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