Thoughts on the Current Uncertain Economic Environment
On the economy, here is what we know:
The manufacturing sector growth is showing weakness, and sales growth from large “economic bellwether” public companies has slowed in recent quarters.
Over the last 5 years, the 10 year US Treasury peaked at 3.24% on Nov 12, 2018 . It bottomed in early September at 1.47% and now sits at 1.63%. The Fed has shifted from tightening to lowering interest rates. In addition, the central bank is at a weaker position now in terms of fighting economic weakness because of its limited room to lower interest rates further.
The US consumer has been spending money on their homes, but growth is slowing in that area and trending downward for the last few quarters.
Here are some areas of risk/uncertainty:
The trade war between US and China
Probability of monetary policy error
The US government’s willingness to use fiscal policy to help the economy. We have already had tax cuts, which haven’t yet materially produced the touted benefits of sustained higher growth, larger business investment and increased worker pay. The budget deficit reaching over $1 trillion for the next fiscal year will mean a lack of agreement on government spending plans, especially in an election year.
The yield curve has inverted, which historically has meant a recession is on the horizon; however, a yield curve inversion doesn’t give us insight on recession timing.
Near-zero global interest rates: G-7 nations are already experiencing negative real long-term interest rates, which suggest economic weakness and a sizeable macroeconomic challenge
Will the US experience something similar to Japan? 20 years ago, Japan’s central bank (BOJ) adopted zero interest rates. Since then, we have witnessed the limits of what a central bank can do as the BOJ has failed to reflate their economy and rates have remained rock-bottom. In the US, will weak economic growth and low inflation lead to lower interest rates? Combined with falling confidence, the US may find it hard to escape a low rate environment.
How can the finance team help be effective risk managers?
Build out a strong Financial Planning and Analysis function, which enables a collaborative budgeting process
With a rolling forecast that is updated monthly with actual results, a business of any size can make smarter, data-driven decisions as new information comes in each month
Communication and discussion of financial info/KPIs among C-level team and departments means fewer surprises and good teamwork on important decisions