August 2020 Volume 2

Official Publication of the Forging Industry Association How the outcome of the November elections could impact the Road to EconomicRecovery page14

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PRESIDENT'S NOTE

President's Note

The Election Our FIA Lobby Firm has once again hit it out of the park with an excellent analysis of the upcoming election. We asked for an article analyzing likely future legislative outcomes depending on which party takes the White House, Senate, and House, and they have delivered in a big way. The firm addresses potential tax changes, Buy American legislation, trade, minimum wage, state and local government investment, infrastructure, and finally, costs, caveats, and consequences of various election results.Whatever the outcome, there has never been a more important time to get the FIA Lobby Day (Feb. 3-4) on your calendar. Reshoring The virus lockdown and supply-chain interruption has increased reshoring inquiries among the membership and within FIA’s RFQ system. FIA offered its membership a “Reshoring Now!” webinar (June 11), with more than 100 members participating. In preparation, I had a chance to get reacquainted with our reshoring presenter, andmy old friend, HarryMoser, founder of the Reshoring Initiative. Harry is an evangelist for American-made manufactured products. Harry asked me pointedly what our industry has done to help ourselves with automation, lean, and other productivity tools commonly found overseas. Having spent time in many types of manufacturing plants, I explained to Harry that job shops are generally challenged to employ automation across thousands of customer part numbers and lower or uncertain lot runs—not to mention the challenges decades-old presses pose for automation projects. He was having none of that. His point was: we have to automate to compete with the world—no excuses . Automation takes many forms, and I’ve witnessed some great applications in both our captive forging member shops as well as our traditional job shops. It can be done, and FIA will continue to offer workshops and plant tours showing examples and know-how. Take a look at the reshoring webinar recap article in this issue or listen to the webinar yourself on the FIA website. Sincerely, James R. Warren

The Virus, the Economy, the Election and Reshoring The Virus Face shields, gloves, protective clothing— sound familiar? The forging industry could teach the world something about protecting

oneself; we are the maestros of PPE. None of us would dream of operating a hammer press, steel making operation, or downstream forging operation without our PPE. I’m proud of this industry for how serious it takes safety. I could not have dreamed that our attitude toward safety would be so important to share with the world right now. In our plants, we partner with our forging teams to keep each other safe, but at the end of the day, in a private or public company, you wear the PPE or you’re out. Thank you to forging safety committees and company leaders for your PPE leadership. Essential businesses need to remain healthy, because you’re an essential business. I would like to think that all people are essential and that the collective public needs to take a page from our PPE playbook. Don’t be afraid to be that PPE leader as you go about your business away from the plant—we need you! This economy cannot afford to have you not be a full-time PPE leader. Here in the office, our CFO/COO has left no PPE stone unturned and has the staff and any members visiting or attending FIA training workshops fully protected. There are lots of analyses out there on this virus, but one that caught my eye is Goldman Sachs’s assertion that mask wearing could save the domestic economy from a 5% hit to GDP. As of this writing, retailers are stepping up mandatory mask wearing; NAM has announced its “Wear a Face Covering” campaign (www.nam. org), and we need to do our part. What was that saying . . . “It’s the economy, silly!” The Economy: ITR Economics Team is Back Alan’s team is back after an outstanding effort in the May issue of FIAMagazine, lauded by many members for its detailed exploration of COVID-19’s impact on our forging markets. For the August issue, his team has mapped out the most likely scenario for our markets in the coming quarters and years. With a 94.7% forecast accuracy record, Alan and team are worth following, and we’re pleased to have him back. Here, I’d like to offer a special thank you to Wozniak Industries for their sponsorship of this important research and article; please see their new ad on the back inside cover of this issue.

President and CEO Forging Industry Association

PUBLISHER James R. Warren jwarren@forging.org CONTRIBUTOR Angela Gibian angela@forging.org Editorial Staff

Board of Directors

Peter Campbell Joseph Cipriani John Coward Robert Dimitrieff Marcelo T. Garza

Ron K. Janzen Chelsea Lantto John Pale Greg Timmons Dan Ulven

OPERATIONS Joseph R. Boni joe@forging.org DESIGN Lorean Crowder lorean@forging.org

CHAIRMAN Mike Gill VICE CHAIRMAN Douglas McIntyre

FIA MAGAZINE | AUGUST 2020 1

CONTENTS

AUGUST 2020 | VOLUME 2

p. 21

p. 29

p. 42

DEPARTMENTS 1 President's Note 3 Cover Stories 19 Industry News & Calendar 29 Washington Update 34 Equipment & Technology 37 Materials 42 Operations & Management

PRESIDENT'S NOTE 1 President's Note COVER STORIES 3 Road to Economic Recovery 14 How the Outcome of the November Elections Could Impact the Road to Economic Recovery INDUSTRY NEWS & CALENDAR 19 Superior Die Set: Manufacturing Mold Bases for Ventilator Parts During COVID-19 Pandemic 21 Serving the Forging Industry for 75 Years 25 First High-Speed Open Die Forging Press with 3D-printed Hydraulic Manifold Block from SMS Group Goes Into Operation at Gustav Grimm Edelstahlwerk 26 FIA Upcoming Events WASHINGTON UPDATE 29 USMCA Conference Call: FIA Members Q&A EQUIPMENT & TECHNOLOGY 34 More US Success for Nutec Bickley in Steel Heat Treatment MATERIALS 37 Alloying Die Steels for Strength, Toughness and

