Transcript: Recovery and Resiliency – Emerging Stronger and Smarter
Deloitte Insights Podcast
Welcome to another edition of Deloitte Insights, a production of Deloitte LLP. Deloitte Insights is an audio news podcast that looks at important business issues. Today program, Recovery and Resiliency — Emerging Stronger and Smarter.
There are signs that we are on a verge of an economic upturn, but the shape, timing, and strength of the recovery is still a question. How might the pending upturn impact company’s growth strategies and what should organizations consider as we emerge from the recession?
Joining me today to discuss some of these issues are David Williams and Heather Boushey. David is the CEO of Deloitte Financial Advisory Services LLP and Heather is a senior economist at the Center for American Progress. Welcome to the program!
David Williams: Thank you.
Heather Boushey: Thank you.
Interviewer: Heather, let’s begin by briefly discussing where the U.S. economy stands today. what are some challenges facing us on a macroeconomic level as we work towards recovery, and what do you see as the likely contenders for the shape of the recovery?
HB: Well, it’s a great place to start? I have been trying to be optimistic for quite some time about the U.S. economy and I was not too pleased quite frankly when we got the most recent labor market picture at the beginning of this month. Although we saw that unemployment is down a little bit, it is at 9.7%, we we hit a peak at 10% a few months ago, we have now seen four months where we haven’t seen any job growth and this recession was deeper and more protracted than any recession in recent memory, which shed over 6% of the the total jobs in our economy have been shed and we would expect that as the economy sort of move from recession into recovery that many firms would be sort of cut to the bone that they would start hiring people pretty quickly, and that’s not unfortunately what we have been seeing. We have seen now four months of the number of jobs lost each month hovering in about 30,000 and in about 36,000 jobs lost last month, not that many jobs lost, but we haven’t seen that sort of the move towards job creation and a focus on job creation because that’s really a big part of what the economy is all about. You know consumers make up 70% of our U.S. economy and until they start seeing jobs, they are not going to be able to start spending robustly over the short, medium, and long term. Now, folks say their home values have fallen, their savings have been depleted, and although people can borrow a little bit, they certainly can’t borrow the way that they could in the 2000 with rising home prices. So if we are concerned about where the macroeconomy is going, we have to be concerned front and center with whether or not family incomes are going to rise and if we are going to able to see that spending and that’s really going to be depend on job creation, and unfortunately, we haven’t seen a lot of that just yet. Over the past six months, I was getting a little optimistic because we started to see a couple of good trends in the labor market. We started to see firms hire temporary workers and we started to see that hours that they work their current employees start to go up a little bit and those good signs because they indicate that you hire a temporary worker for a few weeks and then as you see your demand sort of solidified at a higher level, then you are going to hire that permanent worker and that is why the lack of robust job creation over the past few months is especially disconcerting because it means that those signs that maybe we are going to see some hiring actually haven’t fanned out and in fact we have seen the pace of hiring temporary workers slow and so I think we need to think long and hard about where demand is going to come from. We signed the great economic recovery package that has been out there, it boosted jobs, it saved almost 2 million jobs by now, but it has not been enough to push us over the edge. The president stated a commitment to increase export growth, but we need to figure out how to make that happen in a short term.
DW: I would agree completely with Heather’s statement about jobs being absolutely essential and while we see a great number of interestingly positive signs about other aspects of the economy, productivity and business related, upturn in terms of what’s going on in the economy, jobs are the key and I think the truth is in that Heather indicated was that until people feel comfortable that jobs are being created, that doesn’t translate into a clear desire to spend. Everybody is risk averse and as a result, the consumption and the economy doesn’t drive the type of growth that we are looking for, so I do agree that jobs are the main issue and right now we are not seeing anything that would be a greatly positive sign.
Interviewer: David, how are the economic indicators Heather outlined impacting how companies rethink their growth strategies as we begin to see signs of a recovery?
