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? Have you considered scenario planning to help you make better decisions, both risks and upsides?