ADP Report: Job Creation Proceeds At Turtle Pace
Slow and steady may win the race but the pace of job creation by the US economy continues to move along at turtle speed. For the 20 million unemployed and underemployed people the pace of job creation remains painfully slow as revealed by ADP ‘s National Employment Report for October. During the month, private sector employment increased by 43,000 on a seasonally adjusted basis. ADP also revised its employment report for September stating that the economy lost only 2,000 jobs rather then the 39,000 it had previously reported. Following ADP’s upward revision the private sector has produced 41,000 new jobs during the past 61 days. For the worlds leading economy with a GDP of almost $15 trillion the lackluster growth in job creation is a troubling indicator of an anemic jobless economic recovery.
The October report arrests the September decline in job growth that reversed seven consecutive months of positive job creation. During that time the economy averaged employment gains of 34,000 new private sector jobs per month. This rate of job creation does little to reduce the negative overhang a 10% unemployment rate is having on economic growth. A stabilized and expanding labor market is a key ingredient for a sustained economic recovery. Over the past three years the economy lost over 9 million jobs. For a robust recovery to occur the economy needs to create 200,000 jobs per month for the next four years to return the job market to its pre-recession levels.
As we reported last month the expiration of the Federal stimulus program will force state and local governments to layoff workers. Sluggish job creation continues to pressure depleted unemployment funds and the expiration of benefits for many of the unemployed is draining buying power from the economy.
Soft consumer demand threatens retailers and leisure industry segments and has a spillover effect on the housing market. Joblessness is a principal factor in mortgage defaults and contributes to the growing inventory of foreclosed properties held by banks. The ADP report indicates that during October the US economy shed an additional 23,000 construction jobs. It is estimated that it will take 24 months for the housing market to absorb the existing inventory of foreclosed properties. A healthy turnaround in the construction industry will move in step with the improvement in the housing market conditions.
A sustained recovery will require sector leadership by Small and Mid-Size Enterprises (SME) as principal drivers of job creation. SME’s sector strength has traditionally been in the construction, specialty retail, leisure and service sectors. Among these segments only the services sector continues to be a consistent driver for job creation.
Macroeconomic Factors
The principal macroeconomic factors impairing recovery are the continued high unemployment rate, weakness in the housing market, tax policy and deepening fiscal crisis of state, local and federal governments. The results of this weeks mid-term election and the return of congress to Republican control will encourage the federal government to pursue fiscally conservative policies that will dramatically cut spending and taxes for the small businesses and the middle class. In the short term spending cuts in federal programs will result in layoffs and cuts in entitlement programs will remove purchasing power from the demand side of the market. It is believed that the tax cuts to businesses will provide the necessary incentive for SME’s to invest capital surpluses back into the company to stimulate job creation.
Highlights of the ADP Report for October include:
Private sector employment increased by 43,000
Employment in the service-providing sector rose 77,000
Employment in the goods-producing sector declined 34,000
Employment in the manufacturing sector declined 12,000
Construction employment declined 23,000
Large businesses with 500 or more workers declined 2,000
Medium-size businesses, defined as those with between 50 and 499 workers increased 24,000
Employment among small-size businesses with fewer than 50 workers, increased 21,000
Overview of Numbers
The 45,000 jobs created by the SME sectors reverses a decline from September and offsets the 2,000 job cuts by large companies. The strong growth of service sector jobs is a positive development. However the continued softness of goods producing segments and manufacturing continues to indicate the continued decline of US industrial capacity. The strong rebound in services may be the result of the expanding practice of companies utilizing outside contractors to fill human capital requirements. These types of jobs may mask an underemployed and transient labor pool forced to accept work at lower wage scales.
