What can we expect in 2010 as we continue to see signs the economy is beginning to recover and expand? Uncertainty is gone. We’re certain it’s going to be a tough year but challenges will be different from those we encountered in 2009.
By Jose Ruiz
When 2009 began uncertainty filled the air and the economy paralyzed. It was like driving in dense fog. Trying to sort out what was around us, while we attempted to move forward with caution, hoping nothing would come out of nowhere and hit us. Swine flu did just that and it was not until June that the fog began to lift. We hit bottom, and it became evident that the recovery was going to take time and it was going to be tough.
Let’s take a broad look back at what happened from the perspective of Connie Consumer and Pete Producer. Back in 2006 Connie Consumer was flying high with a steady job, a house, retirement and investment accounts with values that were growing well beyond inflation. The Consumer family’s net worth was growing at a steady pace and they felt comfortable making major purchases. Pete Producer was doing very well struggling to keep up with demand. Pete and Producer Inc. hired more employees and made investments with an eye to the future. He needed to expand to not lose market share.
In 2008 Connie Consumer began to see her net worth slip as house prices began to drop. The foreclosure of her neighbor’s house put downward pressure on the price of her home and her investments were not performing well. The Consumer family is a responsible consumer so they began to hold back on some spending. Pete producer began to notice the Consumers where not spending as much as before and began to see his demand fizzle. Producer Inc. was already set for higher output. Pete producer made small adjustments but his inventory began to accumulate. Pete felt he had increased capacity too aggressively betting on the come and allowed his costs to get out of control. Towards the end of 2008 he had no choice and began to make cost adjustments and had to let some employees go.
By the start of 2009 Connie Consumer was facing a pay-cut and was uncertain about her own job. She could no longer count on the safety net of her home equity or her investment accounts. If she lost her job she would have a hard time making ends meet. The Consumer family hunkered down and increased their savings trying to spend only on the essentials. Pete Producer felt the pressure as his products stacked up in his warehouse. Producer Inc. had no choice and made deeper cost cuts, letting more people go and shutting down plants. Pete was in trouble. His costs were climbing and his product was not selling. Pete needed cash at a time when his bank reduced his credit line. He knew that increasing his prices would be suicide. In fact he had to provide discounts to empty his shelves. He accepted losses to guarantee cash flow.
At the end of June 2009 Connie felt a bit more secure at her job. Layoffs appeared to be over. The Consumer family was still dealing with lower pay because of the pay-cuts but they felt a bit more comfortable spending. Government programs had helped Pete reduce his inventory and Producer Inc. began to see demand come back.
So this is where we are today. Connie Consumer is cautious but spending. Pete Producer has his production lines working again. His reduced capacity is almost at its limit.
The uncertainty is gone but now comes a tricky recovery.
Pete Producer is seeing demand increase but he is very reluctant to increase capacity. His fear of loosing market share is outweighed by his fear of letting his costs get out of control. He will accept losing some customers to guarantee that he will stay afloat and profitable. Pete will grow at a very slow pace keeping a close eye on the Consumer family betting very little on the come.
Connie Consumer will probably get her full pay back by the end of the year. But her employer will be thinking along the same lines as Pete and will keep pay increases in check. In 2010 Connie will likely earn the same salary she did in 2008.
Now say hello to my little friends: inflation and loss of purchasing power.
2009 was a year characterized by the elimination of excess inventory and capacity (supply). When I talk about capacity it’s not only manufacturing capacity. Restaurants, dealerships and stores were closed, production lines were shut down. Overall, capacity to provide goods and services was reduced in reaction to a dramatic drop in demand. Prices remained mostly in check because supply outweighed demand.
Through the reminder of 2009 and 2010 demand will continue to grow at a slow pace. Supply and demand will even out and we will very likely see inflation levels above those that we saw in 2009.
Higher inflation levels and a virtual freeze in salaries equals a loss in purchasing power adding another element to the already strong argument of a slow recovery.
2010 will be a year of recovery. But a slow and difficult recovery as Connie Consumer and Pete Producer keep an eye on each other before taking any steps, both protecting their cash and taking nothing for granted.
Jose Ruiz is a Principal in Heidrick & Struggles’ Monterrey office. As an executive recruiter he has worked on executive search projects for multinational clients in technology, life sciences, industrial sectors and consumer markets.
About Heidrick & Struggles International, Inc.
The world’s premier provider of senior-level executive search and leadership consulting services. The firm’s executive recruiters and leadership experts operate from principal business centers in North America, Latin America, Europe and Asia Pacific. In Mexico, Heidrick & Struggles operates offices in Mexico City and Monterrey. For more information about Heidrick & Struggles please visit www.heidrick.com
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