The warning bells might need an answer

In the light of the partial government shutdown, ongoing trade tensions with China and slippage in the dollar since October, many economists are now saying out loud what business leaders have been whispering quietly for months.

The global economy may be about to take a nosedive.

That’s an uncomfortable thought, and one that many woodshop owners might prefer to ignore for now. But such an approach is becoming increasingly difficult to take as more and more signs of change appear on the nightly news. One of the most disturbing happened on Dec. 4, 2018, when the Dow Jones index dropped 799 points and lost 3.1 percent of its value in a single day. The S&P 500 index fell even more (3.2 percent), and the Nasdaq lost a startling 3.8 percent. The next day wasn’t much better as 2018 saw the worst start to a December for the S&P 500 and the Dow since 1980. Think about the enormity of a 3 percent loss in just a few hours: most banks don’t pay that much on a CD over an entire year.

On Dec. 18, ABC News ran a piece that began with the sentence: “Fears of a recession have been mounting with the U.S. stock market appearing to be headed for its worst December since 1931 — during the Great Depression”. The piece also noted that nearly half the chief financial officers surveyed in a Duke University Fuqua School of Business poll foresee a recession by the end of next year. And by the end of 2020, 82 percent of CEOs are convinced that a recession will happen.

If a hiccup in the industrials and the opinion of CFOs isn’t enough to cause concern, there was something else, too. It’s one more event in a series that has economists ringing warning bells around the world. Beyond billions of dollars in losses in a single day, the most significant event of Dec. 4 was an inversion of the yield curve. That’s where the interest rate on short-term U.S. Treasury securities rises above the rate on long-term instruments. The last time that happened was in 2007, and it’s a pretty strong indicator that investors believe that growth is slowing and recession is in the air. What happened here was that savvy investors took their money out of long-term bonds and put it in shorter term instruments.

Stock markets in Hong Kong, Tokyo and Shanghai also plunged, signaling that the trouble isn’t limited to the U.S. As we learned in 2008, this is now a global economy and investors around the world reflect what’s happening on the political stage. For example, between mid-September and mid-December the London Stock Exchange dropped from 4794 to 3867 on Dec. 10, a contraction of about 20 percent. Keep in mind that Brexit is scheduled to begin this spring.

The Federal Reserve has been fighting inflation with interest rate hikes, and a long, drawn-out series of those has gradually begun to hurt the housing market. That sector is also suffering because of a huge rise in the cost of construction materials, in large part as a result of tariffs.

Any stimulus provided by the massive corporate tax cuts last year seems to have been less a shot in the arm than just one more reason for profit taking. Perhaps because it essentially benefitted businesses and not consumers, the tax relief bill hasn’t had the impact it might have had.

There’s another disturbing sign of coming global recession. On Dec. 5, one day after the stock markets stumbled, the OECD (oecd.org) released its 2018 report on global taxes. Those figures relate to the relationship between GDP and tax revenues in advanced economies, and they are extrapolated from 2017 data. Taxes are going up everywhere. In fact, the OECD average is now higher than it has ever been, and increases were seen last year in 19 of the 34 countries being monitored. Taxes are now higher in 21 countries than they were in 2007, right before the last recession.

High taxes are an indicator that governments are not living within their means. They are also signs that the government’s revenue stream is constraining. That’s especially true in the U.S., where both the trade deficit and the federal budget deficit are both growing.

There are several steps that we can and should take right now, to minimize the effects of a coming recession. And even if the economy doesn’t take that nosedive, these measures can help ensure a healthier profit picture over time.

The first and most obvious is to limit debt exposure, especially on loans that carry a variable interest rate. As those interest rates continue to rise, higher payments can chew up more and more of a shop’s net profit. It is advisable to pay off variable rate loans as soon as possible, and convert long-term unavoidable debt (especially mortgages) to a fixed rate before inflation and more rate hikes kick in.

Now is a good time to contact local, state and federal agencies and utility companies to find programs that might help with the costs of updating. If a woodshop owner waits too long, these programs will disappear because government agencies always cancel them when budgets are tight during a recession.

If the shop isn’t practicing lean manufacturing, this might be a good time to find out what it’s all about. In a recession, lean and efficient shops are definitely going to have a better chance of surviving if traditional businesses begin to fail. One facet of lean manufacturing is just-in-time, which helps keep inventory levels (and the cash tied up in them) as low as possible.

It could be advantageous to invest in machinery and automation now, before rising interest rates and fading tax incentives work against you.

Be prepared to adjust your catalog. In hard times, high-end casework can be among the first market segments to suffer, depending on geography. Just as brick and mortar retail stores have learned to change or die, the custom wood industry is going to have to find creative ways to deliver perceived value at a lower cost. The current revolution in RTA hardware may offer some opportunities when you’re thinking of ways to cut costs and keep quality.

Hiring might get easier. Currently, politicians (but not too many economists) point to the low unemployment rate as a sign of good times. Unfortunately, the reality is that it disguises a massive problem for the U.S. economy. The current dearth of qualified potential employees simply means that we are not educating for our needs, and that millions of people are now working low-paying service jobs rather than high-paying skilled ones. As the recession grows, a lot more people in skilled positions are going to move down the ladder as companies such as Boeing and the car manufacturers downsize or automate. Given the way in which our industry is becoming more and more reliant on apps plus automatic machinery and robotics, this may be a good thing. We should be able to find more qualified applicants who can help develop and run this technology.

This article originally appeared in the February 2019 issue.