The stock market continues to perform well. Yesterdays QE2 initiative by the Fed to pump $600 billion into the banking system may allay bankers credit risk concerns and ease lending restrictions to capital starved SME’s. Despite a projected GDP growth rate of 2%, ADP’s employment figures indicates that the economy continues to dwell at the bottom of an extreme down economic cycle. The danger of a double dip recession still lurks as a remote possibility. Interest rates remain at historic lows and inflation continues to be benign but its danger grows as a weak dollar continues to flounder forcing oil prices to climb while government debt levels continue to spiral upward. The balance sheets of large corporate entities remain flush with cash. Analysts estimate that over $1 Trillion in cash swells corporate treasuries remaining underemployed on lazy corporate balance sheets. The low interest rate environment has allowed companies to pursue deleveraging strategies considerably strengthening the capital structure of corporate America. To the dismay of politicians and the unemployed, economists speculate that deployment of this cash is still a few quarters away from finding its way into the real economy.
Solutions from Sum2
Sum2 offers SME’s the Profit|Optimizer to help them manage risk, devise recovery strategies and make better informed capital allocation decisions.
For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.
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Risk: unemployment, recession, recovery, SME
ADP Jobs Report: Reversal of Fortune
ADP has released its National Employment Report for September. During the month, private sector employment decreased by 39,000 on a seasonally adjusted basis. After an upward revision of 10,000 new jobs created for August, the September numbers are a reversal from employment trends that seemed to be stabilizing by arresting two years of employment declines. For seven consecutive moths the economy was creating average employment gains of 34,000 private sector jobs. The September numbers reverses that trend and raises concern about the strength of the economic recovery.
A stabilized labor market is a key ingredient to a sustained economic recovery. Over the past three years the economy lost over 9 million jobs. For a robust recovery to occur the economy needs to create 200,000 jobs per month for the next four years to return the job market to its pre-recession levels.
The Federal stimulus program that directed funds to state and local governments to help stem layoffs has now expired. This will result in further belt tightening by local government agencies and will result in layoffs of employees to meet the fiscal restraint imposed by the poor economy. This will exacerbate the unemployment problem and further impede the buying power and tax revenues. This will continue to hurt the retail industry and local governments sales tax receipts.
The reduction in the government work force is symptomatic of the reconfiguration of the economy. During the past decade government employment increased dramatically. Its pairing down will put added pressure on the private sector to incubate new industries to drive the recovery. Manufacturing and the growth industries of the past decade will be hard pressed to create the level of job creation a robust recovery requires.
The ADP report indicates that since its peak in January of 2007, construction employment has lost 2,297,000 jobs. Construction trades along with credit marketing, retailing, community banking and services supporting these sectors have been dramatically weakened and downsized in the wake of the recession. The private sector led by small and mid-size enterprises (SME) will need to incubate growth industries to create jobs and lead the country out of the doldrums of the flailing economic recovery.
Macroeconomic Factors
The principal macroeconomic factors impairing recovery are the continued high unemployment rate, continued weakness in the housing market, persistent deflation concerns, tax policy and deepening fiscal crisis of state, local and federal governments. The economic impact of the Gulf oil spill was immediate and dramatic to the local aqua-cultural industries, fishing and regional tourist industries. The long term effects of the spill on the ecological communities of the Gulf is yet to be determined. The geopolitical uncertainty of the wars in Afghanistan and Iraq, persistent worries about Iran’s nuclear program and the sovereign debt crisis of the weaker EU member states are persistent concerns weighing on capital market participants.
Highlights of the ADP Report for September include:
Estimates non-farm private employment in the service-providing sector decreased by 39,000.
Employment in the goods-producing sector declined 45,000
Employment in the manufacturing sector declined 17,000
Construction employment declined 28,000
Employment in the services sector rose 6,000.
Large businesses with 500 or more workers declined 11,000
Medium-size businesses, defined as those with between 50 and 499 workers declined 14,000
Employment among small-size businesses with fewer than 50 workers, declined 14,000
Overview of Numbers
Job loss in the SME sector is troubling. SMEs are the backbone of the construction and retail industries and the continued weakness of these sectors weighs on their ability to become a driver of consistent job growth. The continued deterioration of the financial health of SMEs and their ability to marshal resources from depleted balance sheets and limited credit lines may be impairing the ability to mount an effective response to the dire economic conditions.
