, and I think we are moving now from a hype phase into implementation. I think what we will find is that the implementation, although useful in some cases, is not as crazy or as interesting as the hype has led some to believe.
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