Temper Resistance 40 Heat Treating Corner OPERATIONS & MANAGEMENT 42 What Does Work Look Like Now? 44 Could Your Organization Use a Competitive Advantage? ASSOCIATION NEWS 46 Congratulations to the 2019 FIA Safety Award Winners 49 New Monthly Market Intelligence Reports 50 Reshoring Now! COVID-19 Supply Chain Wake-up Call FORGING RESEARCH 53 Using the Ring Test to Measure Forging Friction Factor as a Function of Temperature and Lubrication Conditions 56 Additive Manufacturing Forging Die Fabrication 59 The Forging Foundation News 62 High Strength, High Toughness Microalloyed Steel Forgings Produced with Relaxed Forging Conditions and No Heat Treatment MEMBERS SPEAK 84 Proud to Serve as Your 2020-21 FIA Chairman

46 Association News 53 Forging Research 84 Members Speak

OfficialPublicationofthe Forging IndustryAssociation Howtheoutcomeofthe Novemberelections could impactthe Roadto EconomicRecovery page14

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August2020 forging.org

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RoadtoEconomicRecovery How long will it take and what’s the impacton the forging industryand its endmarkets? page3

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FIA Magazine (ISSN 2643-1254 (print) and ISSN 2643-1262 (online)) is published 4 times annually, May, August, November and February by the Forging Industry Association, 1111 Superior Ave., Suite 615, Cleveland, OH44114. Telephone: (216) 781-6260, Fax: (216) 781-0102. Print version distributed at no charge only to members of the Forging Industry Association. Digital version distributed at no charge to qualified individuals. Subscription requests available at www. forging.org. Printed in the U.S.A. Periodicals postage paid in Cleveland, OH and additional mailing offices. POSTMASTER: Send address changes to Forging Industry Association, 1111 Superior Ave., Suite 615, Cleveland, OH 44114. Copyright © 2020 by the Forging Industry Association in both printed and electronic formats. All rights reserved. The contents of this publication may not be reproduced in whole or part without the consent of the publisher. The publisher is not responsible for product claims and representations or for any statement made or opinion expressed herein. Data and information presented by the authors of specific articles are for informational purposes only and are not intended for use without independent, substantiating investigation on the part of potential users.

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Road to Economic Recovery How long will it take and what’s the impact on the forging industry and its end markets? By ITR Economics

Many tough lessons were learned in the first half of 2020, and vulnerabilities were laid bare. Navigating the global COVID-19 shutdowns required ingenuity, leadership, and focus. Although some industries prospered, the majority – including the forging industry – were negatively impacted. As we move into the second half of the year, the US is at least partially open for business, and monthly data has ticked up for the industrial and retail sectors. The economy is not out of the woods yet, but there are some encouraging signs. This leaves our clients wondering what the road to recovery will look like. Further, with fall planning season fast approaching, what decisions can firms make now to maximize their prospects and profits for 2021 and beyond?

In this article, we will walk you through these topics and outline our forecasts for the industrial sector and key forging end markets. We will aim to be fully transparent regarding the assumptions, reasoning, and risks related to our forecasts, so you can make the best and most fully informed decisions for your business. Where AreWe Now?The Latest Data Generally speaking, the macroeconomic data showed acute contraction in April, some modest improvement in May, and a stronger June.

Readers of our April article may recall that the forging industry has a particularly tight relationship to movements in US Industrial Production.Thus, it is not surprising that the above table is generally consistent with an FIAmember we interviewed, who described April

and May as the “bottom,” with June and July a bit better. The FIA data (available through May) supports the FIA member's statement regarding severe contraction in April and May:

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On an end-market basis, the oil and gas, automotive, and gear shop markets in particular struggled in April and May. Many markets in those months showed double-digit rates of decline relative to April and May of 2019. The only three markets to post positive

monthly rates-of-change in both April and May were Industrial OpenDie, PowerGen Rolled Ring, andMetal Other &Forge Shops Impression Die.

The June Jobs Report showed a 2.2 percentage point decline in the unemployment rate, to 11.1%. The broader, so-called “U-6” measure of the unemployment rate – which includes people who are employed part time for economic reasons and those marginally attached to the workforce – stood at 18.0%. Workers on temporary layoff decreased by 4.8million, while permanent job losses increased by 588 thousand. From an employment perspective, total nonfarm payroll employment increased by 4.8 million, more than 40% of which was due to leisure and hospitality industry employment increases. In recent Jobs Reports, the Census Bureau has grappled with a misclassification error due to confusion regarding the classification of people not working due to pandemic-related business closures. When answering the survey questions, some respondents selected “employed but absent from work due to ‘other reasons’” instead of “unemployed on temporary layoff.” If all respondents who had given the former answer were classified as unemployed, the unemployment rate for March, April, May, and June would have respectively been approximately one, five, three, and one percentage points higher. This represents an upper bound on the magnitude of the misclassification error and is not likely to be the actual increase. Expected Recovery Shapes by Letter and Symbol Describing the shape of the economic downturn and subsequent recovery by referring to the shape of a letter has been hotly debated in the news of late. Some foresee a “V” – sharp down, sharp up – while others expect a “U” – sharp down, elongated business cycle bottom, and eventual ascent. Others expect a “double-dip” recession, or a “W” in letter parlance, wherein there are two distinct downward movements within a singular business cycle. Some even describe the shape with symbols, from the check mark to the square root to the logo of a well-known purveyor of athletic apparel. The diversity of such shapes leaves business leaders wondering who they should trust and what they should plan for. To answer the first question, we humbly put forth our 70-plus-year track record as an independent forecasting firm, our 94.7% forecast accuracy at four quarters out, and our January 2006 publication noting that there would be business cycle weakness "showing up in the second half of 2008" and lasting "until about mid-2010." Furthermore, we exhorted our readers to be "daring in [their] preparation for the