Despite the backdrop of the stock markets stellar performance during September, ADP’s employment figures indicates that the economy continues to dwell at the bottom of an extreme down economic cycle. The danger of a double dip recession still lurks as a possibility. The balance sheets of large corporate entities are flush with cash. Some analysts estimate that over $1 Trillion in cash swells corporate coffers. Some economists speculate that deployment this cash is critical to the economic upturn and still a few quarters away from finding its way into the real economy.
Solutions from Sum2
Sum2 offers SME’s the Profit|Optimizer to help them manage risk, devise recovery strategies and make better informed capital allocation decisions.
For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.
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Risk: unemployment, recession, recovery, SME
Sum2′s Hamilton Plan Getting Scholarly Attention
The following research paper on The Hamilton Plan was written by Deepak Verma, a business student at Baruch College. To our knowledge it is the first scholarly research that incorporates the Hamilton Plans theme of a focus on SME manufacturing.
ISSUES MANAGEMENT PROJECT
Prof. Michael Kirk Stauffer
DEEPAK VERMA
The Societal and Governmental Environment of Business
Baruch College, the City University of New York
December 16, 2009
Table of Content
Topic Page No
1. Executive Summary 2
2. The Issue: Shrinking Manufacturing Base 3-4
3. The Origin of the Issue and Solution 4-5
4. Small & Medium Enterprises; Catalyst of Sustainable Growth 6
5. Initiative for Development of SMEs 7-8
6. Future of SME and SMEs in USA 9
7. Appendix : References 10
EXECUTIVE SUMMARY
Living beyond means is not sustainable. One of the primary reasons of prolonged Economic and Credit Crisis in United States is its low manufacturing base and American way of consuming more than what is produced. This research paper will examine issue of shrinking manufacturing base of USA, unfair and unethical business practices adopted by countries such as China to boost export thereby causing trade deficit to USA, reasons for low manufacturing base and role of small and medium enterprise (SME) manufacturers in developing a sustainable manufacturing base of the US economy.
Prior to coming at Baruch College for pursuing MBA in finance and investments, I worked for over 10 years with Small Industries Development Bank of India (SIDBI), an apex financial institution of India engaged in the development and financing of SMEs and micro financial institutions. Having worked with this financial institution, I realized the importance of SMEs in bringing sustainable economic development and employment creation, particularly in a mixed economy like India.
The paper will discuss on public-private initiative in USA for development of SMEs, their efforts and capital investment for empowerment and financing of SMEs. Various initiatives taken by private and public sector will be analyzed. Efforts have been made to forecast future of SMEs vis a vis manufacturing sector, role of community development financial institutions (CDFIs), and flow of commercial bank credit and private equity investment in SMEs in the United States.
THE ISSUE: SHRINKING MANUFACTURING BASE
Why should shrinking manufacturing base be an issue in a market driven service oriented economy like US? Federal Reserve Chairman Ben Bernanke stated on Feb. 28, 2007, “I would say that our economy needs machines and new factories and new buildings and so forth in order for us to have a strong and growing economy.” Strong Manufacturing base is the only solution to rising trade deficit and industrial job loss. Manufacturing promotes innovation which leads to investments in equipment and people, research and development, improved products and processes and increase in productivity and higher standards of living. Increase in manufacturing leads to increase in demand for raw materials and other commercial services.
United States has transitioned from an agricultural economy to Industrial economy to a service economy. Over a period of this transition US has lost its manufacturing base substantially and has been importing goods from around the world which has resulted into huge trade deficit and industrial job losses. IMF has categorized the US current account deficit as unsustainable. Warren Buffet also once commented “The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion more of us than we own of them.”
Since the United States joined the WTO, US trade deficit has risen from $150.6 billion in 1994 to $817.3 billion in 2006. US reliance on imports ranges from electronic items to apparels and other consumables. For example, electronic items sold in United States are developed by companies such as Philips, Toshiba, Sony, Hitachi, Samsung and Sharp. We have lost significant market share in Auto Industry also. Toyota has surpassed General Motors to become leading auto manufacturer in terms of global sales. Ironically, items such as clothing and apparel where USA had its dominance are also being imported from foreign countries. Over 90 percent of clothing and shoes sold in the United States are made in foreign countries. US economy has thrived on consumerism which has led to increase in demand for goods over the years but production of domestically manufactured goods has been declining, thereby giving rise to imports from foreign countries and loss of industrial jobs.
