Sputtering Recovery

Late last week I got email apologizing because a client who “needed an immediate start” has now decided to postpone 2 to 3 months. For me, that’s the fourth client to delay a project start within a couple of weeks. This is happening to other people too, apparently on both sides of the ocean.
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I wasn’t overly concerned about some delay at first. Most of my clients are big and big companies are notorious for not moving very quickly. But now it is beginning to smell like all of these projects are going to disappear within a month of when they were hot to start immediately.

When odd patterns like this start showing up in the market, colleagues in consulting and IT often ask for my view of what’s going on. Over the past 20 years I’ve been very good at predicting downturns and upturns in the market. I might as well put my thoughts here and save a few people the bother of an email or phone call to ask me.

One person quipped that it must be anxiety about Libya. There appears to be more to it than unease about Qaddafi.

In the Greyhaven Realty Management newsletters, we have often been months ahead of the mainstream media and pundits in our articles about what we see coming. Late last year we were saying real estate had entire other rounds of trouble to go through, and that is now moving up to mainstream notice.

Here’s what I see when I take a larger view than real estate.

Some parts of the economy are indeed doing better. It isn’t exactly that we’re coming out of the recession. It’s that some businesses have figured out a new equilibrium—they’ve adapted to a radically changed reality and have found some way to get along in it. Those businesses are okay. They are building factories and such, which is wearing out tires on large construction machines. That trickles through to one of my clients which has been running its factory flat-out for six months or so now to provide materials for those tires.

One of the clients who just postponed my start date also reached a major turning point around the middle of last year. The increase in their revenues and profits from mid-2010 is beautiful to behold. They made some smart decisions and financial moves to make that happen. Their materials are used for structural elements in construction, shipbuilding and civil engineering projects.

Both clients are benefiting from pent-up demand. There are some businesses that absolutely must build new plant from time to time in order to stay alive in their markets. They will get an additional boost from the catastrophe in Japan. Although the Japanese are famously economical in their use of materials, even they can’t make a silk purse out of a sow’s ear. They will need structural material and large construction machines (with large tires) to help them rebuild. They are too smart to use an inferior grade from China if they can rebuild to their remarkably sturdy standards with higher grade materials.

As soon as you get away from the building projects that can’t wait much longer, though, there are problems upon problems. The uproar in the Middle East is much broader than Egypt or Libya and promises uproar in the oil markets, adversely affecting everything about normal commerce. It increases the cost of transporting everyone and everything, including food. It increases the cost of plastics and packaging. Add to that an anticipated food shortage that may be of crisis proportions, and that is aggravated by subsidies and laws to divert food into biofuel production. Compound the mix with systemic flaws in the financial system. (To understand that without getting a headache, even getting some laughs along the way, read Whoops! Why Everyone Owes Everyone and No One Can Pay if you haven’t yet.) Bear in mind that Basel II helped make this downturn worse than it would have been, and Basel III is poised to go even further in the same direction. (To read The Guardian’s brief about it, click here, but the BBC explained it more clearly on Radio 4.)

Small to medium sized businesses may not be aware of much of this. Large businesses keep people on the payroll whose whole job is to pay attention to such things and think about how their business could be affected. When there’s just one significant problem area, adjusting for it is not so hard. When there are this many, it’s difficult. The potential ramifications of flare-ups in the Middle East plus the catastrophe in Japan, so close together, seem to have shaken the budding confidence that was about to give birth to a round of fresh projects.

It’s too soon to say whether this will be a brief lull. I would like to think the postponements will be lifted and projects will go ahead in a few weeks as long as matters don’t get worse, but there are some other potential shocks to the system that could fall into the mix. It’s a matter of timing. If enough of these projects go ahead, those projects are meant to improve effectiveness and profitability, so they will build up some extra momentum for the businesses sponsoring them. Get that in place before more shocks hit, and we will all come through this in better shape than we would if fear keeps us collectively on the back foot.