Economic growth continued strongly in the fourth quarter of 2023, defying many recession forecasts, including my own. We may still have a few quarters of slower growth and the possibility of a recession remains, but the most likely path is growth. Distressed business leaders need to rethink their relationships with labor, capital investment, and financing.
Growth in gross domestic product, GDP, adjusted for inflation, was 3.3% annually in the 4th quarter. Our long-term compound growth over the past two decades has been 1.9%, so we did well last quarter, driven by a very strong 4.9% Q3 growth.
Labor Markets Will Tighten
Recruiting and retaining employees should be at the top of the list in many job updates in the news. The labor market, as measured by layoffs and job openings, has softened in recent months. Unemployment rose slightly, but monthly statistics show steady gains in net job growth.
The good news for employers comes amid a decade of low growth in the working-age population. Companies need to go back to the old busy work mentality. Perhaps “harvesting” is going too far; it was a hiring practice with future needs in mind. But for real openings, it makes sense to hire sooner. Working on employee retention will pay dividends as the labor market tightens again.
Capital Investments to Increase Productivity
Many companies have cut their capital spending plans in 2023. Expected slow growth or negative growth meant less need for new capacity. Interest rates were higher, which made some projects unplanned. And banks have tightened lending standards, affecting even businesses willing to pay higher interest rates.
Now it’s time to put those projects back on the to-do list. Future demand looks better than before. More importantly, projects to increase labor productivity coincide with a possible tightening of the labor market.
For some equipment, it will bother those who drag their feet to improve their long-term performance and productivity.
Talk to the Bank About Loans
We don’t yet know if banks will loosen their lending standards, but it’s inevitable as the economic climate continues to improve. Many business owners spend little time talking to their bankers. The conversation should be less about golf and more about creditworthiness. The best questions to ask are related to the bank’s view of the company’s finances. Is the bank ready to give a loan? Would the company be willing to increase its credit line if it found good opportunities? Will it cut credit availability after one bad quarter?
When talking about a loan, don’t neglect to ask about interest rates. Negotiable, so ask. When the economy improves, banks tend to lower rates. This is called the “spread” over the value of their funds. It may be too early to get better interest rates now, but if the outlook for the economy continues to strengthen, consider the idea.
The US economy is not booming. The big change is one of expectations: they were weak, now they are moderate. This change should prompt some tactical changes in the business.
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