downturn." As for what to expect, the answer depends on whether you are looking at the rates-of-change or the data trend. The Case for a Rate-of-Change “V” Our US Industrial Production forecast calls for a “V” (sharp descent followed by sharp ascent) in the rates-of-change but (spoiler alert) not in the data trend. We expect lows in the annual rate-of-change (most recent 12 months compared to those same months from the prior year) as well as in the annual average (average of the most recent 12 months) to form in early 2021; lows in the quarterly rate-of-change (most recent three months compared to same three months one year earlier) and the quarterly average (average of the most recent three months) are likely to form in the coming months. We would like to bring to your attention two factors that underpin this forecast: historical precedents and the historic magnitude of the stimulus. Historical Precedents Looking at US Industrial Production data back to the 1920s provides us with 32 prior business cycles for our analysis. If we exclude all business cycles with either no recession or milder recession than the current 4.2% decline in annual average relative to one year ago, that leaves us with 12 possible precedents. They are listed in the table below:

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There are two takeaways from this table: 1. The 16-month median duration of business cycle rise following the low for the 12 precedents is no different than the overall sample. In plain English: we should not expect the next business cycle rising trend to be especially long or especially short based on history. 2. These 12 precedents suggest we should expect a robust rate-of-change rising trend coming off the low of this cycle, as 9 of the 10 strongest rising trends in the broader set of 32 business cycles fall within our sample of a dozen precedents! Historic Magnitude of Stimulus and Impact on the Consumer’s Balance Sheet There are two additional factors at play that make us more confident that the eventual recovery in the US industrial sector will be robust on a rate-of-change basis: the scale of monetary stimulus that will be in play and the scale of the fiscal stimulus that will be in play. On the monetary side, a chart of the US Money Supply (M2 Deflated) readily illustrates the historic easing in monetary policy conducted by the Federal Reserve. Specifically, the June 2020 Money Supply was up 23.4% from June 2019, more than doubling the 10.8% that was the pre-pandemic record rate of expansion, set during the Great Recession.

These are remarkable figures during an economic downturn. Further, while the fact that consumers saved a lot of their income in April and May is not ideal from a present stimulus perspective, it is great news for the recovery trend. Put simply, saving today means spending tomorrow. Or, to be more accurate, our research shows that savings rates tend to have about a two-year lead time to movements in US Industrial Production:

The takeaway here is be prepared for a busy year in 2022. We anticipate 2021 will be the bridge/recovery year between the sharp recession of 2020 and a busy 2022.

The magnitude of the fiscal response is also significant. Back in late May, the San Francisco Federal Reserve reported that the magnitude of the discretionary stimulus in response to COVID-19 had, at 11.2% of Gross Domestic Product (GDP), already exceeded the Great Recession figure of 7.5%. Subsequent stimulus measures have since added to and will continue to add to the figure. The magnitude of the fiscal stimulus has been so massive that monthly US Personal Disposable Income in April was up a record 14.0% from 12 months earlier as consumers cashed their stimulus checks. At 8.2%, the May growth rate (latest available data) was only 0.1 percentage point below the pre-pandemic record growth rate:

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Drilling Down on Our US Industrial Production Outlook We would rather show you our US Industrial Production outlook than describe it to you in words. Here, then, is the rate-of-change we expect for US Industrial Production through 2023:

the second half of 2023 for Industrial Production to break above the pre-pandemic level of annual average activity. 5. That being said, it took 59 months after the Great Recession low for Industrial Production to fully return to its early-2008 peak. We expect full recovery will take about half as long this time around due to the relatively better position of the US consumer and the magnitude of the fiscal and monetary stimulus programs. What to Expect for GDP, Unemployment, and Inflation Our US Real Gross Domestic Product (GDP) outlook calls for rising GDP off a second-quarter low through at least 2023. GDP is expected to break above the pre-pandemic fourth-quarter-of-2019 high around mid-2021. We expect the Unemployment Rate to diminish through at least 2022, but be aware it will likely remain in double-digit territory into early next year. The quarterly US Producer Price Index is likely to form a low by year-end, with Prices moving higher in 2021 and into 2022. Risks to Our Outlook Downside Risks The primary downside risk to our US Industrial Production forecast is the potential for shutdowns to become more widespread, both in terms of the number of states impacted as well as in the breadth of industries shut down. Currently 10 of 50 states have walked back some of their economic reopening efforts. This list includes key states such as California, Texas and Florida. An additional dozen states, including Washington and the Carolinas, have put their reopening plans on hold.That leaves 28 states either in the process of reopening or fully reopened. The downside risk posed to our US Industrial Production forecast by a potential secondary set of widespread shutdowns is large in scale, but there are several factors that lead us to believe it is not probable: 1. First, the economic damage the first wave of shutdowns imposed on the US economy was historic, and the desire to avoid a second such damaging period is strong. 2. Second, advances in treatments for COVID-19 – even without a vaccine – have significantly reduced the mortality rate of those infected. 3. Third, states and corporations are taking additional steps to encourage social distancing. 4. Last, and perhaps most notably, the weekly and daily macroeconomic datasets we track show ascent or, at worst, some stalling in ascent, but no secondary descent. We encourage you to watch the leading indicators (fill out the form at www.itreconomics.com/free-economic-updates if you wish to receive free updates from us) particularly closely in the next few months to see if the tentative lows in the leading indicators continue to hold.

