How much of the deepening downturn is a direct result of the credit crunch, and how much is the result of indirect causes such as dwindling consumer spending out of fear the recession will worsen?
Credit markets remain extremely tight, leaving producers with few choices in terms of raising new finance when confronted with repaying debt immediately. In addition to facing higher cost of credit, companies having been directly affected by credit market turmoil have had trouble accessing capital.
Yet how much of the deepening recession is really a direct result of the credit squeeze, and how much is the result of indirect causes such as consumers and businesses reducing spending out of fear the downturn will worsen?
According to a recent report, it isn’t the direct unavailability of credit that’s making life difficult for mid-sized manufacturers these days. Rather, it is their inability to measure and predict customer demand as confidence in the economy lags and everyone — consumers and businesses alike — seeks to preserve capital.
The survey, conducted by Prime Advantage, a buying consortium for mid-sized manufacturers, showed that 69 percent so far have not been directly affected by the cost or availability of credit — and only 7 percent of companies have been “very much” affected.
At the same time, manufacturing chief financial officers (CFOs) say they are more concerned about demand and demand visibility. While “credit markets and interest rates” was the second most frequently listed concern among the consortium’s member companies, 94 percent said “an inability to measure customer demand” is among their top three concerns today. Seventy-six percent of respondents cited this as the No. 1 concern. (Volatility of the dollar and a new administration and Congress tied for the third most frequently listed concern.)
Interestingly, in another recent survey, conducted by Duke University and CFO magazine, weak and unpredictable demand was also CFOs’ greatest concern.
In the December 2008 survey of 1,275 CFOs, a record 81 percent of U.S. CFOs were more pessimistic about the economy for the year-end 2008 quarter (twice as many as the quarter prior), and 85 percent of European and Asian CFOs were more pessimistic. In the latest Duke/CFO magazine survey, released earlier this month, CFOs again express record pessimism.
In both the December and March findings, weak consumer demand was the top concern.
The Prime Advantage and Duke/CFO findings seem to suggest that a large part of the cause of the ongoing pain is the expectation by consumers and businesses that the economy is only going to get worse.
The Conference Board’s latest Consumer Confidence Index reflects this consumer pessimism, having determined that consumers’ appraisal of overall current conditions — already bleak at the start of the year — worsened further last month. The index, which was relatively flat in January, “reached yet another all-time low in February.”
Consumers anticipating business conditions will worsen over the next six months increased to 40.5 percent from 31.1 percent, while those expecting conditions to improve declined to 8.7 percent from 12.8 percent in January, according to a statement from the independent economic analyst firm.
“All in all, not only do consumers feel overall economic conditions have grown more dire, but just as disconcerting, they anticipate no improvement in conditions over the next six months,” Lynn Franco, director of The Conference Board Consumer Research Center, said.
Because consumers’ near-term outlook has turned significantly negative, many producers are curtailing any and all spending.
“The uncertainty about both near-term and long-term conditions has made it nearly impossible for executives to plan for the future,” CFO magazine senior writer Kate O’Sullivan said in a statement. “Even firms that are doing relatively well are still cutting back ‘just in case,’ exacerbating the situation.
Indeed, it becomes a self-fulfilling notion as fear-based spending reductions result in lower or unpredictable demand.
Already, more than half (51.1 percent) of the 5,000 Conference Board survey respondents last month claimed business conditions are “bad,” up from 47.9 percent in January.
All of this is not to say that the direct unavailability of credit isn’t hurting small and mid-sized manufacturers in a major way. Over the past six months, the amount of external funding provided by bank lines of credit has been about equal to the total amount provided by other sources of borrowing, such as short-term and long-term debt, according to this month’s Duke/CFO study.
Aimed at helping small companies, President Barack Obama this week announced a three-pronged package to unclog the flow of credit to small businesses.
Coming after a $787 billion economic stimulus package and a $410 billion omnibus appropriations measure for the current year, the new program includes hundreds of millions of dollars from the economic stimulus plan to reduce lending fees while increasing government guarantees on a portion of Small Business Administration loans up to 90 percent. It also seeks to increase bank liquidity by injecting $15 billion into banks in order to thaw the credit market and boost lending to small businesses.
Will continued government involvement in the economy be enough to turn the downturn around? What will it take to convince consumers and businesses that it is again safe to open their wallets?
New Study … Reveals Top Concerns of Midsized Manufacturing CFOs
Prime Advantage, Feb. 27, 2009
CFO Survey: Historic Recession to Last Another Year; Earnings, Capital Spending, and Employment Expected to Drop in 2009
Duke University/CFO Magazine, Dec. 12, 2008
CFO Survey: Historic Recession to Last Another 14 Months; Earnings, Capital Spending, and Employment Expected to Drop in 2009
Duke University/CFO Magazine, March 13, 2008
The Conference Board Consumer Confidence Index Plummets Further in February
The Conference Board, Feb. 24, 2009
President Obama and Secretary Geithner Announce Plans to Unlock Credit for Small Businesses
WhiteHouse.gov, March 16, 2009
Unlocking Credit for Small Businesses Fact Sheet
U.S. Dept. of Treasury, March 16, 2009
FY 2009 Omnibus Appropriations Act
House Appropriations Committee, Feb. 23, 2009