August 2020 Volume 2

COVER STORIES

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.

FIA MAGAZINE | AUGUST 2020 10