Here is what that same forecast looks like on a data trend basis:

We would like to draw your attention to the following key observations about the forecast: 1. The early-2021 rate-of-change low is similar in amplitude to the business cycle trough of the Great Recession. 2. At the low point, on a data trend (annual average) basis, we expect activity to be above the Great Recession nadir but well below the 2015-16 low. 3. The rate-of-change recovery will be robust. At the early-2022 business cycle peak, the Industrial Production annual growth rate will comfortably exceed that of the business cycle peak in the aftermath of the Great Recession (5.9%, set in early 2011). 4. The data trend recovery, while V-like at the very bottom of the cycle, is not a true V shape. We expect it will take until

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General Purpose Machinery Monthly US General Purpose Machinery Production ticked up 3.9% in June from the prior month. This is the second-strongest month-over-month rise in the nearly 50-year data history. However, monthly Production for each of the last three months was down more than 10% from the same month one year ago. We expect business cycle decline in Production to extend into early 2021. The severity of decline at the trough is likely to be around the severity of the 14.3% contraction in Production at the bottom of the 2001-02 business cycle downturn. Production activity levels are likely to be below the pre-pandemic level through at least 2021, but we do expect some robust rise in both the rates-of-change and the data trend coming out of the low. Given this market’s close relationship to US Industrial Production, we anticipate it is likely to be a middle-of-the-pack performer relative to the complete set of forging end markets analyzed in this article.

Upside Risks While we have baked the anticipated effects of the monetary and fiscal stimulus into the US Industrial Production forecast, we may be underestimating its long-run impact on the economy. Taken together, the unprecedented scope of the stimulus, the relative strength of the US consumer going into this recession, and the potential for additional stimulus pose an upside risk to our US Industrial Production forecast. We have learned over the years that a US consumer armed with deep pockets is a formidable force, in a good way. Do not underestimate the strength of the upcoming rising trend. Implications for Forging EndMarkets

The end-market table above illustrates the profound effect of the shutdowns and low oil prices on various forging end markets. The FIA member we interviewed generally corroborated the above figures. The member cited defense as a relative winner and oil and gas as a relative loser. The member did point out there were nascent signs of a turnaround in the construction machinery and mining (excluding oil and gas) markets. Below we provide an analysis of the latest trends in each of these end markets and where we expect the end markets to head in the coming quarters.

Definition: General purpose machinery manufacturing, including pumps and compressors, material handling equipment, elevators and moving stairways, conveyors, industrial trucks, power driven hand tool manufacturing, welding and soldering equipment, packaging machinery, fluid power manufacturing, etc. Index, 2012 = 100. Not seasonally adjusted. Source: Federal Reserve Board.

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ConstructionMachinery US Construction Machinery New Orders to date are faring better than they were in the 2013 or 2015 cycles. Monthly New Orders have contracted at double-digit rates for the last four months of data (February through May) relative to year-ago levels, but the contraction has not exceeded 20%, whereas in the 2013 and 2015 recessions we sawmultiplemonths withmore than 30%contraction. We expect annual New Orders to reach a low early next year, with milder severity of contraction than at the low points of the last three recessions (2013, 2015, and the Great Recession). Construction machinery used in the residential construction market is likely to be an area of relative opportunity in the coming years, as we expect growth in US Housing Starts in both 2021 and 2022. Very low mortgage rates combined with robust June rise in leading indicators such as the National Association of Home Builders’ Housing Market Index and in US Housing Permits bodes particularly well for the single-family side of the market moving into 2021. Target opportunities accordingly.

Production will decline into early 2021, with Great Recession esqe severity. While the recovery will be sharp, the low point we are calling for is so low that Production through year-end 2022 will remain well below the pre-pandemic level. If you are doing business in the auto industry, we recommend you take careful stock of whether your business is able to pivot to other markets and/or take steps to right-size your business. In the meantime, ensure you are continuously assessing your cash position – determine a set of financial thresholds that will trigger certain actions, such as layoffs, to enable your business to survive the downturn.

Definition: Passenger car and light-duty truck production (classes 1-3) in the US, Canada, and Mexico combined, including transplants. A passenger car is a road motor vehicle, other than a motorcycle, intended for the carriage of passengers and designed to seat no more than nine persons (including the driver). Source WardsAuto. Measured in millions of units, not seasonally adjusted. Oil and Gas While oil prices have recovered to around the $40-per-barrel price point, the severity of decline in the North American Rotary Rig Count has intensified. The 72.5% drop in the monthly Rig Count from June 2019 to June 2020 surpasses even the sharpest declines seen during the 2015-16 oil market collapse, or during any other Rig Count recession on record for that matter. The North American oil patch faces a tough road ahead given financial institutions’ wariness of extending credit to the beleaguered sector, oil prices still below the breakeven level for new wells, and global competition. We expect the Rig Count annual average and rates-of-change to reach lows in early 2021. However, the subsequent rising trend is unlikely to bring the Rig Count to the pre-pandemic level by the end of 2022.

