“It was just a flesh wound. ”
For those of you not Monty Python fans, this quote was uttered by the Dark Knight after losing both arms in a sword fight and is an apt description of our economy for the past 24 months. This recession has been longer and deeper than any since the Great Depression testing the mettle of our private equity portfolio CEOs, who were forced to make tough personnel and spending decisions to preserve cash flow. The road to recovery is a long and arduous journey but contrary to the recent buzz, we believe a “double-dip recession” is not eminent and management teams can once again focus on top line growth.
Throughout 2010 and into 2011 we expect marginally improving macro economic conditions will be tempered by restrained consumer spending and a cloudy employment picture. At 67% of our GDP, the American consumer will undoubtedly dictate the speed of an economic recovery. In the near term we expect consumer spending to remain soft as personal savings rates improve and consumers deleverage. It is instructive to remember from December 2007 through December 2009, the U.S. Economy shed approximately 7.4 million jobs and the current real unemployment rate, after including 3.7 million-plus people who are reluctantly working only part time, remains approximately 16%. The good news is overtime hours and temporary employment have started to climb, which should presage a better employment picture going into 2011. Further the Purchasing Managers Index posted a 56.2 in June, the 11th consecutive month above 50. (Note: A reading above 50 indicates the manufacturing economy is generally expanding; below 50 indicates it is generally contracting).
In general, most manufacturing companies, including our portfolio, are experiencing improving sales, bookings and quote activity compared to prior year and the prior quarter, which bodes well for the rest of the year. Our economy will continue to climb slowly from the depths of “The Great Recession” but rest assured the only double-dip you are going to see is at your local ice cream parlor.
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