In a recent webinar hosted by the National Fluid Power Assn., economist Catherine Putney of ITR Economics, Manchester, New Hampshire, provided attendees with an update on current economic conditions, as well as a look ahead. While the U.S. economy and fluid-power-related markets have been doing quite well, she noted, 2019 will be a year of business-cycle decline.
Economist Catherine Putney of ITR Economics
Factors contributing to the coming downturn include trade wars and tariffs, higher inflation, rising interest rates, and a tight job market. The good news, if there is any, is that the recession will be brief and not nearly as severe compared to other slowdowns over the past couple decades.
Regardless, fluid-power manufacturers, OEMs and equipment users should take steps to prepare for the coming pullback, she stressed, so they’re positioned to take advantage of the subsequent rebound in business in 2020. Here are some of her key recommendations.
The recession is going to be mild. Keep that in mind as you head through the slump. A lot of factors in play right now leave our labor market very tight. So when business slows and starts feeling squeezed, try not to cut back on labor—because it’s going to more expensive in the end to hire new staff when things come online again later in 2020, versus just retaining your employees. Businesses might feel a little bit of strain next year, but this is when companies should invest in training and work out any production inefficiencies and bottlenecks, to be able to take advantage when the economy thrives again in 2020.
Interest rates will continue to climb. Over the next couple years interest rates will not decline and that will increase the cost to borrow. So if business is currently good, now is the time to purchase new capital equipment when you have cash on hand and interest rates are favorable. It will cost you a lot less now, considering the higher interest rates in the future.
Watch your margins. Inflationary pressures on both consumer and producer prices are on the rise, and that will eat at your profits. Companies need to implement strategic and selective price increases. There’s a long list of consumer and industrial firms that have or are planning to increase prices. And that’s a smart move, to preserve margins despite inflation.
However, raise prices selectively and strategically. Don’t do it across the board. Don’t do it annually, do it more often and recognize what products and services you offer that are more elastic or inelastic than others. If products can afford to take price hikes without sacrificing demand, give those a higher price hike versus others that may be more vulnerable to those increases. But if you aren’t raising prices, given the data we’re seeing, you’re going to cut into your margins.
Stay on top of aging receivables. When businesses and customers start to enter this slowdown, payment times tend to stretch from 30 or 60 days to 90 or even 120 days. So it is essential to really stay on top of that especially as we’re heading into a downturn. Also evaluate your vendors for financial strength. If needed, look for alternative vendors as a safety net.
Embrace E-commerce. Businesses must take note of what’s called the Amazon effect, and be accommodating of the fact that people are shopping online. The E-commerce industry is doing extremely well, and if you aren’t tailoring your business to be favorable and attractive to online commerce, then you’re going to lose out.
So make sure your web site is top notch, and that users can access sites through a mobile phone. Some studies show that people spend most of the time shopping and researching on their phones, but they end up buying over the desktop. So make sure that your web site is attractive and compatible with the smartphone environment, to ensure that you’re capitalizing on all activities.
Focus on select industries. Some areas of the economy are doing better than others, so it’s good to know which offer better opportunities. For example, the automotive market not doing well: retail sales are stagnant and production is in decline, and the situation will get worse next year. Food production, in contrast, is expected to grow even through the downturn. Also lose the losers. If established business segments are not profitable during this phase, eliminate them.
Consider regional economic health. Especially if your business in regional or even national, look at the migration patterns across states. There is a general trend that people are moving from California, the Midwest and Northeast and to the Pacific Northwest, Texas and the Southeast. (This does not include immigration.) People are moving away from areas where taxes and the cost of living are high. And right now 50,000 baby boomers a day are retiring from now until 2030. Retirees typically move south to warmer climates. So in terms of organic growth opportunity for your business, focus on those states.
Prepare and profit. Businesses can make money in a recession if they know it is coming. Prepare and build up cash right now. If you’re considering buying a new business, do your research now and acquire when the recession hits. That’s the most opportune time, when people are crabby and feeling pessimistic. That’s when valuations are at the lowest and you can get the most for your buck—if you have the cash on hand, you know what’s coming, and you know that this recession isn’t going to last forever.