Setting the Stage – Anticipation

In this ear­ly tran­si­tion for the new Admin­is­tra­tion in Wash­ing­ton, the most inter­est­ing insight to me is how much antic­i­pa­tion most busi­ness lead­ers have for the next four years. The promise of tax reform, infra­struc­ture spend­ing and decreased reg­u­la­tions is cre­at­ing high busi­ness opti­mism. How valid is this opti­mism?  It’s worth look­ing briefly at some key trends and indi­ca­tors for the U.S. econ­o­my.

Com­pa­nies have been real­ly jug­gling for much of the last year. Earn­ings per share (EPS) for the last five of six quar­ters have been shrink­ing. Com­pa­nies have been bor­row­ing to buy back stock in order to prop up earn­ings per share. This is in light of high cor­po­rate debt lev­els. While this makes sense in the short term to keep cor­po­rate earn­ings sol­id, what will hap­pen when they have to refi­nance at future high­er inter­est rates?

With high cor­po­rate debt lev­els, we haven’t seen strong lev­els of R&D and Capex being spent on new inno­va­tion and man­u­fac­tur­ing, which does not bode well for future prod­ucts and ser­vices. And, with labor pro­duc­tiv­i­ty drop­ping into neg­a­tive ter­ri­to­ry in the first half of last year – the first time in 30 years – it tells us some­thing about a lack of invest­ment in cur­rent facil­i­ties. Yes, arti­fi­cial intel­li­gence (AI), inter­net of things (IoT) and pre­dic­tive ana­lyt­ics inter­est is march­ing along accord­ing to numer­ous head­lines, but only those com­pa­nies with deep­er pock­ets, such as a Toy­ota or Google or Face­book, are spend­ing sig­nif­i­cant amounts.

Some good news is that jobs are con­tin­u­ing to grow, giv­en the Jan­u­ary employ­ment num­bers.  Yet, wages are still very slow to increase. As the econ­o­my hope­ful­ly grows this year, high­er demand for employ­ees will like­ly increase wage lev­els and con­tin­ue to improve income lev­els. The trade-off is if the Fed increas­es inter­est rates in March, and pos­si­bly anoth­er cou­ple of times this year, which tem­per spend­ing and growth.

Con­sumers are also in bet­ter shape with their debt lev­els and are more will­ing to spend. Auto sales, for exam­ple, were at record lev­els last year (over 17.5M sold), but there are also signs of more auto loan defaults emerg­ing as we start the year.

The inter­na­tion­al pic­ture is in flux and chal­leng­ing. Shift­ing away from broad trade agree­ments, such as TPP and cur­rent ones like NAFTA, to more bilat­er­al agree­ments is yet unclear. Immi­gra­tion bans are trou­bling to say the least. Increas­ing pop­ulism trends for many gov­ern­ments, whether in Europe or U.S., will cause more gov­ern­men­tal and soci­etal ten­sions. For geopol­i­tics, increas­ing NATO ten­sions along the east­ern Euro­pean bor­der with Rus­sia wor­ries many.

Antic­i­pa­tion for this year is under­stand­able, giv­en the slow eco­nom­ic recov­ery since 2008 which test­ed everyone’s patience. But, as these trends and indi­ca­tors sug­gest, we may be  enter­ing a more volatile, uncer­tain and very excit­ing year! Dif­fer­ent very com­pelling eco­nom­ic and busi­ness futures could unfold. Are you ready for a strong upside to your busi­ness if dereg­u­la­tion unfolds as promised? Are you effec­tive­ly mit­i­gat­ed for pos­si­ble risks, espe­cial­ly pos­si­ble sur­pris­es?

2017-03-20T00:28:09+00:00 February 5th, 2017|0 Comments

Leave A Comment