DW: Well, certainly they are having an impact. Folks are always looking to grow and after a downturn they are looking to grow as quickly as they possibly can. There are really only three ways to grow today’s company. The first one is through optimizing the existing portfolio of products and services, the second is to take market share from a competitor, and the third is through merger and acquisition transaction so called inorganic growth. The economy is not growing as Heather indicated, so growing the portfolio has become more and more difficult. We are not seeing market share changes and market shares are very, very hard level to change even in a good economy, let alone in a bad one. So what we are seeing in terms of growth strategies is a refocus on M&A. Limited in some respects by the credit dysfunction that we have had in the economy, but we are starting to see and have seen over the past, I would say, few quarters, some significant change in M&A. It, by some economists, measures have come roaring back and we are seeing a great deal of emerging market activity taking place with regard to M&A. The other thing we are seeing is a clear desire to manage risks and to control the possible bad outcome that might occur as a result of some of the growth strategies that companies are entering into. Many of them are emerging market and much of the activity is in a market where our client does not have a great deal of knowledge in terms of how to do business, so risk rises to the top of their agenda as well, so concerns about growth fundamentally, but also managing risks in the context of that growth.
HB: And David, I want to add to that, especially on this question of risk. Stepping back actually, our main concern is that if companies don’t pursue a growth strategy that creates U.S. jobs, then we are looking at a prolonged period of sort of a lackluster economy moving forward here in the United States and so I think there is a lot of challenges there in terms from the policy side and what is happening in Washington and state houses around the country that is actually encouraging the growth strategy that will create jobs and income growth that will support U.S. demand. So that is sort of one set of issues, but that gets to the other question which you mentioned which is risks and one of the things we have been hearing from some of the businesses that we talked to, is a concern that because we had this massive great recession and of course all of the challenges in the financial sector alongside this commitment to do something on health care is really sort of led a lot of companies to say, “you know what, I am not really sure what the law of the land is going to be in six months or a year” and that may be hampering growth in some sense. The employers who don’t necessarily know yet what the outcome of the health insurance conversation is going to be, maybe waiting to hire those permanent workers until they have a better sense of what their rights and responsibilities are going to be. Similarly, we need to sort of move forward on the financial regulation in order to give firms the knowledge to know this is what the new regulatory structures are going to look like. So over the past year since the current president took off as, we have been talking a lot about these big issues, financial reform, health care, and energy and climate policy, which we hope we can sort of move towards getting some solutions around that can then lay the foundation, not just for long-term economic growth, because of the policy landscape without change, but also to give firms that security for knowingly at least what their challenges are going to be in those areas as they look to grow.
DW: Certainly, uncertainly is not at all helpful in figuring out how growth takes place and Heather is absolutely right. That uncertainly, I believe, is driving a lot of the risk concerns that we talked about and is also hampering some of the transactions but for that uncertainty the companies might be willing to do.
Interviewer: One way the companies weather the downturn was through cash management and cost reduction programs. How did this new thinking impact a company’s discretionary spending and how are those decisions being looked at in the pending upturn?
DW: Well, certainly with the great recession came a dysfunctional set of credit markets and that impacted companies significantly and it drove a fair amount of the retrenching that companies often did. Sometimes, the term is used cocooning to describe the fact that when cash is not available, when credit is not available, the companies don’t grow, and they actually shrink, and in that what we saw in many instances as a result of this lack for credit. Certainly most growth initiatives have to do funded in some way, shape, or form. You can fund some of it out of current operations, but as you cut cost and reduce expenses design to cover operating expenses is very little, if any, was left over to do some of the growth initiatives that you might want to do beyond that. Companies could certainly use their own stocks and their own capital to drive some of this, but also that’s a problem as well given the fact we were in the middle of recession and often stock prices were depressed, so you using your stocks for that purposes didn’t go anyway near as far as you might have thought. So, this notion of these decisions being short sighted is an interesting one that I hear as well. For example, when in cutting costs might have cut some of those key functions that made them resilient for example lots of companies spend a lot of time cutting their internal audit departments. Many of them made substantial cuts in their legal departments and while most of that was litigation and litigation to some extent is a discretionary spend. A lot of it may have been in areas that were relevant to making sure that organizations were resilient, for example, organizations could find fraud, organizations could defend themselves against law suits that were out there or bring law suits to the extent that they were necessary in order to make sure that the corporate interests were protected. This downturn and the need to manage cash I think is also put companies at some risk as we turnaround with regards to their ability to be resilient.
