Hello, my name is Jim Tompkins, and I am the CEO of Tompkins Associates and Tompkins International. I am pleased to be with you today to present our 4th part of our 4th series of the Global Supply Chain Podcast.
This 4th series has taken a slight diversion from the supply-chain specific content of our first three series' and looks at a broader subject that nevertheless has a major impact on us supply chain professionals. This broader subject is the Great Comeback.
The Great Comeback is my phrase for the recovery and return to prosperity in response to the economic meltdown we all have experienced over the last half of 2008 and the first six months of 2009. In this four-part series I covered the things you must do to be ready for your organization's Great Comeback.
In the first three parts of this series, I covered why this topic is so important, the Great Comeback process, and the timing of the Great Comeback. In this last installment, I will present an update on the economy and conclude this series.
The last four months have been an exciting time to be engaged in business, as there is so much happening: Like an economics class, but happening in the world around us. In May I read over 20 reports where economists said the bottom of the recession is behind us.
May also saw improvements in:
Consumer confidence
US leading index
Help-wanted online index
Employment trends index
CEO confidence
Small business owner sentiment
And many other market and financial indicators. At the same time we read the pain was not done, unemployment remains a major issue, and the consumers are changed and cautious.
June we saw further positive signs in that:
Durable goods orders were up,
Investment in capital equipment was up,
Consumer sentiment index continued to climb, and
Consumer savings was at an all-time high since 1993.
July saw little discussion about hitting bottom, but rather discussion about a long recovery already being underway. Caution was that the consumer was changed and not roaring back on a spending spree. However housing and automotive were reported to be stable.
But job cuts continued as increased consumption was supported by reducing inventories and increasing productivity, and not by hiring people. Consumer confidence was down, as they were concerned about unemployment and the huge drop in wealth experienced by everyone.
August is a different month, as patience has worn thin, speculation and second guessing is high, and many are disappointed in the lack of stimulus that has occurred as a part of the stimulus plans. Consumer confidence slipped again in response to the noise in the marketplace. Investors were questioning the return of the stock market, as it was not clear if the market had returned, or we were just celebrating dodging the financial doom.
The reality is the stock market is not healthy, just up from panic lows. Okay, so where are we and what should we expect?
Specifically, three questions:
1. What is the status of recovery and comeback?
2. What will be the shape of recovery and comeback: V, U, W, or L?
3. What economies will recover first, and how about the global economy?
I know of no one who thinks we can recover from this great recession without a very significant stimulus to get the economies growing again. The stimulus by different countries around the world began in the 3rd quarter of 2008. The consumer has taken this Great Recession very hard and so was very cautious and hesitant to spend the stimulus money.
Much went to pay down debt, much went to savings, and so it was only after the consumer felt more comfortable about their personal safety net that they began to spend again. Eventually, this stimulus did lead to increased consumption.
However, this increased consumption did not result in an increase in gross domestic product, as business too was being cautious and hesitant, and instead of increasing production in tune with increased consumption, they handled increased consumption by first reducing inventory, and then increasing productivity.
So business continued to layoff people, even though their top line was being restored. This beget the improved profit reports that beget the improved stock market performance. Eventually, enough stimulus finally found its way into increased consumption, so that inventories were depleted and further productivity improvements could not meet demand, so plant utilization increased in July for the first time in many years. This increased consumption, then, finally resulted in an increase in the GDP.
This led to increased employment, with me still predicting that unemployment will continue to grow until the end of the year, but at a reduced rate, with true unemployed growth not occurring until January 2010. Nevertheless, this increased unemployment will beget increased capacity utilization, which will then allow the economic growth cycle to continue with increased GDP, increased capital expenditure that will start in the 3rd quarter of 2009, which will result in further increased employment, consumption, GDP, and more capital expenditure.
So the recovery and comeback are here: The mechanics are all in place and they are working. This then leads to the 2nd question about the shape of the recovery and the comeback. This is a difficult question, as it is the wrong question. There is no answer to the question: What is the shape of recovery and comeback. It depends on the sector and how companies are positioned.
In general, sectors will respond as follows:
Necessities and low cost discretionary items- V (quick to tank, quick to respond)
Stimulated durable goods - U
High cost discretionary items - Long U, with a protracted base of the U
The only ones that are really talking about an L are folks who do not believe in government stimulus, and the folks who anticipate a W are thinking well beyond years 2010, 2011 and 2012, and are beyond the ability to predict or understand the long term implications of the Great Recession of 2008. The third question has to do with what economies will recover first, and how the global economy will recover and come back.
The answer here is actually quite straight forward: The economies to recover first have been the ones where the stimulus has been most effective. Unfortunately, although the US stimulus package is the largest, it has been very slow to flow into the economy. In fact, of the over $800 billion dollar total US stimulus package, by the end of 2009, only a little over $100 billion will flow into the marketplace. Next year, 2010, will be the peak, with over 225 billion flowing, and then another $175 billion in year 2011.
Unfortunately, this slow flow of funds has resulted in a delayed response by the US market. To the contrary, the Chinese stimulus has been most effective, followed by the European stimulus. Thus, this is the order of economic recovery. First, China, then Europe, and then the US. Unfortunately, the global economy will not be fully restored until the US consumer fully returns to the marketplace in the mid of 2010.
So there you have the great comeback story. As we said in the 2nd installment in this series:
It is the companies who plan for their comeback who are the companies that will recover, grow, and prosper
The 5 Steps of Comeback planning process are:
1. Environmental Assessment
2. Competitive Intelligence
3. Comeback Expectations
4. Organizational Analysis
5. Actually Defining the Comeback Plan
The economy is returning. You need to get on with your comeback plan. Any delays now can have a major, lasting, long term effect on your organization's success. Thank you for being with us for this 4th series.
I look forward to being with you in 2 weeks when we begin our 5th series on a critical part of the supply chain continuous improvement process: Benchmarking and best practices.
This five part series will include an introduction to the supply chain consortium and how this consortium can help you achieve supply chain excellence. Until we speak again I wish you well - all the best.
