Ask an Economist

Oct. 3, 2007
The first questions that people are asking right now are, “Do we face a near-recession in the near-future, or is talk of a recession (partly due to housing pressures) overblown? Will business spending slow by the end of the year?”

The U.S. economy is in better shape than most people think it is. The downturn in the housing market delivered a significant body blow, but we have largely absorbed that, at least for now. It is not hard to imagine that in past decades, this would have sent us into a recession. But this time, we have “taken the hit” and are continuing to grow, albeit at a noticeably slower pace. To put this in context, the decline in housing starts over the last 16 months is the steepest in the post-World War II period, and yet gross domestic product (GDP) and Industrial Production are continuing to grow. That is amazing staying power.

Business spending, as evidenced by Nondefense Capital Goods New Orders (without aircraft) is more than just slowing down; New Orders for the last 12 months are flat at $750.4 billion. New Orders for the last quarter are a disappointing 1.7 percent below this time last year. We are anticipating an increase in the New Orders figures later this year and into 2008. A pick-up in activity is consistent with healthy levels of profitability and the amount of cash on hand in U.S. businesses. Both of these factors, profits and cash, are likely to be diminishing in the latter half of 2008 and on into 2009. The New Orders trend will likely follow suit.

The next question we are asked concerns the “credit crunch.” Is this something that can filter down to businesses—and in turn affect spending and the current economy?

Business As Usual

There has been plenty of talk about a “credit crunch” and even some occasional use of the term “liquidity crisis.” First, let’s make sure everyone realizes that this is not a liquidity crisis. When the news broke and the “credit crunch” was first announced, there was a flight to safety to U.S. government bonds. If there had been a true liquidity crisis, there would have been no money to move to bonds. The perceived liquidity crisis pertained to the inability to refinance questionable loans in the financial sector. The credit crunch is probably an overstatement of what is in reality a swing back to normal credit conditions. The fact that lenders are now requiring deposits coupled with income documentations does not measure up to a “crunch,” but in our minds would be best called “good business.”

What should you do? Be proactive. This would be a great time to take action in preparation for a rough 2009-10. Business leaders should take a hard look at their balance sheets and concentrate on having enough cash on hand to weather the economic storm of 2009-10. Debt reduction should also be considered. Watch long-term capital expenditures and check the impulse to add to fixed costs. Lastly, but perhaps most importantly, this is the time to develop a plan for what’s next. By that, we mean that leaders need to prepare to take their businesses into areas that will be less impacted by a downturn or entirely immune to a global slowdown. Missionary efforts into new markets or services should begin now. These are called “Management Objectives” at the Institute for Trend Research. After identifying where you are in the business cycle, implementation of these Management Objectives is key to maintaining profitability now and preparing for enhanced profitability later. 

Alan Beaulieu, [email protected], is Senior   Analyst, an economist and a Principal with the   Institute for Trend Research, in Concord, N.H.

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