Happy Thanksgiving to all. Hopefully all of you will find a safe and enjoyable way to connect with your family during this unusual period. While 2020 has been a struggle for all of us, there is still much to be thankful for in our lives. For this week look to the light, avoiding the dark and the pessimistic. Please take time to relax and contemplate all the good that is around us in spite of all that has occurred this year. Express your gratitude for the beauty and success that exists in your life.
The early numbers for November show continued economic growth in both the retail and the manufacturing sector. The November New York Empire State manufacturing report came in at 6.3 indicating a steady growth level. The Philadelphia Fed Manufacturing report for early November was very strong at 26.3. Likewise the Kansas Fed manufacturing index was at 20, another strong sign. During the past couple of years manufacturing activity has increased in part to recent trade policy but more so due to patent infringement and the risk of intellectual property loss experienced on almost all goods that were off shored for production. The industry learned a lesson that lower production costs do not compensate you when your product is stolen and produced under different names. Even if the new administration abandons the current trade approach, it is unlikely that much of the manufacturing that was brought back to the US will be sent back to China or elsewhere for production.
While manufacturing is doing well our supply chain is at risk. Ports in California are awash with containers that cannot get shipped off site. Worse, there is an over abundance of ships waiting to unload as well as load to return to their base. The issue appears to be with the level of healthy staff. The number of new covid cases is decimating the work pool in the ports. Thankfully the recovery rate for those acquiring the virus is extremely high. The down side is it takes a week or two so the rolling absence level is curtails the productivity of the ports. In time the virus impact will pass and the supply chain will return to normal. The good news is the supply chain is full, manufacturing is not falling behind, it is a logistic issue which will be resolved in time.
Many firms have adequate liquidity and are holding onto funds received from various government programs. The programs provided either grants, such as from the PPP, or deferred loans for business to remain active during a shutdown period. The key is to determine the bleed rate for the firm. While they are liquid today, if you pulled out the liquidity provided by these programs how tight would their financials look? How much are they spending currently in a period where their capacity might have been curtailed? How long will it be before they reach a critical point with their liquidity in light of a possible new shutdown impact? These are the questions many business owners are asking themselves right now. Bankers should also be asking the same questions, meeting with their clients, assessing the near term future before the client becomes insolvent. In light of the lack of any movement in Washington DC to provide any new assistance, businesses are on their own. How management will respond, what resources they currently have and how they will use them is critical to their survival.
The issue is not just loss of revenue due to a shutdown or curtailed capacity or even loss of workers due to illness that will affect the company. The flip side is many industries are experiencing growth as the market changes. Growth has the same problematic impact on a firm as declining revenue. The borrower as well as the banker need to understand the level of sustainable growth that the firm can experience before running out of liquidity and failing. Many firms grow themselves into bankruptcy, as a banker you need to work with your clients to guide them through some very treacherous waters in the coming months.
Have a great Thanksgiving.
