Economy Watch: More of the Same Till 2013?

OK, here's the bad news: The current economic and fiscal uncertainty in the United States will most likely persist for at least two more years. You probably suspected that already, but the Federal Open Market Committee (FOMC), the interest rate-setting arm of the Federal Reserve, confirmed as much in a statement following a meeting today. Here's how the FOMC put it:

    The Committee currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

Of course, the FOMC did not explicitly state it expects continued turmoil in the US economy for another couple of years. However, reading between the lines, it is clear that a return to normal conditions is unlikely for another couple of years at the earliest. The FOMC said it will keep the already-low interest rates on federal funds at the zero to 0.25 percent level. It said this was being done “to promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.”

The stock market swooned at the news, confirming my conclusion above. Investors don't like being told an unacceptable situation will be the status quo for another couple of years, even if they suspect this will most likely be the case. Rather, they want to know how governments and regulators will improve the situation and help boost their investments. Unfortunately, the Federal Reserve itself is running out of ammo. It can keep interest rates low (done that) or implement “quantitative easing” by buying Treasuries to inject funds into the market (done that, too). Beyond this, however, the government must wait for the market to clean up its mess and heal itself.

What does this mean for businesses in the high-tech market? First, the decision to keep interest rates low is a double-edged sword. It means companies generating huge cash flow (think of {complink 379|Apple Inc.}) will continue to generate slit-size returns on their investment portfolios. That's the negative. On the positive side, low interest rates also translate into low borrowing costs for companies with credit ratings pristine enough to attract wary lenders. Hurrah! This applies to many of the companies in the high-tech sector. A few are highly leveraged, but most publicly traded companies in this sector either are flush with cash or have limited debts. They should, therefore, be able to secure the funds to make acquisitions and consolidate their market sectors.

A few more immediate concerns from the FOMC's statement should be of interest to the electronics manufacturing world. The premier US banking organization warned, “Economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.” Again, the electronics industry and other sectors of the economy are already aware of the slowdown in consumer spending, as well as the lack of improvements in the labor market. What spooked investors was the hint this may persist for a while.

I intend to address the subject in a separate blog, but I am equally concerned now about how the electronics industry will perform in the second half of the year. We'll know more when companies start to announce third-quarter results and provide fourth-quarter outlooks, but right now I would say it makes sense to review sales forecasts again to avoid getting caught in a situation of oversupply should anticipated demand fail to materialize.

8 comments on “Economy Watch: More of the Same Till 2013?

  1. techendeavour123
    August 10, 2011

    The nightmare is predicted to be a reality again! The debt crisis was supposed to be postpond but this is far from real now. The emerging countries like China is now a capitalist state when compared to Uncle Sam.

    The States making maximum efforts to support big banks for them tto sustain the financial meltdown, the smaller banking surving no chances to pull it over. With this strategy the US housing market is falling apart.

    Thus this financial apocalypse is a result of the big money keepers of US sqeezing out the cash suppy and lending!

    iphone application development



  2. Jay_Bond
    August 10, 2011

    I think most investors, company execs and a majority of people who pay attention to the economy and the markets were all expecting an announcement like this. Most companies, mine included, have been told to reel in any unnecessary spending for 2012 and focus on 2013. The markets will fluctuate during this time period and we should see some growth. A big lingering question is, are we still going to continue to see housing and commercial loans defaulting at rates that will put any growth to a quick halt?

    Some economists stated that the commercial sector was in deeper trouble than residential homeowners, and that a couple years after the housing crash we could see it again with commercial property and it would be worse. Given our current economic struggles, hopefully the overall housing crisis hit earlier than expected and we can focus on growth and getting the deficit under control.


  3. eemom
    August 10, 2011

    While the economy is in flux, there are a number of large corporations that can take advantage of low interest rates as they continue to collect cash.  Why isn't this resulting in more employment?  I understand that we are only talking about the electronics market segment, but, I would have to believe that the same holds true for other markets.  At what point does it become these collective corporations responsibility to aid in some economy recovery?

  4. mfbertozzi
    August 10, 2011

    eemom, if we consider drammatic events currently in progress in UK, we could assume gap between citizens (employees) and Govs/Managers at Enterprises is still increasing. Not to say that form of protest is right. It is absolutely to ban. But economy is falling down since two years, no real recovery plans have achieved concrete results and citizens are really worried about. Who is really listening to them? For those reason I agree with Bolaji, electronics forecast has to be revised and as per other sectors, it needs a real plan from corporations to going back in track. No plans is an option and if happens, imo, managers have to leave their seat.

    August 11, 2011

    It is difficult to find encouraging news anywhere these days.  I believe we are in for challenging times for the next few years.  What we need to see now is strong leadership from our governments to promote fiscal policies that steer us through the crisis.  We also need our business leaders to take proactive and creative action to maximize their current position to come out of the lull stronger.  However I still see governments giving the big banks (some of which are majority owned by the govt) too easy a ride on things like lending to small business and obscene top management bonuses.  I also see weak business leaders simply reducing costs and making no strategic investments (like investing in acquisitions or manufacturing capabilities) for fear of spooking their investors on a quarter by quarter basis.  I need some encouragement …..please !

  6. Ariella
    August 11, 2011

      I need some encouragement …..please !” 

    Don't we all? People really need to feel encouraged to make plans to grow their business.

  7. bolaji ojo
    August 11, 2011

    Ariella, Perhaps the best encouragement businesses need is a stable political environment. When adults squabble in Congress and European governments bumble around while a fiscal fire rages around them companies won't feel that excited about the future.

    The uncertainty is not always bad, however. It also makes companies and individuals wary and more determined to ensure each step they take is carefully thought through. The only challenge is that companies can easily become very hesitant and suffer “analysis paralysis.”

  8. hwong
    August 19, 2011

    @Ariella –  Totally agreed. People like you and me need to feel that there is security and hope for the future before the economy will pick up again. Unfortunately, the debt is so bad in our country that we are losing faith in current environment. Let's just keep our fingers crossed for global peace and prosperity

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