Definition: New Orders for construction machinery in the United States. This industry comprises establishments primarily engaged in manufacturing construction machinery, surface mining machinery, and logging equipment. Source: US Census Bureau. NAICS Code: 33312. Measured in billions of dollars, not seasonally adjusted. Automotive – Light Vehicle The consumer side of the auto industry showed some resiliency in June, but only in the relative sense. US Light Vehicle Retail Sales for the month came in 26.9% below June of 2019, an improvement over the 45.8% decline in April relative to the year-ago level. On the production side, North America Light Vehicle Production in June was down 19.7% from one year ago after 84.1% and 99.2% declines in the respective prior two months. The unprecedented severity of decline in second-quarter Production led us to lower our already gloomy expectations for Production in the coming years, a notable downgrade since the publication of the April Forging Industry Association article. We expect annual

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street, and rapid transit cars and car equipment for operation on rails for freight and passenger service; and (3) manufacturing rail layers, ballast distributors, rail tamping equipment and other railway track maintenance equipment. Index, 2012 = 100. Not seasonally adjusted. Source: Federal Reserve Board. Heavy Truck Monthly US Heavy Duty Truck Production for June was down 58.4% from June 2019. This comes on the heels of a remarkable 92.6% contraction in April and 77.0% contraction in May relative to respective year-ago levels. Like the auto sector, the heavy truck market has been hit particularly hard by COVID-19 on both the supply (positive tests for COVID-19 at manufacturing facilities) and demand (reduced economic activity and associated impact on surface trade) side. We expect early-2021 lows for both annual average Production and the annual rate-of-change. The severity of the contraction will likely exceed the expectations we outlined in the April article and come in more on par with the Great Recession, which saw 37.9% contraction at the trough. Production is likely to be below the pre-pandemic level through at least the end of 2022.

Definition: Monthly count of drilling rigs actively exploring for or developing oil or natural gas in the United States, Canada, andMexico. Rigs are considered active when they are on location and turning to the right. The active rig count acts as a leading indicator of demand for products used in drilling, completing, producing and processing hydrocarbons. Source: Baker Hughes. Not seasonally adjusted. Rail Monthly US Railroad and Rolling Stock Production rose in May and June off a tentative April low. However, June Production was still 6.8% below the year-ago level. The macroeconomic leading indicators generally suggest that business cycle decline in Production will likely extend into about mid-next year. Weekly US Intermodal Rail Traffic is recovering, with the latest week down 1.7% from the same week one year ago as opposed to the roughly 20% week-over-week decline of late March and early April. This suggests that there may be some small green shoots forming in the industry, but we need more definitive movements in the data to say more about the future recovery trend.

Definition: This industry comprises establishments primarily engaged in (1) manufacturing heavy duty truck chassis and assembling complete heavy duty trucks, buses, heavy duty motor homes, and other special purpose heavy duty motor vehicles for highway use or (2) manufacturing heavy duty truck chassis only. Includes trucks weighing 14,000 pounds or more. Index, 2012 = 100. Not seasonally adjusted. Source: Federal Reserve Board. Defense US Defense Capital Goods New Orders represent one of the few markets for which the annual trend is above the year-ago level. Our clients and the FIA member we interviewed continue to note this sector as an area of opportunity. But for a brief period of decline around year-end 2021, we expect general growth in annual New Orders through at least 2022.

Definition: This industry comprises establishments primarily engaged in one or more of the following: (1) manufacturing and/or rebuilding locomotives, locomotive frames and parts; (2) manufacturing railroad,

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Tensions with Russia and China led the latter to announce plans to raise its defense spending by 6.6% in 2021. This is likely to spur US defense spending higher. Instability in the Middle East is also likely to drive demand for US-produced equipment, although low oil prices pose a funding risk. USDefense Expenditures for Ships are one area of opportunity; annual Expenditures were up 10.7% year over year in March (latest available data).

Definition: New Orders for nondefense aircraft and parts in the United States. This U.S. industry comprises establishments primarily engaged in one or more of the following: (1) manufacturing or assembling complete aircraft; (2) developing and making aircraft prototypes; (3) aircraft conversion (i.e., major modifications to systems); and (4) complete aircraft overhaul and rebuilding (i.e., periodic restoration of aircraft to original design specifications). Measured in billions of dollars, not seasonally adjusted. Source: US Census Bureau. Power Generation Monthly US Engines, Turbines, Generators, and Other Power Generating Equipment New Orders were down 16.2% in April and 11.0% in May versus the same months one year ago. Annual New Orders will decline into the middle of 2021. Year-over-year contraction at the bottom of this cycle is likely to approach or exceed that of the last three business cycle lows (2009, 2013, 2016), each of which came in at around 25% contraction at the trough. New Orders spending will subsequently rise through at least the end of 2022. Nascent business cycle rise in industrial, machinery, and utilities utilization rates bodes well for the 2021 recovery trend we are forecasting for New Orders. Power generation tends to be a very cyclical industry, with deep troughs and robust peaks. If possible, position your business to benefit from the upward momentum we expect in New Orders beginning around mid-2021 and extending into 2022.

