By Mike Neidle/Optimal Management
In the month since the inauguration things have been rather chaotic. Business dislikes uncertainty which makes it hard to plan for the future with any degree of confidence. With a conservative party in power, one would normally expect a balanced budget, a reduction in the national debt, a cut in spending, predictable foreign relations, etc. But nothing seems normal any longer; and that is bad for business, but perhaps good for market speculators.
So let’s look at what is happening. We have the greatest short term run up in the stock market in anticipation of severable events: repatriation of some $2-3 trillion in foreign earnings by US companies to the US Treasury, which could will be taxed at 35%, but if it is brought back to the US might be taxed at 15%, for a potential windfall of some $300-$450 billion. The domestic corporate tax rate could be slashed by as much as 50%, reducing taxes by $150 billion. Personal income tax rates are in flux, but a 10% reduction would cut Treasury collections by another $150 billon. Taken together this could amount to a net gain to the Treasury of $0 to $150 billion. There are many other items up for consideration and this is before congress turns this all into legislation. Nevertheless the net impact has been factored into the stock market as a 2,700 level in the S&P, up 29% prior to the election (we have already seen half of this gain as of 3/1/17). Thus it would seem that the market is likely to be overpriced and ready for an adjustment.
The administration plans to increase defense spending by $57 billion (to be taken from other departments), $23 billion for the Mexican wall, plus $2 trillion for infrastructure spending. Clearly these numbers don’t add up without a huge increase in our GDP or other considerations. In 2016 we had a 2% growth, for an $18 trillion GDP. This is the highest for any sizeable developed country, with a mean GDP of under 1%.The administration’s position is that we can experience a 4-5% growth is optimistic, as the last time we approached this was during the super-heated Y2K/dot com bubble (which led to a recession) and during the 1960-70’s, and in Thomas Friedman’s words the “world was flat”. The jobs lost were to a combination of automation, offshoring, legislation and a flattened world supply chain. Even if we somehow doubled the GDP, at a 5% corporate profit and a 15% tax rate that would bring in another $270 billion, not nearly enough to offset spending increases. If we also increase tariffs that will likely backfire with higher prices to consumers and there is always the possibility of funding an unforeseen war. And most importantly, the US manufacturing economy of yesteryear will not return. If magically the plants that closed were to reopen tomorrow they would close shortly thereafter as they would still be uncompetitive.
So what does one do to prepare for the climate we are in? This would include having various options developed for different economic scenarios.
If the market were to contract, one might have plans ready to move on, such as:
- What cost savings would be made, tied to a cost/benefit analysis of staff and other costs
- Review ones investment portfolio to have as much liquidity as needed in a downturn
- Stay close to your clients, so if they cut their demand for services you will remain
- Actively prospect for new business, so if you lose clients, you have replacement options
If the economy were to continue growing, stay on your growth path, i.e.:
- Keep moving ahead, but track your results to make changes as conditions warrant.
- Still evaluate the cost/benefit of you expenditures; you can only increase your profits
- Likewise stay close to your clients to pick up whatever new business is available
- Never stop prospecting. If you have limited resources, trade up to increase you margins
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