Our economy has given us some great rewards in the last few years. North Texas has experienced phenomenal growth for several years now:
- Many large companies have moved here.
- For every one of them, 10 or more supporting businesses have moved here too.
- And don’t forget the housing market plus all the infrastructure to support all the new arrivals.
It’s not just been a bull market, but a roaring bull market and it looks to still have some healthy life still ahead.
On a broader basis, stock market volatility has returned:
- We have had several years of consistent upward movement.
- Investors seem to have reached that point where they are expecting a correction and get a little jittery.
- The market drops quickly on news and then rebounds as bulls continue to buy the dip.
The overall market is still positive.
While there is really no reason for concern just yet, there is something lurking that we should all pay attention to carefully.
That something is interest rates.
- The Fed is signaling more short-term interest increases on top of the ones they have already put in place.
- They will also be selling debt sitting on their balance sheet into the market.
All of this will affect borrowing costs. Not just for our own businesses but for our primary customers and their customers.
Let’s take an example.
North Texas is in a building boom.
Those buildings (projects) have a timeline to completion which could run a few years.
Lots of different companies provide goods and services to these projects: companies like general contractors, architects, engineering firms, electrical, plumbing and construction contractors, material suppliers, and related trades and suppliers.
These companies employ a lot of people who buy goods and services from other businesses. Many business sectors benefit.
All projects rely on financing.
Companies in this supply chain use leverage (debt) too. Increases in interest rates which is the cost of debt translates to less funds available for other purposes.
As interest rates rise the number of projects will likely decrease because the economics won’t work as well. Some projects already scheduled could be delayed or scrapped. With fewer projects in the mix there will be greater competition for the remainder creating downward pressure on the price of services as well as a build-up in inventories.
Those with higher debt service and the least free cash flow will begin cutting costs, delaying payments, laying off employees or filing the big “B.”
Then the ripple effect begins.
There will fewer people to buy certain types of goods and services causing a slowdown in other business sectors. We all know the process.
Today everyone’s boat is floating high with the tide. It’s easy to make money. The real test of leadership is being prepared for adversity–that “what if” you don’t really want to think about – and how you perform when it comes. The cycles of 2000-2001, 2007-2009 and 2011 and the precursors are repeatable (I can go much further back but that’s giving away age).
We are enjoying the good times, will we be prepared when that changes? :
- Can you reduce debt and what you think your borrowing needs are or will be?
- Can you improve your accounts receivable collection time with your top customers by even a few days?
- Do you have the right customers or should you amp up marketing?
- Do you have the right people and processes in place inside your company and as partners?
We can get away with much while things are good. It seems it is also a good time to fine tune. What do you think? Sure would like to hear your views.