Critics of the argument say it is the increase in production efficiencies, resulted from technological innovation and advancement that has resulted in loss of jobs. Additionally, it is the increase in consumption which is the root cause of import deficit rather than shrinking manufacturing base. Undoubtedly long term data indicates an increase in US manufacturing, but the way we are loosing our manufacturing share from last 2 decades and if we continue shrinking, we will soon have no choice but to consume whatever is dumped in our market and will be on the mercy of foreign imported goods. Increase in manufacturing has not kept pace with global growth in manufacturing in USA. Since 2000 global manufacturing growth has been 47%, whereas USA has recorded a growth rate of only 19%.
ORIGIN OF THE ISSUE & SOLUTION
What is causing shrinking manufacturing base in the United States? Is it purely competitive and cheaper products manufactured in Asia and Europe or some other factors are also responsible? Undoubtedly competitive global business environment has severely affected domestic production in the United States, this crisis in large arises due to unfair and unethical business practices adopted by its trading partners mainly China. Some of those practices are significant government subsidies, currency manipulation, large-scale dumping in the U.S. market, and other market-distorting practices. Additionally, unfavorable govt. policies, tax structure, increase in cost involved in healthcare, litigation, and regulation has significantly affected the bottom line. Increase in cost and strict regulation forced manufacturing units to move their facilities to other countries where companies do not face those kinds of impediments. Companies operating in the U.S. started outsourcing low-value tasks like simple assembly or circuit-board stuffing, but lower cost of outsourcing and shrinking margin lured them to continue outsourcing sophisticated engineering and manufacturing capabilities that are crucial for innovation in a wide range of products. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented.
Is there any way to bring back our manufacturing base?
The view that the U.S. should focus on R&D and services is completely flawed. Manufacturing is part of the innovation process and United States has to expand its manufacturing base to remain a world leader.
Following may be suggested to address the issue:
(1) Increase the tariffs on foreign goods so that they are more expensive than domestic goods.
(2) Demand the same level of quality in all foreign goods as American goods.
(3) Diplomatic measures should be taken to create pressure on foreign countries particularly China to stop manipulating their currencies.
Efforts should be made to open up foreign consumption markets adequately to U.S. producers so as to increase export and minimize trade deficit and should endeavor to combat predatory foreign trade practices aimed at undermining U.S. producers in their home market. Next big step is to promote small and medium enterprises to set-up manufacturing units.
SMALL & MEDIUM ENTERPRISES (SMEs); CATALYST OF SUSTAINABLE GROWTH
The issue of shrinking manufacturing base in the United States has been discussed by economist, policymakers, industrialists, and think tanks since economic integration and various measures to improve domestic manufacturing base have been suggested. But considering our free market dominance no sincere efforts were made to expand manufacturing base. Alarming rise in trade deficit and current economic and credit crisis which resulted in to massive industrial job loss has called for immediate intervention of private-public participation to protect and develop domestic manufacturing base for long term sustainable economic growth of United States. It is this time only that the role of SME manufacturers was felt inevitable to address this alarming issue.
President Obama during an interview said “We’ve got to make sure that we’re cultivating small businesses and entrepreneurs who are going to be driving employment growth,” the President said, “so that 20 years from now we can look back and we can say, ‘This was the pivot point, this is where we started to turn the corner.”
US need to change course at this point of time and need to develop a network of small and medium enterprises focusing on cleaner and green technology. The U.S. can explore strategies used in emerging markets for development of SMEs. According to Hau L. Lee, a professor at Stanford Graduate School of Business, “America needs large industrial zones devoted to specific industries–similar to zones in Taiwan, Singapore, Malaysia, and much of China. Such areas offer tax breaks, cheap or free land, workforce training, plenty of water and power, and agencies that serve as one-stop shops for all of the necessary permits and regulatory approvals.” A national level specialized financial institution may be created to provide low cost credit to newly setup SMEs in the manufacturing sector. US strength lies in high end technology, innovation, R&D, robust infrastructure, and know-how.
