Recession Possibly Around the Corner

Posted by on September 27, 2012 11:01 pm
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Categories: Economy

LEE’S SUMMIT, SEPTEMBER 27, 2012 – The Economic news today continues the downward trend.  GDP growth for the second quarter of 2012 has been revised down to 1.3% from the already sluggish 1.7% reported earlier.  To put it into perspective our National Debt (all inclusive) stands at $16 trillion, and our Gross Domestic Product now stands at $15.6 trillion – if you do the math: It’s scary!

According to the Government figures and Economists who monitor the start and end of a recessionary period have consensus that the Great Recession as President Obama calls it on the campaign trail ended in 2009 – some two plus years ago.

Now the sluggish recovery we’ve had seems to be losing steam.  James Pethokoukis at AEI has a great graph from the Commerce Department that shows the quarter to quarter growth in GDP.  The precipitous fall over the last 3 quarters is beginning to look like a trend – and not a good one.

Graph of the Commerce Department Quarter over Quarter Growth in Real GDP

Image Credit Commerce Department

 

When you look further at Durable Goods orders for August you find that they fell by 13.2 percent, the largest drop since the recession.  According to CNBC the drop comes from weak aircraft and automobile demand.  Transportation equipment tumbled 34.9% after a 13.1% increase in July – so it lost all its gains and then some.  While orders of capital goods, excluding aircraft rose 1.1 percent, the shipments of these same goods fell 0.9 percent.

For those of us in the Manufacturing business it means that we’ll have difficulty over the next few months.  We’ll have to watch inventories to make sure they don’t get out of hand and tie up too much cash going into this winter.  It means that employment will remain sluggish because manufacturers – the ones who’ve carried the burden of trying to pick up the economy are still unsure of the future; so we’re going to be careful.

If consumers are not buying, then stores and distributors are not replenishing inventories so that slows things down.  If inventories at the distributorships are not going down, manufacturers start to put on the breaks.  If manufacturers are slowing down, then the supply base has to slow down – but that’s where it gets tricky.

As an OEM you have the ability to look into your key distributor’s inventory; buyers will share that information so you are prepared.  However, the supplier to the OEM is not going to see that data, and worse their suppliers have no chance at an early warning.  We all know this, so our conservative nature calls to us to “BE CAREFULL” you could end up with all your cash tied up in inventory that is not moving.

Recessionary pressures, uncertainty about the tax bills, increased costly regulations, and skittish consumers tend to make all Manufacturers very conservative with their cash.  As a young engineer I was told that “Cash is King” and I did not understand that too well.  Then I worked for a company’s division with almost 3,000 employees and sales that I thought were great; till one day I was told we were out of cash, and we had run out our credit line and that while for now I didn’t have to worry about getting paid, it may get to that point in a few months.

Then I understood the meaning of “Cash is King” because when you don’t have it, and you can’t get it – in business nothing else matters.  Businesses that have survived one or two recessions live in fear of running out of cash, before the economy runs out of recession – and a double-dip recession hits you when your cash reserves are still low from surviving the last recession.

Let’s hope that three (3) quarters in a row of significant decline is not really a trend; just a statistical coincidence.  No, perhaps it is simply an anomaly.  Or better yet, the precursor to {you got me, I can’t think of anything positive – so I hope we can control our cash, and our inventory so we can survive this coming recession}

Respectfully Submitted

The Lee’s Summit Conservative

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