Can We Survive Another Recession?

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Can We Survive Another Recession?

If the Great Recession can be likened to a massive coronary for the United States and world economies, then I guess we can say we are still in intensive care and in the process of undergoing extensive rehab. Recent indicators do indeed point to an economy that isn’t responding as quickly as we’d hoped to the medication and rehab we’re in the process of administering. On top of our economic recovery, our national debt and Congress’s reluctance to make tough decisions has put us in a non-enviable position heading into 2012.

I guess that is what Standard & Poor was hinting at in its downgrade of U.S. treasuries earlier in the year, given that a big part of its rating model is a reflection of the current political environment. However, S&P’s unprecedented action hit the markets hard with its conclusion that our government is incapable of making any rational decisions regarding our debt situation. While all of us are frustrated, the decision by S&P couldn’t have come at a worse time.

What Happened

What irks me about S&P’s downgrade and the subsequent market malaise is that once again we let this firm’s actions influence us unduly. Remember this is the same firm that missed the entire mortgage-backed securities problem right under its nose and gave Lehman Brothers a triple-A rating right before it tanked. Yet we let one company with a track record like this once again ignite disruption in the markets? Someone please explain to me the logic in that.

The Federal Reserve and other regulators immediately pointed out the $2 trillion mistake in S&P’s math and warned folks not to take this downgrade seriously, but to no avail–the roller coaster in the stock market had already begun to take shape. The G-7 also stepped up and said that regardless of the rating, it was willing to do what it takes to keep liquidity flowing in financial markets worldwide.

What’s Next

So what does this mean for the economy in general? First, most economic forecasters (with fairly accurate track records) are projecting modest GDP growth during the remainder of 2011 and into 2012. Consumer spending is expected to show modest signs of life after a disappointing showing the first half of the year. There are even modest projected gains in employment, if you can believe it.

Housing activity is still expected to rise only slightly, particularly in the construction sector. The widening spread between rents and costs of home ownership are creating opportunities in the rental market, which may be a good thing since we need a more mobile work force in order for folks to move to areas of the country where jobs are available.

Business investment in new equipment and commercial real estate is expected to increase slightly in 2012–a good thing since government spending is likely to scale back considerably, not only at the national level, but at the state and local levels as well. Commodity price fluctuations should lessen over the next year, easing inflationary pressures.

The Federal Open Market Committee has elected to keep the fed funds rate at near zero through mid-2013, an extension of its earlier policy. It has removed the quarter-percent interest rate it pays on the reserves banks hold at the Fed. Banks will likely be more willing to lend if they are not getting a risk-free, though negligible, return from socking away money at the Fed. This is good news for businesses looking to make strategic investments as we head into 2012.

The Bottom Line

The health of the economy is extremely fragile, with some of our leading indicators continuing to be negative. Fortunately, some are trending positively. Mixed performance in the economy coupled with extreme weather conditions makes for a terribly challenging environment. I remain optimistic about the recovery, but then again, as you know, I find the silver lining in most economic storms.

But what if my optimism does not pan out and things do not continue to improve, even modestly? What if Europe’s financial market unravels and propels the rest of the world into Great Recession: Part 2? What if the gloom and doom economists are the ones who are right and this is only the beginning of financial Armageddon in this country? Can we as an industry make it through another recession like this one?

If I can elaborate on a couple of my comments a few months back, I still have reason to believe the firms that are well positioned with their customers in the marketplace, not overleveraged and clearly articulating their value proposition, will be OK. However, those that aren’t probably won’t be around much longer.

We will likely see continued structural changes across the industry supply chain as we morph into the more compact and efficient industry of the next decade. This will not only mean fewer key players in the industry but deeper, more strategic relationships among those left from the transition. We are not going to look the same; not even close.

Yes, we (as an industry) will still be around (if we maintain our value, relevance and authenticity to our end consumers), but the factors that will guarantee success in the future are going to change. Better brand management, more detailed SKU movement and replenishment analysis, greater efficiency in distribution and logistics, closer integration of genetic innovations and supply levels with consumer demand, and the assimilation of innovative marketing technologies (social media and otherwise) are the new key success factors of the future.

Notice that growing a quality plant isn’t listed. That’s because it’s a given. You’ve got to have quality to even play in the game. Master these key success factors and you’ll not only be positioned better for the potential double dip in the short run (if it does occur), but you’ll lay the groundwork for solid performance during any future economic downturn.

Charlie Hall (charliehall@tamu.edu) is a professor and Ellison Chair in International Floriculture at Texas A&M University.

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