Is a Recession Ahead? Is it Time to Dust off the Hammer?

OK, I admit the second part of the title of this post is a bit of an inside joke. I'd never advocate using a hammer exclusively to beat down suppliers, but given the content you're about to read, it's important to consider that we might see more and more categories moving into the "leverage" spend bucket in the coming years, if market capacity increases as demand slackens. What is this news you ask? Perhaps the most important publicly traded economic indicator, Caterpillar, has reduced guidance for 2007. According to Bloomberg, "Sales of construction equipment such as bulldozers will be less than the company anticipated as a housing slump triggers a period of slack economic growth, Chief Executive Officer James Owens said in the statement. Peoria, Illinois-based Caterpillar said dealers started cutting back inventory in the quarter and it expects a 'sharp drop' in sales of truck engines ... Caterpillar is a bellwether of the U.S. economy because its sales span industries from mining to oil to construction, making orders dependent on both consumers and corporate spending. The U.S. economy slowed to a 2.6 percent rate of growth in the second quarter, and Caterpillar said today that third-quarter growth was even slower, possibly less than 2 percent."

The timing of Cat's revenue warning could not be more opportune, at least from my perspective as someone who tracks the market as a columnist, and called out the chance of a recession earlier this fall (though not on these virtual pages). A few weeks back, I co-wrote an op/ed for Surplus Record, a print-based industrial publication which I've served as Editor-at-Large of for years, discussing what I believe is the high probability chance of recession in 2007 (Unfortunately, the third generation Publisher, Tom Scanlan, has not yet put the op/eds from the print edition online).

In the piece, I wrote that "the combination of a stalled and slumping housing market, declining auto sales, and inverse debt yield curves do not combine to paint a rosy picture for the economy in the coming 12 months. [But] while many economic forecasters are suggesting a better picture than the one framed in this column, it is important to note that according to market historian James Stark, 'Not one recession in the past 50 years was forecast in advance by a major poll of economic forecasters.' Clearly, spotting recessions is not a skill economists like to claim as their own ... [But] even if a recession does not occur, manufacturers can plan for the worst by bringing down the costs of their operating structure. In a capital constrained environment, reducing the costs of goods sold through better direct materials sourcing and trimming unnecessary indirect expenditures is perhaps the easiest lever many companies will have to pull. But they should not stop there. From examining manufacturing processes for unnecessary waste to reducing physical inventories, there are many additional strategies even small manufacturers can take to prepare for volatile times ahead."

Like many who are invested in the domestic and international equity markets, I hope that we do not see a prolonged period of stagnation or even a true recession (marked by negative GDP growth). But if we do, I suspect that Spend Management will take on a whole new level of importance, as top line growth opportunities become even harder to identify and realize.

Jason Busch

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