State of the economy: A mid-year review
Within our strategic planning practice, we have a front-row seat to trends emerging within the economy. As we’ve observed, business owners are currently trying to make sense of the politically charged environment and its potential impact on the broader economy.
The government’s reporting of Q1 Gross National Product (GNP) is the first meaningful objective measure on the pulse of the economy in 2017. At first glance, GNP grew a meager 1.2% in Q1. But to get a real sense of the economy, you need to dig deeper. It is important to remember that GNP is a compilation of four components:
- Personal consumption (+.6%)
- Gross private domestic investment (4.8%)
- Net exports (5.8%)
- Government spending (-1.1%)
Analyzing the current environment
Gross private domestic investment is a measure of future productive capacity, and Q1’s surge suggests companies are investing more and charging ahead. Prices were up 3% in Q1, a sign that suppliers can pass on price increases, and inflationary pressures are an actual threat. The “Trump Bump,” as it is known, was clearly a factor in a stock market that added $3 trillion in market value (at its high). Government spending may increase as the military budget escalates.
In April, the jobless rate fell 0.1% to 4.4%, which is considered full employment. “Full” is an interesting description. I have always maintained that unemployment is a terrible bellwether of the economy. There is a huge populous of Americans that remains underemployed and struggling. It is hard to imagine a true American resurgence if the middle class cannot participate.
One gets the sense that many sectors and industries are still lagging. In Q4, agriculture was down 8% and manufacturing down 3%, while entertainment was up 9%. Record precipitation last winter across many parts of the country appears to have influenced this outcome.
Meanwhile, many are questioning whether President Trump can execute his agenda, given the controversy surrounding him. While Trump has offered an outline for tax reform and infrastructure spending, adoption of many of his proposals seems unlikely. If tax reform is not passed in some manner, the capital markets are likely to reverse themselves.
As is well understood by the investment community, “animal spirits” will prevail in capital markets. To an extent, the economy will be driven by our confidence in it.
Optimizing results in today’s economy
There are several things management teams should focus on to optimize their results in this economy:
Stick to your core. Be wary of salespeople reaching for new opportunities outside your core competency. Expansion may require new people, processes or technology. Identify your niche (or multiple niches) and stay true to it. If you are going to enter a new market, force your team to create a business plan that improves the probability of good results. Make sure the grass is greener on the other side.
Understand price tiers. A critical strategic choice for every company is to decide which sandboxes to play in. Major hotel brands, for example, stratify the market based on hitting price points and satisfying specific customer segments, such as the weekday business traveler and weekend soccer mom. Many premium or super-premium providers are participating at multiple levels (such as Hilton with DoubleTree, or Tumi with Tech by Tumi).
Maintain sales and marketing spending. When business is poor, many companies pull back on investments in sales and marketing. During sluggish periods, sales teams need to work harder to prove their value. Continue to shift spending to higher-return digital assets and other tools that can drive conversion. For more guidance on sales and marketing spend, review my post “How Much to Spend on Marketing in 2017.”
Capitalize on a falling dollar. The recent skid of the U.S. dollar was par for the course. As interest rates rise, the dollar will fall off. This will have significant consequences for U.S. imports and exports.
Be a talent magnet. Most entrepreneurs tell me their number one challenge is finding great people. It is critical to treat recruiting like any other marketing exercise. Companies should create a best-in-class culture and actively promote it through dedicated landing pages, testimonials, and other interactive rich media. Millennials will be aware of this messaging, and attracting them is critical as companies attempt to create a competitive employment offer.
Embrace the internet instead of fighting it. Online discounting is among the most powerful of consumer trends. Some retailers and B2B providers have found ways to leverage the internet, while others remain frozen in time. Lamps Plus, a Southern California retailer, placed internet kiosks in its stores in an effort to feed off of consumer behavior. By incentivizing their staff on internet sales, the company is leveraging the internet rather than fighting it.
It will be interesting to see what the rest of the year brings. As Barclays economist Michael Gapen put it, “This recovery is perhaps uninspiring, but it is awfully durable.” With economists predicting 3% gains in GNP in Q2, there may be an uptick if there is no significant upheaval in presidential politics. Generally, we appear to be in for more of the same.