Definition: New orders for defense capital goods in the United States. Includes defense small arms and ordnance manufacturing, defense communications equipment, defense search and navigation equipment, defense aircraft and parts, defense missiles and space vehicles and parts, and defense ship and boat building. Source: US Census Bureau. Measured in billions of dollars, not seasonally adjusted. Aerospace Monthly US Nondefense Aircraft and Parts New Orders were negative for each of the last three months through May. In other words, the value of cancelled orders exceeded the value of incoming orders for each of these months. Remarkably, and ominously, New Orders are negative on a year-to-date basis as well. This portends additional pain ahead for an already-suffering industry. We expect annual average US Civilian Aircraft Equipment Production to decline into early 2021, then rise through at least the end of 2022. Be prepared for the decline to be deep enough to break below the Great Recession lowpoint of activity and stay well below the pre-pandemic level through at least 2022. Be conservative in your projections and operations if you do a lot of business in the aerospace sector.

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Definition: United States industries that primarily engage in mining, mine site development, and beneficiating (i.e., preparing) metallic minerals and nonmetallic minerals, including coal. The term "mining" is used in the broad sense to include ore extraction, quarrying, and beneficiating (e.g., crushing, screening, washing, sizing, concentrating, and flotation), customarily done at the mine site. Source: Federal Reserve Board. NAICS Code: 212. Index, 2012 = 100, not seasonally adjusted. Ships Annual US Ships and Boats New Orders moved sharply lower off a February 2020 peak. New Orders for the month of May were down 45.4% from May of 2019. Our analysis suggests that the extremely volatile New Orders data is likely to be in a business cycle declining trend in at least the coming quarters. Nascent rate-of-change lows in the JP Morgan Global PMI and the OECD Plus Six Non-Member Economies Leading Indicator point to a first-half-of-2021 business cycle low for NewOrders.This would be consistent with our US Industrial Production outlook. China’s reopening, the associated surge in China's leading indicators, and upward movement in shipping costs are positive signals for the prospect of a 2021 recovery in NewOrders.

Definition: New orders in the United States for engines, turbines, power transmission equipment, generators, gears, motors, drives, speed changers, etc. Source: US Census Bureau. Measured in billions of dollars. Not seasonally adjusted. Mining (excluding oil and gas) Monthly US Mining Production (excluding oil and gas) in June was down 19.1% from the same month one year ago. This is the sharpest decline in Production since the early 1980s. The story does not apply across the board, however; the Coal Mining component declined 30+ percent in each of the last three months relative to one year ago, while the Metal Ore Mining component was down 1.1% in April, 1.9% in May, and 2.2% in June versus those respective months in 2019. The data suggests that being selective about your opportunities is key; the Gold and Silver Ore Mining component, for example, is expanding amid the backdrop of higher pricing for both of these commodities. Our overall outlook for the mining (excluding oil and gas) sector is for decline in the annual average into early 2021. Expect a double digit rate of decline at the trough (year-over-year basis). Recovery and rise will then extend through at least 2022, but we are unlikely to see activity levels return to the pre-pandemic level during this time.

Definition: New orders for ships and boats in the United States. Includes barges, cargo ships, container ships, dredges, drilling platforms, drydocks, ferry boats, fireboats, fishing boats, hyrofoils, naval ships, passenger ships, sailing ships, submarines, towboats, tugboats, yachts, dinghies, inflatable boats, motorboats, rowboats, hovercraft, etc. Source: US Census Bureau. Measured in billions of dollars. Not seasonally adjusted.

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COVER STORIES

Bridges US State and Local Bridge Construction totaled $23.4 billion during the 12 months through May, down 15.8% from one year ago. The most recent month of Construction was 25.7% below the same month one year earlier. Construction is likely to be on the back side of the business cycle in at least the coming quarters. House Democrats did pass an infrastructure bill with $300+ billion earmarked for road and bridge repairs. However, Democrats and Republicans remain far apart on what they wish to see in the specifics of any potential infrastructure bill. Our outlook for US State and Local Tax Revenue suggests that, barring the passage of an infrastructure bill, limited funding will likely hinder Construction into at least 2021, given the typical relationship between Revenue and Construction.