INITIATIVE FOR DEVELOPMENT OF SMEs
US govt. runs a number of programs for providing technological know-how, contracting opportunities, counseling and assistance, financing, and R&D facilities to small and medium enterprises. Some of the prominent programs run by US department of commerce are Manufacturing Extension Program, Advanced Technology Program, Technology Transfer, and Small Business Innovation Research (SBIR) Program. State govt. and number of govt. agencies are deployed for implementation of these schemes across the United States. SBA provides technical and financial assistance to SMEs through its partner lending institutions.
On November 17, 2009 The Goldman Sachs Group, Inc. launched 10,000 Small Businesses — a $500 million initiative for development of 10,000 small businesses across the United States. The plan envisaged to provide greater access to business education, mentors and networks, and financial capital to small businesses. Lloyd C. Blankfein, Chairman and CEO of Goldman Sachs quoted “Small businesses play a vital role in creating jobs and growth in America’s economy.” Warren Buffett, CEO of Berkshire Hathaway also mentioned “Our recovery is dependent on hard working small business owners across America who will create the jobs that America needs. I’m proud to be a part of this innovative program which provides greater access to know-how and capital – two ingredients critical to success.”
Sum2 LLC, a firm which assists SMEs in implementing sound business practices by offering a series of programs and products, announced The Hamilton Plan on Labor Day. The Hamilton Plan is a ten point program to foster the development of manufacturing in the United States by tapping the entrepreneurial energy of small and mid-size enterprises (SME). The Hamilton Plan requires concerted focus of investment capital to fund development and establishment of an SME Development Bank (SDB) which will focus, manage and administer capital formation initiatives to incubate and develop SME manufactures.
I contacted James McCallum, CEO of Sum2llc to discuss the issue of shrinking manufacturing base and how SMEs can help in restoring manufacturing base in the United States. In response to my comment here is what he stated “It is pretty amazing that the United States has not done more to specifically encourage and address the unique needs of this critical economic driver. Many Asian countries are miles ahead of the US in SME banking and capital formation. These banks have extensive portfolios of finance products and technical assistance they provide to SME’s. The reasons that the US lacks focus in this area are many. US commitment to free market forces has badly warped our economic infrastructure. SMEs in the US have primarily relied on community banks for financing. Most of which went for real estate and construction projects. SME manufactures have just about disappeared from the economic landscape of the US. The credit crash and the economic malaise are awakening our understanding of the critical nature of SMEs and our need to manufacture products. Goldman’s 10,000 Businesses Initiative coalesces nicely with the Hamilton Plan we developed in 2008.”
USA MANUFACTURING & SMEs IN YEAR 2030
With the concerted government efforts for promotion and development of SMEs and private sector initiatives such as “10,000 Small Businesses plan” by Goldman, SMEs will be largely benefited having access to innovative financial products and services from a network of financial institutions. Ten point program suggested in Hamilton plan, if implemented, will bring cluster based development of SME manufacturers. Cleaner and green technology will drive long term sustainable growth, increase national income and result in employment creation. Healthy SMEs will be focusing on export of goods thereby reducing the trade deficit and offer a new market for commercial banking sector. High-tech growth oriented SMEs will also have access to private equity investments and will offer a new avenue of diversification to private equity industry.
But the task of SME development is a challenging task and requires strong will on the part of different stakeholders. SMEs are considered to be the riskiest segment of borrowers from a financial institution’s perspective and thus struggle for timely and adequate credit. Access to technical and market information, financial assistance and trained and educated workers is the biggest challenge for SMEs. Future SMEs require sound business practices such as corporate governance, risk management, stakeholder communications and regulatory compliance.