Interviewer: The downturn let us all both on our personal and a business level to rethink our priorities. Where should we be focusing our attention now so that a strong recovery becomes reality? In your opinion, what are some of the key indicators that suggest we might actually emerge with stronger businesses and a more stable economy?
DW: I will just give you two thoughts with regards to the current state of business that suggest that we could come out of this great recession stronger than we were. One of them is that unfortunately the downside of the lack of the job creation that took place in the economy that Heather spoke about earlier and that is the level of productivity and particularly the level of business productivity in the economy is pretty close to all time highs. I think that is a good thing and I think there has been some lessons learned with regard to doing things smarter in most businesses that will serve business well once they have the opportunity to raise capital and to go on these growth initiatives that they will likely go on as things go forward. The second thing that we seen is also related and that is the ability to manage cost and manage the size and the efficiency of their organization in such difficult times. Those lessons we are finding are not sort of cyclical. They do not go away as a result of the economy recovering. In fact, what we are seeing is many of those companies continuing to implement such things in making them lasting, ongoing, repeatable parts of their businesses and their management structures and opportunities and as a result I think overall once the economy does turn and businesses feel more comfortable in the jobs that we need so much to stir consumption among consumers are created. I think we have hit a reset a button and allowed certain companies and in many industries to rethink their waves of doing things and could be better as a result.
HB: Well, I certainly would second a number of things that you just said David and especially on the productivity , I would agree with that. I want to point out that one of the things that I hope we have learned from 2000s was the rise bubble and the stock bubble kind that was associated with that was really masking some underlying problems in U.S. economy, some pretty big challenges that were now sort of trying to emerge from and when we look at the economic recovery of the 2000, the period from year 2000 through 2007, which was the last economic peak what you see is the that recovery was actually the weakest in the post Word War II period in terms of growth of business investment, in terms of job gains, and employment gains. So, it was a recovery the kind of look good on some level there was a sheen to it especially because so many of us are our home prices you know doubled or triple or you know go up sharper than we ever got possible and a lot of people to feel very wealthy, but the underlying fundamental did not appear to be as strong and I think that moving forward one thing that I hope to see out of this realignment from recession to recovery is an increased focused on the kinds of investment that we need to see to get our economy back on track in a long term, investments that will increase the long-term productive capacity of U.S. industries, lead to sustain job gains, and hopefully make us a lot more competitive in international market. So, that move from finance serving to sort of inflate this bubble to really spur domestic investment of the kind that we need to compete in the 21st century is what I hope to see moving forward.
Interviewer: David are there any final thoughts you would like to share?
DW: Sure. As we come out of the great recession where the focus of most of my clients and most of the companies that we deal with has been on survival. I think the message that I am hearing in the marketplace right now and I am glad that I am hearing it, is that companies are now beginning to transition on things will create growth for them and ultimately make them more resilient in the longer term and I think that absolutely the right focus for them to take even though there may be some question as to where we are in the upturn or whether we are in the upturn. That focus cannot be harmful to companies as they go forward.
Interviewer: Well thank you David and Heather for joining us today.
DW: Thank you very much.
HB: Thank you, it has been a pleasure.
Interviewer: Visit www.deloitte.com/us/recovery to access additional insights on today’s discussion.
You have been listening to Deloitte LLP’s production of Deloitte insights, the program that looks today’s important business issues. We want to hear from you. Contac t us with your feedback or suggestions for future podcast topics and find Deloitte insights at deloitte.com/us/podcasts. This has been a production of Deloitte LLP.
This podcast contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not by means of this presentation rendering accounting, auditing, business, financial, investment, legal, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor it should be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult the qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this podcast.