Economy 101
This is article is part of a series of monthly articles produced by Harbour Results for PMA’s MetalForming Business Edge e-newsletter. Click here to view the full collection of articles.
Let’s Talk Economic X’s and O’s
Globally, economists have conflicting perspectives on the future and how quickly the marketplace will recover from the COVID-19 crisis. And, for manufacturers, it is increasingly more challenging to forecast 2021. Many are extremely busy and struggling to find enough employees to keep up with demand. It is clear, that some industries are doing well including automotive, home appliance, marine and recreational vehicles. However, it is important to note that economically we are not out of the woods yet and the overall health of the economy will impact your business in many ways. The re-employment of the workforce that lost their jobs during the start of COVID has slowed dramatically, with sectors like retail and hospitality taking the biggest hits. Long term unemployment continues to increase, and individuals are choosing to leave the workforce rather than continuing to look for jobs. Eviction moratoriums and payment deferral programs have expired, which will create more financial strain on lower income demographics.
So, when will the recession end and recovery begin? We strongly feel it will be eight to 10 months before we experience a recovery. In this case, economic recovery means consistently low unemployment across income demographics and industries, as well as consistent consumer spending in the hardest hit sectors, travel, brick and mortar retail, and hospitality. But, it is not a one-size fits all forecast. Each shop must monitor key economic indicators and determine what they mean specifically for your business and the industries you’re in. To help you stay informed these are the key economic indicators to watch to build future business strategies.
Employment
Employment is important for two reasons. First, when people are unemployed, even temporarily, they stop spending money on nonessential goods and services, which slows down the economy and impact demand on manufactured goods. Also, with less people in the job market, less taxes are being paid impacting the national deficit, which will likely impact your business taxes in the future. In Q1 2021 unemployment in most industries – excluding manufacturing – will go up as businesses deal with the COVID-19 surge in December and January.
Consumer Spending
Again, as less money is injected into the economy and spending patterns are inconsistent and unsustainable, some manufactured goods will see a dip in demand. Additionally, it is important to monitor if consumer spending patterns are sustainable or is the recession artificially inflating them.
Consumer Debt
Consumer debt levels are directly correlated to spending and have been trending upward, most notably in the millennial generation (who own the buying power). And while this generation doesn’t carry the largest amount of debt, their debt is growing at the highest rate and a large portion is driven by their student loans. The debt carried by older generations is more heavily driven by mortgages that, unlike student loan debt, point to the overall wealth and financial stability of those generations. The financial situation facing many millennials, combined with the unsustainable spending of the lower and middle classes, will continue to prolong this recession.
Government Deficit
The growing deficit in the U.S. and Canada is creating concern around the world. In terms of discrete dollar values, the deficit in the U.S. will exceed the size of its GDP this year. This is a level not seen since the U.S. financed WWII in 1946. In Canada, the deficit is expected to be 49% in fiscal year 2021. Although substantially lower than the U.S. deficit, Canada is used to a much lower government deficit, so this anticipated ratio is quite concerning. To offset this growing deficit, taxes will need to go up and this will impact the cost of doing business. Shops need to be thinking about this for 2021 and beyond.
Health of Banks
Banks play a key role in how much money is funneled back into the economy. Historically, banks have recognized a certain amount of bad debt (accounts receivable that will not be collected) but at the end of 2020 bad is on the rise. This is due to many businesses and individuals not being able to pay what they owe as a result of the economic turmoil. From a manufacturing standpoint, more than 10% of respondents of an Harbour IQ Pulse Study indicated they tripped a bank covenant. This dramatic increase in bad debt will lead to banks changing their lending practices, making it more challenging to secure loans.
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In addition to these factors, it is important to collect current state and forecast data for the industries that you serve. Having a resource that provides production and/or sales forecast, along with other trends impacting the industry is another important piece of the strategic decision-making equation.
Most importantly, leadership needs to apply critical thinking to the industry data and what’s going on with the economy to determine the best path forward for your business. For example – if you supply to the home appliance market, ask yourself why is the housing market booming? Is the growth sustainable or is it driven by recessionary behaviors, low interest rates or other reasons? How will recovery impact the market?
Looking forward to the year ahead, from our perspective, uncertainty is a given. But a few things are clear: we are still in a global recession; economic recovery is at least nine months away; and whether shops make it through these times will largely be determined by their specific industries and how they are running their business to date as well as future strategic plans.
The reality is that we won’t see economic recovery until the spread of COVID-19 is significantly slowed and protections are in place to prevent a recurrence – which is on the horizon. Those that will emerge successfully and stronger are those who have gathered the data and used it create and implement a sound strategic plan.
