Business Uncertainty Abounds Why a Recovery Remains Muted

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The long weekend gave me an opportunity to pause and think about some of the comments and feedback we have received from MetalMiner readers over the past few months. And before we get into some of those comments, I thought it might make sense to start this post with an analogy. Personally speaking, when the economy started to slide into recession back in 2000, (and I was working for the venerable consulting firm Arthur Andersen in their supply chain management consulting practice) I actually became a little nervous about the firm’s ability to weather the economic cycle without layoffs (mind you that was before that little problem called Enron). I immediately did what probably hundreds of thousands if not millions of people did across our nation during this last economic downturn – I started cutting expenditures and doubled down on my personal rainy day fund. I’m sure we can all relate to that behavior.

And like each of us individually, a corporation (be it a little one or a great big one) behaves much like, well, an employee. It too engages in multiple strategies to both reduce costs and increase working capital (increasing working capital incidentally in my opinion is often a more polite way of saying one is cutting costs). When we lay people off, we increase working capital by gaining back that cash outlay after the severance period, as an example. We increase working capital by reducing DSO (days sales outstanding) or eliminating inventory or WIP. So what’s the point of this analogy? Uncertainty underpins risk aversion. When we don’t know what our financial future might bring, we hoard our cash. It’s natural.

I’d argue that business uncertainty (forget about personal uncertainty for a moment) is now higher than it has ever been, ever since I can remember entering the business world (1990 for those of you who must know). It doesn’t take a rocket scientist to see that our economy will remain muted, tepid, apathetic, unenthusiastic, half-hearted pick your adjective – as long as we have such a high degree of uncertainty. What kind of uncertainty am I referring to? Let me list just a few of the biggies:

  • We know of multiple companies who have offered overtime and extra hours to current employees vs. hiring new ones. Is this at all tied to the fact that the majority of Federal stimulus dollars went toward entitlement rather than what was originally earmarked for infrastructure?
  • Health care legislation – despite its passage, many of the details have yet to be articulated. Large companies are grappling with whether it makes more economic sense to pay a penalty than to continue offering health-care coverage and many smaller companies also face uncertainty. (We won’t even comment on the tax ramifications of the bill on certain manufacturing industries e.g. medical device) Perhaps more troublesome, the sudden sequestering or perhaps even censorship of any debate on the subject of corporations opting for the penalty vs. providing health care (see this article for additional details). I recall hearing about John Deere, Caterpillar and Verizon articulating the costs of “non-compliance” but we sure haven’t heard much lately.
  • Carbon cap and trade is also a huge damper on manufacturing activity. Companies are literally waiting to see how they will be impacted by it and what cost ramifications it will impose on their business. Any US company thinking of expanding (that could be impacted by this legislation) has adopted a wait-and-see attitude about expansion.
  • The impact of changing tax policy is also creating uncertainty. Given that the majority of small businesses are taxed at the marginal tax rate of their owners, many manufacturers are waiting to see the impact of tax increases in 2011.
  • Next year we see a 90% reduction in the capital expensing limit for purchasing assets (currently at $250k)

Let’s pull out our handy dandy napkin shall we? Let’s say 1000 companies decide to not open a new plant (or new facility) originally planned for 2011. Let’s say 3000 manufacturers decide to increase hours instead of hiring new employees. Let’s say 100 of the top metal producers in the US “do nothing in terms of expansion as a policy while they wait and see how cap and trade shakes out. Add up these decisions across the manufacturing b2b landscape (we all know what individual people do when faced with economic uncertainty) is there any doubt what government ought to focus on for the balance of this year?

Not a doubt for me and that’s what I concluded this 4th of July¦

–Lisa Reisman

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