Is This the Start of a Correction or Recession?

Last week saw a double-whammy in economic news. For one, the previously invincible Chinese economy appeared to show some weaknesses, marked by a significant decline in the Shanghai stock market. This drop cascaded globally, as the US capital markets fell in turn by a few percentage points. But perhaps even more important is new economic data coming out of the US that suggests the nation's economy is not on as solid footing as many thought.

According to The New York Times, "the Commerce Department reported that economic growth inched ahead by 2.2 percent in the fourth quarter of last year, only slightly faster than the 2 percent growth recorded in the third quarter and substantially below the economy's long-term trend rate of growth ... the downward revision, by 1.3 percentage points, in the preliminary estimate of gross domestic product was almost three times the average adjustment since the early 1980s, which is 0.5 percentage point. Coupled with a 17 percent decline in new-home sales in January and a 7.8 percent drop last month in orders of durable goods like computers and washing machines, the new data indicated the economy was much weaker than it seemed."

I apologize for the level of detail I just quoted -- there's a lot of numbers in there -- but it's important to grasp the magnitude of the downward revision combined with declining home sales and durable goods orders (not to mention falling housing prices). When I look at this data, I see the potential for rising inventory levels, not to mention general pricing pressure despite stable commodity prices for metals, energy and other key economic inputs (at least so far). Unless the commodity rise turns into a bubble that pops -- unlikely in the near term -- the combination of these factors could quickly lead the US economy into a recession in the next 12 months, as many economists like Alan Greenspan are suggesting is possible. And it will be particular bad for manufacturers who will have to wait to see major COGs inputs and commodity fall after the a downturn takes hold.

Within companies, procurement can -- and should -- be on the front lines of monitoring the North American economy (not to mention the Chinese situation as well). The strong possibility of a downturn might suggest it's a goodtime to revisit core strategies as well as to invest in risk management capabilities to not only monitor supplier stability, but to minimize downside risk should supply disruptions and volatile pricing pressures take even greater hold. From a strategy standpoint, it might be a good time to insure that smaller order quantities enjoy the same pricing breaks as larger orders (a negotiation of this sort can never hurt). Or, perhaps, it might be time to pay a premium to have suppliers take greater inventory risk through JIT and VMI programs that improve working capital and reduce shop floor, warehousing, and retail space requirements.

Jason Busch

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