2008 Mid-Year Economic Report

by, Elisha Tropper, president, T3 Associates, Harrison, NY, USA
Elisha Tropper, an industry consultant and former label company owner

Energy Crunch: Oil prices are at all-time highs, impacting everything from fuel prices, home heating bills and commodity prices to global oil exploration, the development and expansion of alternative energy sources (solar, nuclear, agricultural), and a potpourri of political, military, ethnic, and religious conflicts.

China 2.0: The changing business face of China is significantly convoluting what for the past decade has been a relatively simple global business equation. Most visibly, rising production costs are impacting the market positioning of Chinese goods. These higher costs have arrived in the form of inflation (raw materials, utilities, freight, etc.), a reduction or elimination in the VAT rebate for exports, and a rash of new labor laws enacted to protect workers and ease international concerns of abuse, resulting in, by some estimates, an increase of as much as 40 percent of the labor costs. In addition, the no-longer fixed Chinese yuan has dramatically risen against the US dollar (10 percent in 2007 alone), resulting in lower export profits. The effects of these changes are beginning to affect the world economy, as lower cost nations are making inroads into the low-end manufacturing sectors, while the (relatively) shrinking margins of Chinese manufacturing is putting pressure on global manufacturers who based financial investments on higher profitability.

The Fed: The US Federal Reserve has succeeded in its effort to devalue the dollar, and is now striving to stave off the inflation that appears to be following. We could debate Fed decision making all day long, but the consequences, however unintended, of the current policies have damaged US credit abroad, slowed economic growth, and enabled foreign investment in US assets at a discount.

Credit Markets: The housing and credit market crunch has dramatically (and disproportionately) had an impact on just about everything financial from Wall Street to Main Street. For businesses, the credit approval process is tougher, loan covenants are stricter, and despite low interest rates, the capital markets are tighter then they’ve been in very long time.

Election Day: The upcoming US presidential election will have significant ramifications across the board, including the economy, taxes, and international diplomacy (or lack thereof). For example, it would be difficult to imagine any new administration, in the face of budget deficits and political pressure, capable of fending off a congressional effort to raise capital gains taxes, let alone personal income taxes (regardless of the potential damage such moves might make to the overall health of the economy).

There is no doubt that each of our businesses is and will continue to be affected in a very significant way by some combination of these events and pressures. The challenge for us is to harness an understanding of how these economic developments in their various permutations potentially impact our existing businesses, and plot the course of action that gives us the best opportunity to grow and thrive.