As history turned the page on another decade a few weeks ago, the word that may best describe the last 10 years is survival. After all, a huge percentage of “dot com” companies did not make it through the technology bust early in the decade, 2002 saw corporate accounting scandals drive WorldCom and Enron to the brink, and the recession of 2008-2009 resulted in some of the most storied companies falling victim to the financial crisis. Through it all, it is likely not surprising to many that the S&P 500 Index began the new millennium in 2000 at 1469 and closed the decade at 1115. One of the primary reasons of the difficult decade for investors was the fact that the 10-year time period was book-ended by two major recessions.
But 2010 starts a new decade and perhaps a new paradigm. Emerging from the worst recession since the Great Depression, economic recovery appears to be the theme for the coming few years. The housing market has begun to stabilize, employment is moving towards net positive jobs, and corporate profitability has been on the rise. As a result, the start of this new decade will see a very different tone, as companies are poised to transition from a strategy of surviving to one of fueling growth.
In 2009, investing for future growth was not at the forefront for many companies. In a year when market giants like Lehman Brothers, AIG, and Bear Stearns all went out of business, companies were more focused than ever on surviving the present rather than investing for the future. To do this, companies cut spending, eliminated redundant business lines, and most notably laid off staff. In fact, since December 2007, companies have reduced their workforces by a total of 7.24 million jobs. Overall, the strategy for 2009, and frankly much of the last decade, was quite simple: survive.
While tough markets test the resolve of corporations, investing for the future is the lifeblood of corporate success—it sets the stage for future innovations, discoveries, and enhanced product lines, as well as preparing for the increasing demand of a growing customer base. The modified adage that you have to spend money to make money is certainly appropriate as companies look to invest today for benefits in the future. To do this, companies in 2010 will need to increase capital expenditures, continue inventory re-stocking, and accelerate the pace of re-hiring staff to fuel future growth in years down the road.
Perhaps the greatest proxy for corporate investments is capital expenditures, or simply cap-ex, which are the outlays that corporations make to upgrade machinery, embrace new technology, and start new product lines. This is corporate America’s version of investing for the future. After peaking at nearly $56 billion in monthly cap-ex spends in late 2007, corporations reduced cap-ex dramatically during the next 18 months. In fact, cap-ex bottomed out in mid-2009 just below $31 billion a month, which is almost a 50% reduction from its peak. However, as the economic backdrop has begun to improve, companies are beginning to re-allocate spending back to capitally intensive projects in an attempt to invest for the future.
The other prominent means of reducing costs in 2009 was companies “right-sizing” to meet diminished customer demand, which resulted in significant lay-offs, reduced work hours, and an unemployment rate that topped 10% for the first time since 1982. However, with the steady improvement of the economic environment, many companies have realized that they may have cut too many staff in order to adequately meet improving demand. This is evidenced by the average work week for manufacturing employees across the U.S. having risen almost one hour per day since the low point in early 2009, which is very significant when this extra hour is pooled across millions of employees.
Until corporate America shifts from its strategy of protecting the bottom line (profits) to growing the top line (sales), all is not perfect and economic danger still exists. This transition from defense in 2009 to offense in 2010 will be a key mile-marker in the economy’s continued road to recovery. While many recessions are rescued by the strength of the consumer, this recovery is poised to be fueled by the return of business spending, as increasing capital investments and re-hiring workers to meet growth initiatives will be the recipe for success in 2010’s road to recovery. As always, I encourage you to contact me with questions or concerns.
Greg Powell, CIMA