ARC Advisory Group develops a broad range of technology market studies – including a portfolio of logistics software and automation studies. We utilize a number of inputs for our study forecasts including past market growth rates, segment growth, feedback from market participants, technology factors, and global macroeconomic factors. Occasionally we need to incorporate the impact from factors that elevate the level of uncertainty within the market. The global macroeconomic downturn of 2009 is the most prominent example of such a factor. And the recent coronavirus outbreak is another example. ARC is currently developing the warehouse management systems (WMS) study, the global trade compliance (GTC) study, and the transportation management systems (TMS) study. My colleagues and I are currently faced with incorporating the business impact of the coronavirus outbreak into our forecasts. This has to be done with limited information about a rapidly developing situation. I am going to take this opportunity to discuss some inputs that we utilize to address the additional uncertainty from such situations and how they can provide valuable perspective to our forecast process.
US GDP and National Income and Product Accounts (NIPA)
During the global financial crisis, we looked at the historical relationship between the periodic changes in GDP and the more narrowly defined NIPA categories that relate to ARC markets. For example, the statistical relationship between US GDP and equipment spending and software spending provided the historical relationship between change in GDP and the change in these private fixed investment categories. It revealed the degree to which these segments are more variable than the overall economy. This data proved useful and insightful when applying GDP forecasts and analyzing the likely downturn that would occur in these private investment categories. Of course, these NIPA accounts are for the US and are much broader than ARC’s markets, but still provide better context than GDP forecasts.
ARC’s Modeling of Temporary Economic Shocks
My European colleagues Florian Güldner and David Humphrey conducted a thorough scenario analysis on the potential impact of the corona virus on automation markets and supply chains. Their model uses historical capital expenditure data of public companies broken down by end-user industry along with the impact of past regional economic shocks such as the Tokyo earthquake, Hurricane Katrina, the SARS virus outbreak, and other events. A range of scenarios were analyzed to provide a range of impacts across time horizons. This analysis showed which industries tend to have large swings in capital expenditures and the behavior of capital expenditures subsequent to economic shock. The scenarios result in a broad range of outcomes, from no downturn to a substantial double-digit reduction in capital expenditures.
Of course, the difficulty of forecasting the impact of the corona virus on individual technology markets is compounded by the lack of similar events to use as a guide and the variation in the mechanisms by which these events exert influence on the given markets. For example, the corona virus exerts influence on supply side factors, such as production (worker availability), and demand side factors, such as purchasing activity (for example, reduction in airline travel or conference attendance). Also, cautionary measures taken by governments and businesses are responsible for much of the current reduction in activity. Businesses activity is likely to rebound quickly from self-imposed restrictions, but the extent of these restrictions is difficult to forecast. Furthermore, ARC’s logistics industry market studies capture multiple revenue types that will be impacted differently. For example, I foresee implementation services being impacted more than maintenance fees or software-as-a-service (SaaS). So, the revenue stream make-up of each market will contribute to the impact of the mechanisms that are curbing business activity.
My statistics and forecasting professor used to say “don’t worry about being right or wrong with forecasting. I’ll save you the suspense, you will be wrong. It’s more a matter of how close to correct your forecast will be.” I want to communicate to Logistics Viewpoints readers that ARC Advisory Group is considering the factors at play. And I believe that going through the thought process and exercise is valuable in itself.