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By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, April 27, 2003
The state of business confidence does not receive
the same attention as consumer sentiment.
However, it is very important to the health
of global economies. Especially, to our US
neighbour.
Let us overview what is happening. Just speak
to sales executives. The majority say that
booking the next order is harder than ever.
Businesses now have little wiggle room to
raise their prices. This makes it difficult
to grow profits and forces them to keep costs
low.
As an example, earlier this year Intel announced
that it would spend 400 to 600 million less
during 2003. This cutback has adverse rippling
effects for all companies who supply Intel.
Now multiply that by the number of companies
who are pursuing a similar course of action.
The jobless recovery in the US lives on.
The lowest interest rates in 40 years are
not sufficient to make companies spend. The
war and the cost of reconstruction contributed
another worry.
Companies reported low earnings for the last
quarter. Consumers are showing some strain
from the load of accumulated debts.
Government deficits are in our face again.
Unfunded pension liabilities will reduce the
precious earnings that companies are able to
muster.
The March 2003 manufacturing report for the
US was very clear. Production and new orders
declined. Employment and inventories declined.
Supplier deliveries slowed.
Soon you may be able to buy one car and get
one free if the incentives keep getting any
sweeter!
In my view, a robust business confidence outlook
will play a significant role in the recovery
of global economies. Nevertheless, how can
we know when business confidence turns the
corner in a sustainable way?
It is far from an exact science. However,
business confidence gives rise to more jobs,
more wages and salaries, a brighter outlook
for retail sales and higher interest rates
on fixed income investments. Yes, I can hear
the retirees shouting, “Hurray!”
One economic signal that I look for is for
US companies to stop reporting considerable
layoffs. That is a sign that a sense of stability
will return to the marketplace.
As a minimum, a slowdown of layoffs is the
early indication that an upturn is probable.
We are not there yet, but hopefully closer.
At that point, companies can focus on their
business plans to improve revenues and earnings.
The prospects of returning to positive earnings
and, perhaps, some growth in earnings, will
affect the markets in a very beneficial way.
Companies will have brought their costs under
control when layoffs are no longer on their
minds. Consequently, investors, consumers and
businesses will have more confidence about
making long-term commitments.
These commitments are an important part of
sustaining economic and investment expectations.
Everyone will then breathe a little easier.
An improved business outlook will assist investors
realize their expectations. However, investors
should never lose sight that asset mix decisions
have the biggest impact on their portfolio
returns than any other factor.
Therefore, it is important that each investor
follow prudent investment policies designed
to attain the personal goals.
Expect the investment journey to serve up
some bumpy patches. Keep a firm grip on your
investment policies and a keen watch on the
business confidence signals.
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