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Economic growth remained strong in the fourth quarter of 2023, defying many recession forecasts, including mine. There may still be a few quarters of slower growth and a recession remains a possibility, but the most likely path is growth. Business owners who are feeling gloomy need to reconsider their attitudes toward labor, capital investment, and financing.
Gross domestic product (GDP) grew at an annual rate of 3.3% in the fourth quarter, adjusted for inflation. Our long-term compound growth rate over the past 20 years was 1.9%. So last quarter was strong. This comes from his very high 4.9% growth in the third quarter.
Labor market is tight
For many business adjustments to the news, employee recruitment and retention should top the list. The labor market has been softening in recent months, as evidenced by the number of people leaving jobs and job openings. Monthly statistics show continued net employment growth, although the unemployment rate has increased slightly.
The good news for employers comes amid a decade of slow growth in the working-age population. Companies should go back to their old overwork mindset. Perhaps “hoarding labor” has gone too far. It was a practice of adopting in anticipation of future needs. However, when it comes to actual job openings, it makes sense to hire sooner rather than later. As the labor market tightens again, addressing employee retention will pay off.
Capital investment to improve productivity
Many companies have reduced their 2023 capital spending plans. Expected lower or negative growth means less need for new production capacity. Some projects could not be implemented due to high interest rates. And banks have tightened their credit standards, affecting businesses willing to pay higher interest rates.
Now it’s time to put these projects back on your to-do list. Future demand is likely to be better than before. More importantly, projects that increase labor productivity are consistent with the expected tightening of the labor market.
Long lead times for some equipment can hold back your ability to increase production capacity and productivity.
Talk to your bank about credit
There is no data yet that banks are loosening credit standards, but it is certain that they will do so as long as economic conditions continue to improve. Many business owners spend too little time talking to bankers. The topic of conversation should be about credibility, not golf. The best question is about the bank’s view of a company’s finances. Are banks willing to lend? Will they be prepared to increase credit facilities if the company finds good opportunities? Will credit availability decrease after a series of bad quarters?
When you talk about credit, don’t forget to ask about interest rates. This is negotiable, so please ask. When the economy improves, banks tend to lower their profit margins. This is called the “spread” over the cost of funds. It may be too early to improve rates, but if the economic outlook remains strong, keep this idea in mind.
The US economy is not booming. Big changes are one thing to look forward to. It was weak before, but now it is calm. This change should prompt tactical changes on the business side.
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