A couple of weeks ago, I blogged about how the Trump administration tax cut would impact procurement.
A related potential development is the possibility of the U.S. economy overheating in 2018. The fact that the Dow Jones Industrial Average closed above 25,000 for the first time ever just yesterday only serves to reinforce this possibility.
A good economy is characterized by consumers having money, consumers having confidence, and consumers having good experiences that keep them spending.
When unemployment declines, people have jobs. When people have jobs, they have money to spend. When people spend money, businesses produce more products and services. When businesses produce more products and services, they spend more with suppliers. When businesses produce more products and services and spend more with suppliers, they all hire more people. When businesses and their suppliers hire more people, the unemployment rate drops further, encouraging more consumer spending and multiplying all of the positive after-effects.
It’s an upward spiral. So, why would it ever stop?
Well, as the scientific law says, all good things must come to an end.
In the economy, there is a breaking point. There is a point where businesses cannot find enough resources to support the increased amount of products and services that confident, well-compensated consumers are demanding. Those suddenly scarce resources include qualified people, production capacity (e.g., space, equipment that needs to be built by qualified people, etc.), and available suppliers.
So, the following things start happening:
- Businesses start raising prices
- Businesses deliver later than promised
- Businesses increase their lead time
- Businesses have to cancel sales orders due to inability to fulfill them
- Businesses have to hire employees and suppliers with less talent than they are used to thereby resulting in decreases in quality and service
So, at that point – where the economy becomes overheated rather than merely hot – those impacts start a new spiral. Suppliers fail to meet timelines and other standards. Production and projects fall behind. Things don’t get done. And the economy feels the effect. Consumer confidence declines. Business spending is restrained.
Once business spending is restrained, jobs are cut. Once jobs are cut, consumer spending declines and all of the positive aspects of healthy consumer spending unravel. That usually results in an economic recession, which is commonly defined as two consecutive quarters of negative economic growth as measured by a country’s Gross Domestic Product.
There is a fine line between an overheated economy and an economy in recession. It’s good to keep an economy hot, but not good to allow an economy to overheat.
There are ways that governments can keep an economy from overheating.
One way is to raise the federal funds rate (used in the US) or the equivalent (outside of the US). Doing so results in higher interest rates that banks charge for loans, which discourages the propensity for business investments that heat up an economy. The US government has been raising the federal funds rate since late 2015. Obviously, it is striking a good balance because the economy continues to grow, but hasn’t overheated.
Conversely, there are ways that governments can stimulate a cold economy. One of the most popular of those ways is through tax cuts.
Oddly enough, the Trump administration’s tax cut mentioned earlier comes at a time when the economy is hot, not cold. Tax cuts put more money into play for business and consumer spending. Though I definitely feel that the taxes in the US are too high, this is actually one time where we don’t really need a tax cut (though it’s certainly nice).
So, that leaves us with a critical question: Will the Trump administration’s tax cut push the economy past its boiling point?
Time will tell. But, in procurement, we have a unique opportunity to observe the leading indicators of an overheating economy: rising prices, increasing lead time, strained supply base capacity, decline in supplier talent, etc.
Keep an eye on those things, my procurement friends!