EconomicGreenfield

The economic weakness that has occurred has caused a significant amount of financial damage.  This can be seen in a variety of indicators and statistics, such as widening credit spreads, defaults, credit downgrades, etc.  These worsening conditions have been accompanied by a curtailed (in many cases severely) access to credit.  Whereas credit and other types of funding were abundantly plentiful (and in many cases cheap) into 2007, that level of credit and financing availability has since undergone a dramatic reversal.

An array of adverse business conditions have added to the misery.  These have taken various forms, from very high excess manufacturing capacity to low capital investment.

In addition to these adverse conditions and financial strains, a major factor going forward will be consumer spending.  As I discussed in a June 18 post, the ability for the consumer to keep spending may well be constrained going forward due to a variety of factors.  This will be one more “headwind” that businesses will likely encounter.

Should further significant economic weakness occur, there is another major concern relating to businesses – their ability to successfully manage through severe economic weakness.   Most businesses have not been exposed to the severity, both in length and extent, of economic weakness that further economic weakness would entail.  This lack of operating experience could pose significant challenges and hurdles to businesses that have already been adversely impacted.

Part IV to follow…

SPX at 977.57 as this post is written

The economic weakness that accelerated in the latter months of 2008 and into 2009 played out in a very “tricky” fashion.

Very few mainstream economists foresaw what would happen.  A testament to the complexity of the situation as 2008 progressed was the business shows airing arguments during the summer as to whether the economy was even in a recession.

Needless to say, that argument was answered by the 4th quarter.  The list of rather unbelievable economic occurrences in 2008, and into 2009, is very extensive. 

Given the “trickiness” in which the economic weakness has played out, one question that may be asked is “How well have businesses reacted?”  As well, another major question becomes, “Given how businesses have reacted so far, how are they positioned for the future?”

Both of these questions are very difficult to answer.  With regard to the first, there really is no established “scorecard” with which to grade businesses’ response to the events of 2008 and 2009.  As aforementioned, the way the economic weakness played out was “tricky” and certainly highly unexpected.  While one may argue, in hindsight, that corporate forecasting might have been better, or any number of corporate actions, from cash management to inventory control, could have been more effective, those arguments certainly make more sense “after the fact.”  Sure, things may have been handled better, but most businesses won’t, and can’t, be effectively run if they seek to plan for contingencies that, at the time, seem very unlikely, if not unimaginable.  

Perhaps even more important is the second question, “Given how businesses have reacted so far, how are they positioned for the future?”  If one believes the current consensus among professional economists, that the worst (as far as economic weakness) is behind us, and that a steady, if not weak, economic recovery will continue through 2010, then the answer appears to be that businesses, as a whole, will continue to face a challenging environment, but in most cases will be able to survive.   

However, if the economy defies consensus expecations, and materially weakens (a view I hold, as previously mentioned in this blog), it is much harder to generalize how adversely businesses would be impacted. 

In the next post, I will discuss some issues that bear significance should this more adverse economic scenario occur.  

Part III to follow…

SPX at 977.68 as this post is written

“As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering.”

-Bill Gross, from the July 2009 Pimco Investment Outlook: http://tinyurl.com/mxnnzo

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The unemployment issue current facing the country is severe and complex.  Although this unemployment problem is to various extents recognized, there seems to be little discussion around the question “Why aren’t companies hiring?”  The  simple, and perhaps indirect answer, is “because the economy is bad.”

The next few posts will explore this question “Why aren’t companies hiring?”

A few disclaimers with regard to this series of posts: 

First, this unemployment/hiring aspect of our current economic situation is very complex.  This series of posts will present a simplified approach to the question, as to avoid excessive complexity and length.

Second, as with any discussion of our current economic situation, it is of course impossible, and unwise, to characterize all businesses as if they currently are in the same situation.  Obviously, they are all unique; however, there is enough commonality as to be able to generalize to some extent, especially among those businesses that suffer when the economy is weak.

Third, I have many theories as to why companies aren’t hiring; this series of posts will explain some of them.  The remainder will go undiscussed, at least for now, due to a variety of reasons.

Part II to follow…

SPX at 976.29 as this post is written

Copyright 2009 by Ted Kavadas