Compass Points

Economic Commentary

US Slow-down; International Recovery

by Denise A. Harrison

At last Alan Greenspan and the Federal Reserve are successful in moderating US economic growth through a series of interest rates hikes. The results are reflected in corrugated box shipments.

While we see growth moderating in US, many countries' economies are the rebound. Examples of this international economic upward trend are seen in the UK jobless rate and the upturn in Mexico's GDP:

Another indicator of international recovery is the increasing expenditures for international freight shipments showing increased demand for cargo space for cargo to and from South America and Asia.

U.S. Economy
The Federal Reserve put the brakes on economic growth through a series of interest rate hikes to head off the inflationary pressures that come from a fast growing economy with scarce labor resources. The goal of these tactics is to slow upward growth to ease inflationary pressures for an economic soft landing. The brakes can be applied too hard and economic growth could halt rather than decelerate. The brakes could be applied too late allowing the inflationary pressures to spiral upward. No easy trick to manage a soft landing. However, if the Federal Reserve does successfully moderate growth what is in store for the US economy?

  1. People are beginning to say, "I am not as rich as I thought I was". Heightened stock market volatility and stagnation will dampen consumer spending that occurred due to the wealth effect.
  2. The wealth effect, which resulted from the unprecedented upward movement in the stock market, caused many consumers to add significant debt to their household balance sheet by spending money that they thought they had. This debt will motivate consumers to stall future spending plans, as we already see reflected in the housing and automotive markets.
  3. This slow-down may cause less overtime and higher joblessness resulting in less income. Slow payments and increased bankruptcy filings are the result.

Businesses will see the effect of slower growing consumer spending in slower revenue growth. Corporate balance sheets contain a great deal of debt. Higher interest rates mean that additional cash flow will be required to fund this debt. Banks will continue to tighten their credit polices, particularly for small businesses, as bad debt write-offs increase.

Commodity prices will continue to fluctuate as the international economies recover and the international demand for basic commodities increases. The following graph highlights global growth and its impact on commodity prices.

In our last issue of Compass Points we suggested you consider the following strategies:

  1. Lower debt burden
  2. Tighten credit policies
  3. Look outside of the US for growth

These recommendations are still sound strategic issues to be discussed with your senior management team.

International Outlook - Asia
Is Asia recovering?
Export growth continues to drive recovery in Asia. Taiwan's exports are up 24% and China's exports are up 24%. Regional economic growth within Asia is funding this growth in addition to exports to the US. It looks as if Asia is making its rebound.

As the international economies strengthen, demand for US goods will increase; however, the flip side is that commodity prices will also increase. If commodity prices increase significantly then the probability of a hard landing in the US rises significantly.

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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