As we come to the end of 2011, most of our clients are of the opinion that this particular year can’t end too soon. Though there are some “signs of life” in a number of sectors of the economy, and some of our clients are beginning to see at least some return of economic growth, the year has produced wide variations in month to month activity, demand is still uncertain, and the overall economic climate remains extremely tenuous. It’s true that 2011 was, for most clients, better than 2010, but that’s definitely a low hurdle to compare with. In fact, I think the old saying that fits best here is, “…damning with faint praise.” Faint indeed.
The real question, however, is whether or not businesses in the industries we serve can expect 2012 to be much better. Unfortunately, no one really knows the answer. It is true that recent economic activity reports seem to be improving, there has been a slight down-tick in the unemployment rate (at least nationally) and there does not seem to be much inflation on the horizon. However, business and consumer confidence indicators continue to be shaky, at best. In the long run, when it comes to economic activity, perception has a tendency to become reality. If people don’t think things are getting better, they will make choices that will result in things not getting better. And right now, we don’t see a whole lot of reason to be positive, based on that.
In a recent report, Wells Fargo cited three major concerns regarding how quickly we can expect the recovery to really kick in:
- First, the recession exposed the credit dependency of many U.S. households, which, after a rapid decline in wealth caused by the crash in housing values, have realized the need to adjust current consumption more in line with current income.
- Second, housing, one of the major drivers in the economy for half a century, cannot be counted upon to drive economic growth the same way it has in previous cycles; demand has fallen because there is a downside risk to wealth from unstable housing prices, and mortgage lending has become much more difficult to obtain.
- Third, the slower pace of economic growth seen in this recovery will limit state and local government revenues and make it difficult to cover the spending promises of prior generations.
These all affect the willingness of consumers to begin spending again, even if they are employed. But what about the unemployed? We think this may be at least as big a problem as those above, and will likely slow down any recovery for some time. The fact is that for many people currently out of work, they have not received the training or the education to compete successfully for jobs in the economy of today. Simply ask most hiring managers how easy it has been to fill job openings in the past six months. Our clients are constantly telling us that in spite of high rates of unemployment, finding qualified applicants is a real challenge. And the continued high unemployment rate is just another drag on our economy.
What does all of this mean for our clients in the business community? I believe that the following are all important considerations for any owner or manager for the next few years.
- First, avoid being overly pessimistic or optimistic. The truth is that though overall the economy has problems, individual companies will thrive even during these times. And even those companies that may not thrive all the time will find opportunities that they need to be prepared to take advantage of. This means staying very close to your markets and engaged with your customers more intensely than ever before. It doesn’t matter what the economists or the politicians say about the economy; what matters is what your customers are saying. Listen to them and make sure all of your employees are doing the same.
- It’s always good advice to avoid unnecessary borrowings, but now more than ever, companies should be extremely careful about incurring additional debt. While intelligent borrowing can be a real benefit to any company, it’s important to carefully examine each and every assumption that any new loans are based on. For instance, borrowing in order to expand capacity has to be critically reviewed in terms of whether or not there will be real demand for the new capacity. The days of “if you build it, they (the customers) will come” are long gone…if they ever actually existed to begin with.
- Develop and have available for rapid implementation “contingency plans” to allow your business to deal with a sudden downturn in the economy. We’ve seen already what can happen to companies that don’t do this. When the economy moves, the companies that will do the best are the ones that are most prepared. Don’t wait until the storm hits to buy rain gear!
- Be prepared to accept the fact, no matter how unpleasant it may be, that when the economy is not strong, prices suffer. You have to be able to accept the prices the market is willing to pay for your product or services, not bemoan the fact that your costs tell you that those prices are too low. When the market cost for your product is lower than your costs, you can’t change the market, but you can at least consider changing your costs. Focus on what you can change, not what you can’t.
- Finally, focus on the real inner strengths of your business. Even in the worst of times, companies that focus on the things they do best will experience demand for their products or services. Understand what your real strengths are, and be ready to play to those strengths.
Of course, 2012 may be a breakout year for the economy, but at this point, betting on that could be dangerous. We recommend that you prepare for more of what we’ve had over the past 12 to 18 months for at least another year. We have no doubt that the US economy will come back strong as ever. The trick is to be able to take advantage of it when it does.