can think of using weekly or daily rates-of-change. Use that information to know when to start getting aggressive again, or when to batten down the hatches. 3. Stay informed. Follow the latest leading indicator signals. Feel free to reach out to us if you don’t already track a system of leading indicators. 4. Use the downturn productively to prepare for the rising trend. This requires optimism and foresight. We can help with the latter, by virtue of our forecasts, but most of this comes from you and your team. Consider the following as fodder for discussion among your management team: a. Do you have the right people on the bus? If not, where can you find them? b. Do you have any C-players you can shed to free up resources elsewhere? c. Is your production process state-of-the-art? d. Are you competitive in the industries and with the customers you wish to reach? e. Is your firm right-sized, given we expect it will take until the second half of 2023 for US Industrial Production to return to the pre-pandemic level of activity? PartingThoughts We will conclude with a quick aside that relates to the decisions you and your firm will face. There was one major part of US Industrial Production that went into the shutdowns expanding, expanded throughout the shutdowns, and is still expanding – high-tech manufacturing. There is a lesson in that for all manufacturers. In many ways, capital-intensive manufacturing is what we do best here in the United States. The FIA member we interviewed commented that “made in America means something again,” and remarked that while he had temporarily postponed a major capital investment in his firm to boost productivity, he did not cancel it altogether. Rather, he is postponing the investment until he sees more green shoots emerge in the recovery. Ultimately, the FIA member sees what many of ITR Economics’ clients see, and what we economists see as well – an opportunity amid the incredibly challenging market conditions wrought by the pandemic and low oil prices to create a better, more competitive company coming out the other side. Reshoring – utilizing North America’s natural advantages such as a highly talented workforce, close proximity to consumers, and access to cutting-edge capital equipment – is getting a shot in the arm as the pandemic has firms rethinking lengthy supply chains that prioritize price above all else. It is about price today, too, but also capabilities, reliability, service, and cleanliness. Position your firm to meet those demands, and you will likely find yourself busy again as the economy recovers next year and hums along come 2022. ■

Definition: State and local construction of bridges, including overhead crossings (vehicular or pedestrian) in the United States. Source: US Census Bureau. Measured in billions of dollars, not seasonally adjusted. What to Do Now We have laid out where we expect the US industrial sector, key forging end markets, and, by extension, the forging sector will head in the coming years. We have also articulated upside and downside risk scenarios for our outlook. What can you do with this information? ITR Economics President Alan Beaulieu shares the following pieces of advice as you prepare for the recovery trend: 1. Ask yourself what you wish you had done as you neared and approached the bottom of the Great Recession. Do that as we approach the early-2021 business cycle low expected for the industrial sector this cycle. 2. Know your business, your customers, and your industries. Some firms – due to either their position in the competitive landscape, customer base, industry mix, or combination thereof – will face more acute downside pressure in this cycle. Others will be relatively spared. Track your incoming orders, RFQs, and anything else you

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COVER STORIES

How the Outcome of the November Elections Could Impact the Road to Economic Recovery By Steve Haro, Mehlman Castagnetti Rosen & Thomas

COVID-19 has brought the world to its knees and dealt an economic blow that modern history has not seen since the Great Depression. The U.S. has been hit particularly hard and had to make the dramatic move of shutting down the economy in mid-March to slow the spread of the pandemic. In those opening days, the government moved quickly to enact policies to help both flatten the virus’s curve and minimize the economic pain brought on by the shutdown. As readers will recall, we went into greater detail in the last issue of the FIA Magazine on the massive legislative response to the pandemic. All told, the U.S. Congress passed three bills totaling $3 trillion. Those bills included policies like enhanced and extended unemployment benefits, a substantial small business loan/ grant program, a loan program for medium and large enterprises, money for vaccine research, and a large investment to help expand the country’s testing capacity, among others. Months later, it would seem that this robust investment has not been enough. As of this writing, the U.S. stands at an unemployment rate of 14%, though economists believe the real rate is much higher. 20 million folks are out of work, tens of thousands of small business have shut their doors, trillions in capital has been lost, borders are closed, schools don’t know how to reopen in the fall, and no one knows when we will be back to normal – or even what a new normal will look like. What is clear, though, is that any hope that the pandemic would pass quickly and we would then see a so-called “V” shaped economic recovery is not in the cards. What is also clear is that more will have to be done to prevent further economic collapse and put us on a path to recovery. But what does that entail? It is a tough and expensive question to answer. Further complicating this is the fact that all of this is happening in the midst of a heated election year, and politics has a way of impeding progress. “This is the most important election in our lifetime” is a phrase overused by many pundits, prognosticators, and other media types every four years when the United States elects a president. Honestly, it’s a tired, dramatic line that rarely matches the actual moment in which the country finds itself. Yes, any election involving the White House is one of historical importance, but that does not mean that every presidential election rises to the level of the “most important in our lifetime.”

That said, there have been very few presidential election years in our history to match the tumult and turmoil of 2020. As such, one can argue that the overused phrase is wholly appropriate this year given the state of the world, its underlying health – physically and economically – and the policy prescriptions that will be required to get us all back on the road to economic recovery. But the solutions to guiding us on that road depend on the outcomes of more than just who gets elected president. The make-up of Congress combined with the White House resident will shape the possible and probable policies. Is an infrastructure bill possible? Maybe under the scenario of a fully Democratic Congress, but more unlikely if Congress has a partisan split like it does now. Will trade policy – a major macroeconomic driver and a critical factor to the forging industry – lookmore isolationist or expansionist in 2021 and beyond? It is hard to see us changing from our current isolationist course if Donald Trump retains the White House and the Congress stays the way it currently is. These policy questions and many others are what we hope to explore in this article. But to properly paint that picture, we have to investigate how each question will fit under different electoral outcomes. So, let’s first provide a snapshot of the current political breakdown of the government and then discuss what the likely electoral outcomes could be come November 3rd. Once we’ve done that, we can dive into what an economic recovery policy roadmap could look like depending on who occupies the White House combined with who controls each chamber of Congress. The Current Political Makeup and Electoral Outlook Republican Donald Trump currently occupies the White House. At the time of this writing (mid-July), the national polling numbers show the president trailing former Vice President Joe Biden 51-40. State by state, which is what really matters since we elect a president by way of the Electoral College and not by popular vote, the polls are very close. When you go state by state, polling indicates that Biden would win enough states to garner 268 electoral votes, Trump would take 204, and four states are pure toss-ups (Arizona, Florida, North Carolina and Wisconsin – Trump, it should be noted, won all four of these states in 2016). It takes 270 electoral votes to win. Though one could deduce that Biden is headed to victory, there is plenty of time for these numbers to move; let’s not forget that in the summer of 2016, most folks predicted a comfortable win for Hillary Clinton. As such, though a Biden win is looking pretty likely, it should not be

