August 2020 Volume 2

COVER STORIES

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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FIA MAGAZINE | AUGUST 2020