Emerging Trends as the Economy Turns the Corner
by Denise A. Harrison
2001 saw unprecedented interest rate cuts by the Federal Reserve Bank. The goal: to stimulate the economy out of a recession. Lower interest rates stimulate the economy on two fronts:
- Corporations are more likely to invest in capital improvements - lower rates lower the cost of investment, others are able to restructure their balance sheets and enhance cash flow through lower debt payments.
- Consumers' debt burden is lowered; consumers with variable rates benefit, a record number of mortgages are refinanced, freeing cash flow for other purchases.
With the large number of interest rate cuts combined with the tax rate cuts enacted in 2001 one would expect a significant upturn in 2002. However, there are a number of factors that suggest that the upturn will be more gradual than past recoveries. These factors include:
- The global nature of the economic slow-down - the 1990 US recovery was aided by the healthy economies of a number of our trading partners; this is not the case in 2002.
- Excess industrial capacity (25%) means that growth can occur without significant new investment.
- Increased consumer spending is a key ingredient. However, in this recession the consumer remained strong. Auto sales in 2001 were the second highest in history. Although consumer spending may increase, it is increasing from a high level, so the change will not be as significant as in previous recessions.
- Construction remained high in 2001 and, while it will continue to remain or grow from present levels, it will not show the large increases that occurred in previous recessions where spending went from low levels to high levels.
- Bankruptcies, both corporate and individual are significant and banks are only recovering about 50 cents on the dollar. This low recovery rate will force banks to increase their loan loss reserves and become more cautious in their lending.
Hence we expect this year's upturn to be gradual. In addition to slow growth, recessions often result in permanent shifts. For example, a company that shuttered plants during 2001 may reopen production offshore.
What about long term trends?
During the 1990's we saw companies make significant investment in technology, especially to prepare for the year 2000. Many technology dinosaurs were replaced by state of the art technology. The Federal Reserve felt that much of the growth in the 90's was fueled in part by increasing productivity often resulting from technology investments. Has this productivity growth stopped? Have we reaped all the benefits of past investments?
Many believe that we have only hit the tip of the iceberg. US industry is still in the toddler stage of learning how to harness the power of these technical investments. Here are some ways technology has raised effectiveness in a variety of industries:
- National Semiconductor's website allows customer engineers to design, test and order an electronic circuit board.
- PolyOne, a chemical manufacturer, installed sensors at its biggest customers' chemical tanks to track their inventory real-time.
- Financial Services, online trading, online banking.
- Amazon knows what you have purchased previously, makes recommendations based on this information and says hello to you when you enter the website.
- Pepsi is using satellite transmissions from its vending machines to time the restocking.
- Maine is testing computer monitoring software for chronically ill patients to lower incidents of life threatening events.
- Veterans Health Administration (long known for poor, inefficient service) has significantly enhanced patient service and efficiency by:
- Allowing doctors to access complete patient files online allowing for care coordination among doctors;
- Bar coding medicine and patients to ensure that patients are receiving the proper medicine (this has lowered medication errors by 70%);
- Tracking doctor errors to avoid reoccurrence through education;
- Developing "best practices" for specific illness treatment based on historical data.
These are examples of progress. However, many companies have not taken the steps to learn how to better use the information gathered by their ERP (Enterprise Resource Planning) and CRM (Customer Relationship Management) systems, if they have such systems. When more companies harness this information and technology, productivity will increase.
There is some risk to this long-term growth trend; recently many power plants building permits have been canceled. While the California energy crisis is fading from people's minds, one can only imagine that, if the infrastructure is not built to sustain future growth, regional disruptions will occur as they did in California.
What should a company do?
- While growth is in the forecast, look for specific factors within your industry. Recessions often weed out the unprofitable players and cause shifts that are permanent. Shuttered factories may allow for companies to assess offshore production. Understand how your customers will change after the recession. It may not be business as usual as they ramp up their production.
- Evaluate your company's information technology against the state of the art in the industry? Do you lead? Do you lag? How do you stay ahead or close the gap? Is there an opportunity to leapfrog the competition?
- As you look across other industries, are there applications that you can use in your industry? The Veterans Hospital Administration came up with scanning medicines and patients after returning a car to Avis and observing their scanning for check-in and invoicing.
- Also, as you seek new opportunities, remember to look for singles and doubles, not everything will be a homerun. A few base hits are often enough to win the game.
Denise Harrison is a consultant with Center for Simplified Strategic Planning, Inc.
She can be reached via e-mail at firstname.lastname@example.org.
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