It is really hard to get excited about the current economic climate. While it is technically in a period of recovery, it is the most sluggish recovery in modern times. U.S. GNP growth sputtered along at a clip of +1.2% in the second quarter[i]. Ho hum.

Our future prospects are about as clear the drinking water in Rio De Janeiro. Some economists predict a recession in 2018-2019. Between now and then, most pontificate that we will have more of the same: tepid growth and very modest inflation. You might describe the mood as slump-timistic.

But pulling back the Kimono on GNP paints a sobering picture. Consider the key contributors to GNP growth in the second quarter:

  • Consumer Spending: +2.83%
  • Net Trade: +.023%
  • Government Spending: -.16%
  • Residential Investment: -.24%
  • Business Investment: -.28%
  • Change in Inventories: -1.16%

The U.S. economy is being driven by consumer spending, and not private investment. Inventories are tightening. Home building is lackluster. In a period of austerity, the U.S. government is not spending freely.

Of the levers for growth, consumer spending may be the least favorable with regard to our long-term financial health. While it is gratifying that our friends and neighbors have the confidence to buy more movie tickets and sailboats, it does not bode well for long-term prosperity.

2015 was a hot year for acquisitions, but the market has since cooled considerably. The acquisition frenzy was certainly influenced by the inability of companies to generate organic growth.

One might argue that well-run companies are still prospering. I was recently in a conversation with a group of entrepreneurs in a similar industry. While they were all doing well, they had heard of less organized competitors who were begging for work.

Thus, it appears in this economy that the rich are growing richer and poor are getting poorer. Professionally managed companies will have the opportunity to hire better talent and retain loyal customers. Every management team will have to clearly define its targets, and which projects it is willing to accept. It would be easy to fall into the trap of venturing out into red oceans, with bad customers at low margins.

So budget wisely, and beware of continuously choppy waters ahead.

 

[i] “US in Weakest Recovery Since ’49” by Eric Morate, The Wall Street Journal