I believe that SMEs are sine qua non for manufacturing sector & I can foresee a bigger space for SMEs in next 20 years from now. I am so intrigued with the idea of SMEs development and their contribution in the economic growth that in the long run I wish to work as a freelancer offering consultancy and advisory services on financial and strategic matters to SMEs. I would work with a network of financial institutions, venture capitalists, engineers, environmentalists, social workers, suppliers, and policy makers so as to offer SMEs a comprehensive set of services.
APPENDIX: REFERENCES
U.S. Needs to Return to Its Manufacturing Base
http://seekingalpha.com/article/119136-u-s-needs-to-return-to-its-manufacturing-base
Securing America’s Future: The Case for a Strong Manufacturing Base, A Study by Joel Popkin and Company, Washington, D.C. June 2003, Prepared for the NAM Council of Manufacturing Associations
http://www.pmihome.org/Popkin_Study_3-03.pdf
President predicts it will take decades to revive declining U.S. manufacturing base?
Manufacturing & Investment Around The World: An International Survey Of Factors Affecting Growth & Performance, ISR Publications, revised 2nd edition, 2002. ISBN 978-0-906321-25-6.
Economy Watch: Economy, Investment & Finance Report
http://www.economywatch.com/world_economy/usa/export-import.html
USA Manufacturing output continues to increase (over the long run), Curious cat, Investing and economics blog
Alliance for American Manufacturers http://www.americanmanufacturing.org/issues/manufacturing/the-us-manufacturing-crisis-and-its-disproportionate-effects-on-minorities/
Can the future be built in America? http://proquest.umi.com.remote.baruch.cuny.edu/pqdweb?index=28&did=1860761601&SrchMode=1&sid=2&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1259505905&clientId=8851
TO SAVE AMERICAN MANUFACTURING: USBIC’S PLAN FOR AMERICAN INDUSTRIAL RENEWAL BY Kevin L. Kearns, Alan Tonelson, and William Hawkins
http://americaneconomicalert.org/USBIC_Save_American_Manufacturing_Jobs_Plan.pdf
Goldman Sachs Launches 10,000 Small Businesses Initiative
http://www2.goldmansachs.com/our-firm/press/press-releases/current/10-k-business.html
Goldman Sachs as Social Entrepreneur http://sum2llc.wordpress.com/
Hamilton Plan by Sum2llc http://sum2llc.wordpress.com/2008/09/03/sme-development-bank/
You Tube Video: Isley Brothers, Work to Do
Risk: SME, manufacturing, economic revitalization, social wealth
Rutgers Job Study: Full Employment By 2017!
Rutgers University has released a sobering study on expected recovery rates in employment levels for the United States economy. The study, America’s New Post-Recession Employment Arithmetic indicates that the employment deficit has grown so large that it may take until 2017 for the nation’s labor market to return to its pre-recession level.
The study, released by the Edward J. Bloustein School of Planning and Public Policy is a cause for concern. The study reports that the US economy has shed over 7 million jobs since the recession officially began in December 2007. This has reduced the total number of jobs in the United States by 5.8%, the largest drop during any downturn since World War II. The authors of the study, James W. Hughes and Joseph J. Seneca, project that the employment deficit will total 9.4 million private sector jobs by the end of the year.
The study estimates that if the economy adds more than 2 million jobs annually starting next year, it would take until August 2017 – more than seven and a half years – to both recover the jobs lost since December 2007 and create new positions for the roughly 1.3 million people who join the labor force each year.
Hughes and Seneca believe that a recovery in 2017 may be an optimistic assumption. An economic expansion that lasts for seven years is about 50 percent longer than the average for postwar recoveries. Hughes and Seneca refer to the last ten years as “The Lost Employment Decade,” because the U.S. is on track to finish this year with 1.3 million fewer total jobs than it had in December 1999. “This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade” the report states.
The past decade has witnessed a startling reversal in economic fortunes for the US economy. The U.S. finished the 1990s with 19 million more private sector jobs than it had at the start of the decade. Approximately 16 million jobs were created during the 1980s. Before the recession, annual rate of job growth was about 1 million jobs per year, about half of the growth rates of the previous two decades.
Hughes and Seneca believe that this will force states into fierce competition to realize job growth. States must respond by creating desirable environment for business based on costs, affordability, business climates, support infrastructure, labor force quality and tax policies.
