Compass Points

Economic Commentary

Opportunities Abroad, Challenges with the Economy
Bright light on the horizon

by Denise A. Harrison

Companies will find growth in international markets as international economies strengthen.

This growth is fueled not only by an economic recovery, but also the emergence the “new economy” in emerging countries. We looked at the emerging “New Economy” in the US in our last issue of Compass Points; now let’s look at some global impact.

First, some historical perspective: during the fall of 1998 there was a significant downturn in many global economies. These economies had been enjoying boom times that were growing only from increased production, but also from significant speculation. While many companies were not really performing well, their numbers were bolstered by partner companies so that the weaknesses were transparent to those on the outside. These cartels that artificially inflated company profitability finally folded like a house of cards when it became too hard to prop up all of the institutions. These cartels of companies did not allow the market to weed out the inefficient companies investment to funnel into poor risk situations. These company interdependencies prevented new entrants to the market place, stifling innovation.

The collapse caused by the economic downturn resulted in the loss of power of many of these large cartels. This loss of power along with the efficiencies of the information provided by the “New Economy” is allowing many new companies to emerge in countries where formerly the power hierarchy was dominated by a few families. The new economy has lowered the barriers to entry by providing easily accessible information about potential markets. These new players will further enhance international growth. (see Chart 1)

What about the US? The long expansion is producing stress in segments of the economy. The labor market continues to tighten in most areas of the country. Material costs are rising, sometimes offset by increases in productivity. Consumers are faced with increased volatility in the stock market causing a slow-down in the wealth effect. We see mixed signals rather than a definitive pattern as we survey the data. Some examples:

Corporate Earnings Continue to Fuel GDP Growth.

Wealth effect: will it continue to fuel consumer spending? As stock market volatility increases will consumers slow their spending? Examination of these trends indicate that both GDP and consumer spending will continue to rise.

The housing market shows signs of weakness, but will low supply cause prices to continue their upward motion? We think so as evidenced by the low supply of available housing, which has resulted in higher home prices in many regions of the US.

Are financial institutions vulnerable? Have relaxed lending requirements due to the good economic times, resulted in high risk loans that will sour with increased economic volatility? Will this cause banks to raise their lending standards? We believe credit availability will tighten in the future.

Are oil prices really high? No, oil prices are relatively low by historical standards.

In general we can expect heightened volatility and stress on the economy as we move into the latter half of this year.

What does this outlook mean for the reader?

  1. The labor market in the US will continue to tighten and force companies to hire less skilled labor.
    Action: Companies need to increase their emphasis on training.
  2. Credit availability will tighten as financial institutions see the write-offs for bad loans increase.
    Action: Secure lines of credit, enhance cash flow.
  3. New Economy will enhance information flow, this will create more efficient markets.
    Action: Companies must fully understand their cost structure to effectively bid on business opportunities that emerge in the new business to business auction environment.
    Action: Companies need to enhance relationships with large customers so that they do not put the business out to bid.
  4. International growth will provide significant opportunities outside of the US.
    Action: companies need to seek a global customer and supplier base and be prepared for foreign competition.

Denise Harrison lives in Wilmington, North Carolina and is a consultant for the Center for Simplified Strategic Planning. She presents the workshop, Simplified Strategic Planning for Small to Mid-Sized Companies. For more information about Denise, check out her bio page.

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