Redbank Quarterly Business Review

As the quarter comes to a close I thought I would share some of what we've been reading about the economy.  The name of this update post is borrowed from the meetings we hold with some of our clients to review progress and adjust course on a quarterly basis.

The Outlook

The economy in general continues to pick up steam.  February marked a full year of 200,000 new jobs gained per month.  It’s safe to say that not everyone is restored to their pre-recession positions.  There are still many that are employed at levels below where they were in 2007.  It’s also safe to say that things have generally picked up for the majority.  Recent declines in the price per barrel of oil make that industry and the ones serving it a notable exception.  The decline has had a marked downward impact on selling prices and on the appetite for fracking development which appears to have all but stopped.  Wells continue to be operated, but development is paused.  This is likely to remain the case until growth absorbs the capacity in this industry.  Fracking and other new sources increased the capacity of the industry which eventually led to price declines.  As a result, the Saudis, in particular, decided to maintain production levels and constant barrel output in order to put pressure on the newer sources including fracking but also the BRIC (Brazil, Russia, India and China) countries.  The alternative would have been to cede share permanently which was viewed as the greater of two evils.    This, coupled with a slower growth percentage rate for the Chinese economy, whose growth had been driving higher demand for oil, will put tremendous pressure on the BRICs and to a lesser extent the fracking industry.

American consumers of oil are experiencing a low oil dividend right now which surpasses that experienced in other regions due to the fact that oil is traded in dollars and the dollar is strong right now. 

The oil raw materials value chain industries, particularly petroleum, chemicals, metals, steel pipe, transportation, and containers, are already affected by this slowdown in development activity.  Other industries will see improvements in raw materials and transportation costs.  It remains to be seen if the cold currently being experienced by the petroleum industry will be caught by the rest of the economy offsetting the boon related to reduced fuel prices.  To put this in perspective, the petroleum extraction and development sector at $320 billion is less than two percent of the U.S. economy.  Its value chain, the people and businesses that supply it, is in turn, a fraction of that number.  Those alone are not enough to significantly slow the economy. 

Other sectors, including banking and construction appear to be experiencing welcomed expansions.  Banks are currently “gushing cash” according to one recent headline.  With unemployment expected to be at or below 5.5%, and disposable income expected to rise 3.8% this year, consumers are able to finance homes and expanded credit card debt.  However the appetite for debt still appears staid relative to 2007 levels.  The ability to maintain these debts is improved due to the higher employment levels which also mean good news for the collections industry.  More employed debtors means more collectible debts.  Banks will also be aided by expected hikes in interest rates (10 year T’s +.5%) and increased business spending (+5%).

In the construction sector, new housing starts are predicted to hit 770,000 up more than 100,000 from 2014.  Home remodelers, designers and home improvement suppliers should see a 3.5% expansion or more across the country with pockets outstripping this.  In the commercial sector, construction of commercial and health care facilities is expected to rise this year as well.

Manufacturing and distribution seem to be riding the demand wave.  They are expected to grow slightly behind the 5% rate for the rest of the economy.  Automotive will lag behind, but it will feel like a pick-up.  They will see a rise to 16.8 million units sold, up 2% from 16.4 in 2014.  This continued increase should help ease some of the downward pressure put on metals by the oil & gas pull back.

Inflation at 1.8% can be expected to about double last year’s rate.  That sounds terrible, but the resulting 1.8% could be considered healthy for the economy.  Some economists say a little inflation is needed in order to avoid the very devastating deflation.  In a deflation, consumers get used to waiting for prices to fall which leads to an ever slowing economy and a destructive self-reinforcing cycle.

What can upset this apple cart?  Shocks that can effect this otherwise rosy picture include war in Europe, which would be one approach Putin could take to overcome his domestic crises, a 9/11 scale terror attack or a Katrina scale natural disaster.  Our economy right now is pretty resilient.  Even the Boston Marathon attack, a grave tragedy, did not phase the national economy.

At this time our advice to clients is to look to profitable growth... make sure that new business you add is also accretive and adds EBITDA.  Also, don't forget customer retention as a growth strategy.  Your customers will likely be growing this year and you can simply grow with them, if you retain them.  A customer defection fights growth and must be replaced BEFORE growth can occur.  We are also working with several clients on resiliency planning which goes beyond sustainability and looks to shock-proofing the business.  Asking; "What can go wrong and how can we protect ourselves from such events?"