With pandemic fatigue setting in, more and more states are looking to get back to business. While companies are dealing with immediate concerns like social distancing, staggered work shifts and deep cleaning, they also need to plan for recovery over the long term, according to Alan Beaulieu, president of ITR Economics. In a recent webinar hosted by WTWH Media, “Managing Uncertainty: How to Handle Black Swans in the Economy,” he offered some pragmatic suggestions for fluid power companies as they move forward.
In his presentation, he certainly didn’t sugarcoat the current economic situation. “The rate of growth and GDP had been slowing down since the middle of 2018. Now, it is falling off a cliff, and it will be painful,” said Beaulieu. But the decline will not last as long as in 2008-9. He predicts the economy will contract for the next couple of quarters, but will be expanding at a 3.6% clip by June of 2021.
That’s in large part due to government intervention. With the CARES Act and PPP, money is getting out to individuals and it’s providing for some really inexpensive loans, a large amount of which will be forgiven. “If I were to give them a pat on the back, it would not be inappropriate. They approached the target economy in a very reasonable fashion,” said Beaulieu. Thanks to the stimulus programs, it won’t take years before companies to benefit and recover to the previous high levels.
In addition, the Federal Reserve Board cut reserve requirements to zero to ensure that the credit market doesn’t dry up. “It’s inflating their balance sheet like there’s no tomorrow, but it’s certainly an incredible action to make sure that banks can lend. It means that banks can be all in, which is very encouraging if you’re credit worthy,” said Beaulieu.
So it could be a good time to buy a business, because interest rates will be low. If your company has deep pockets and a competitor is facing tough times, now is the time to strike a very favorable deal. “Do your due diligence and then be ready to move, you’re acting on very low interest rates to get a good company with a reduced EBITDA, and off you go,” he said.
Likewise, we know the American consumer will bounce back. It’s in our DNA. We’ve been through other crises, and this time won’t be any different. As such, we’ll see businesses coming back, which means there is a demand pull, he continued. So all those distributors and manufacturers that laid off people are going to need them back. “Do I think firms that cut 200 people in one day will hire back 200 people in one day? Probably not. They may do that in tranches as they ramp up. It will depend on the company, customer base and orders,” said Beaulieu. But be prepared for a lot of activity in regards to unemployment and new hiring.
“Now, some of them are not going to want to come back right away out of fear, or because their kids’ schools are closed, or because they’re enjoying getting a check from the government,” he continued. You’re going to be facing a pretty tight labor market in the future. So for right now keep the best and easily trainable. If you need to let workers go, make sure they’re the ones who are easy to replace.
Also expect that there will a second and possibly a third wave of Covid-19. Cases and deaths will come down, stay-at-home restrictions will be lifted, and businesses that were shut will begin to operate. And then there will be additional spread. Watch that rather closely, he recommended, and anticipate there’ll be a stop-and-go kind of effect.
This is probably a good time to invest in automation because labor will be tight post-recession, he advised. You can more easily make the case that robots don’t need to be furloughed; robots only need to be turned off. Of course, you still have to pay for them. But they turn right back on easier and they come back fully trained. If there’s another outbreak and workers stay at home, next time you can keep your facility running even if most people are afraid to come in. It’s a pretty good time to push automation, as we have had people problems in the past and we’re going to have them in the future.
Firms will get busy again, so be ready for that. But first you need to get through 2020, he cautioned. There will be some signs of improvement later this year and especially in ‘21 and ’22. “Hang in there, watch your cash. Make sure you’re talking with your banker. Make sure that you’re talking to your employees. Be as transparent as possible. Make sure your suppliers are not ready to go bankrupt. Make sure that people you sell to know that you’re not about ready to go bankrupt. If we all communicate the daylights out of each other over the next couple of quarters, we will get through this with our relationships intact.”
There will also be a resurgence in near-sourcing to the U.S., as well as Canada and Mexico, he said. Many companies will want to rethink suppliers and supply chains that were centered on Asia. And the President may be considering a law or executive order about buying domestically. We’ll naturally see more along these lines, which will be a positive for your business.
And don’t forget about marketing. In the classic down phase of a business cycle, as things get worse, a lot of things get slashed as nonessential – including marketing. That is a mistake, Beaulieu stressed. “You may have to pare it back for cash reasons. But marketing, which means knowing what your customer’s thinking, wanting and doing, has to go on or else you come out of this blind. Marketing as far as keeping your name out there and product recognition going has to continue or else you’re going to be forgotten. So I firmly believe that some level of marketing has to go on.
“And, I may add, it’s a great time to lock in contracts of various sorts from vendors, everything from your cleaning company to your landlord,” he said. If they’re shook up, if they are of the mindset that this is going to last forever, you may be able to work a better deal. “Look, this is a tough time for everybody, including you,” said Beaulieu. So negotiate better terms that allow you to save money, and they’re happy because there’s cash flow. So take advantage of other people’s pessimism.