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COVER STORIES

Tax Changes Joe Biden has been quite clear that if he became president he would look to roll back the 2018 corporate tax cuts from 21% to 28%while also going back to the top marginal rate of 39.6% for individuals (the current top marginal tax rate for individuals is 37%). He’d also look to make changes to the carried interest loophole as well as seek changes to the current capital gains rate (the current rate is 20% – Biden has not indicated what percentage rate he would seek, but speculation is that he and a Democratic Congress would want to match the capital gains rate to the top marginal individual rate). The economic stimulative rationale is to raise revenue to fund other recovery plans. But admittedly, this will be a difficult task in any electoral scenario, particularly if the 60-vote filibuster is still in place in the Senate. President Trumpwould like to put in place a payroll taxmoratorium. He proposed it earlier this year when Congress passed the first three recovery packages; it was not included. It is hard to see this payroll tax holiday becoming law under any electoral scenario. Congressional Republicans and Democrats have all rejected it outright. Buy American Both Trump and Biden have called for tighter “Buy American” laws, whose effect is designed to benefit U.S. manufacturing firms in the government procurement process. Trump has not said how he would specifically look to do this. Biden has been more specific, however, saying that he would invest $400 billion over four years in the government procurement process of American made goods and services while requiring that companies receiving procurement contracts pay workers “at least $15 per hour, provide paid leave, maintain fair overtime and scheduling practices, and guarantee a choice to join a union and bargain collectively.” The idea behind “Buy American” is obviously altruistic and serves to prop up American-based manufacturing companies who often face unfair competition from foreign actors whose products are priced lower. It seems like, no matter the make-up of Congress combined with either a Democratic or Republican president, a reworked Buy American policy in some form is imminently doable. However, it is important to note that the policies put in place around this would likely only apply to government procurement. It would be near impossible to institute a Buy American purchasing policy across the entire country. However, Buy American presents a great opportunity for American-based companies in the forging industry – but the devil will be in the details when it comes to country of origin content requirements and other factors. Trade Should either administration pursue the Buy American route, the short-term victim would be international trade, and even if Buy American isn’t enacted, it is difficult to see how trade could be properly used to stimulate our economy. Our country, and many others across the globe, have turned inward and soured on international trade. As folks have come to learn over the last three and a half years, the Trump administration has been reticent to seek

treated as a fait accompli. The United States Senate is currently controlled by Republicans, who hold a 53 to 47 majority. Every two years, a third of the Senate is on the ballot. This year, 35 senate seats are up for grabs: 12 Democratic seats and 23 Republican. To win control of the Senate, Democrats would need to pick up a minimum of three seats and the White House (the Vice President of the United States serves as President of the Senate and would therefore cast the 51st majority vote) or four seats to have an outright majority no matter who occupies the White House. Of those 35 seats on the ballot, there are competitive races occurring in Arizona, Colorado, Georgia (where both senate seats are on the ballot), Iowa, Maine, Michigan, Montana, North Carolina, and South Carolina. Of those 10 races, all but one are currently occupied by Republicans. Given the recent polling numbers, there is a very real possibility of Democrats winning four or more seats, enabling them to take control of the Senate. At the beginning of 2020, this was not a likely scenario, with many believing the Senate would stay in Republican hands. However, the Trump administration’s response to the pandemic has weakened the president’s overall approval numbers, which has had a trickledown effect on the approval numbers of congressional Republicans, allowing for the competitive map to widen and putting more races in play. The United States House of Representatives is currently in Democratic hands by a 233-199 majority (there are three vacancies). All 435 congressional seats are on the ballot this fall. To win the majority, Republicans will have to win a minimum of 19 more seats than they have now. Given where things stand today, this is not an easy lift. Traditionally, more Democrats vote in presidential election years than they do in congressional elections that do not include the president. In 2018 – an off presidential year – Democrats managed to capture 41 seats and win back the House. With more Democrats poised to vote in 2020, therefore, it is very hard to see Republicans taking back control of the House. Given all of this, there are eight electoral outcome scenarios. We list them all out below ranked by likelihood: White House Senate House Likelihood Scenario #1 Biden GOP Dem Likely Scenario #2 Biden Dem Dem Likely Scenario #3 Trump GOP Dem Likely Scenario #4 Trump Dem Dem Unlikely Scenario #5 Biden Dem GOP Highly Unlikely Scenario #6 Trump Dem GOP Highly Unlikely Scenario #7 Biden GOP GOP Highly Unlikely Scenario #8 Trump GOP GOP Highly Unlikely Let’s now take a look at how some of these likely electoral outcomes can affect what economic policies could be considered next year.

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