We believe that joblessness and unemployment continue as significant threats to economic growth. The conception of the unemployment rate as a lagging indicator is emerging as a lead driver inhibiting economic recovery. High unemployment continues to inhibit consumer spending and works against a rebound in the housing market and related construction industries. Retailers are already bemoaning the bleak forecast for this years holiday shopping season. State and local governments reeling from dwindling tax receipts are beginning to crack under the strain to fund basic community services, public schools and social assistance programs.
The structural dysfunction of the American economy is a critical issue that must be addressed. A concerted program aimed at the development and incubation of SME manufactures will encourage the entrepreneurial energy and kick start badly needed economic drivers to ignite a recovery. Sum2 advocates the adoption of The Hamilton Plan and the creation of an SME Development Bank to reestablish sustainable growth and national prosperity.
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(RU and Bruce, Perfect Together)
Risk: unemployment, job creation, SME, political stability, recession,
ADP Reports 250,000 More Jobs Lost in September
ADP has released its National Employment Report for September Nonfarm private employment decreased 254,000 during the month on a seasonally adjusted basis. The ADP report indicates that job loss continues to decelerate. Though slowing, the unemployment rate continues to creep higher. The impact of the loss of a quarter of a million jobs is an indication that economic recovery remains sluggish and the US has a long way to go before the benefits of wide spread sustainable growth are realized.
The evaporation of jobs will continue to hinder a broad recovery in the housing market. Yesterday I heard a speaker claim that approximately 25% of homes in Florida are in foreclosure or are behind in their mortgage payments. It is an incredible statistic that speaks volumes about the acute systemic problems of the service based, boom/bust Florida economy.
Highlights of the ADP report include:
Employment from July to August was revised from a decline of 298,000 to a decline of 277,000
September’s employment decline was the smallest since July of 2008
Employment losses have diminished significantly over the last two quarters
Nonfarm private employment in the service-providing sector fell by 103,000
Employment in the goods-producing sector declined 151,000
Employment in the manufacturing sector dropped 74,000
Employment with large businesses with 500 or more workers declined by 61,000
Employment with medium-size businesses with between 50 and 499 workers declined 93,000
Employment among small-size businesses with fewer than 50 workers, declined 100,000
Employment losses among small-size businesses have diminished in each of the last six months
Construction employment dropped 73,000. This was its thirty-second consecutive monthly decline, and brings the total decline in construction jobs since the peak in January 2007 to 1,632,000.
Employment in the financial services sector dropped 19,000, the twenty-second consecutive monthly decline.
Sum2 advocates the establishment of an SME Bank adoption of The Hamilton Plan to address the recession.
For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.
You Tube Video: The Silhouettes, Get A Job
Risk: unemployment, recession, recovery, political
Drivers Wanted!
The cash for clunkers rebate program is a great success. The first $2. billion allotted to the program was spent within two weeks. The recently approved additional allocation of $1 billon for the program will no doubt be taken advantage of by consumers. American’s are always keen to do a deal and can’t wait to drive away in a brand new ride unwritten in part by our most favorite relative, Uncle Sam.
The government’s goals of the cash for clunkers program are being achieved. The program will have a positive environmental impact as more fuel efficient vehicles replace the old gas guzzling clunkers. The program has also allowed car manufacturers to liquidate 2009 inventories that were piled high due to tepid demand borne from the recession and credit crisis. The program may also help cure consumers recession psychology and their new found aversion to purchasing new stuff.
It is hoped that this boost to car manufacturers may kick start the economy. Ford Motor Company’s recent positive earnings announcement and GMs and Chrysler’s arrest of declining quarterly sales are one of the “green shoots” of recovery pointed to by politicians and economists. However a huge question remains concerning how to incubate long term sustainable drivers that will end the recession? The $600 tax rebate checks sent out by Paulson last year provided a temporary boost to the economy. Its effects did little more then forestalling the more deleterious effects of the growing recession. See The Charge of the Light Brigade. Hopefully cash for clunkers will help to kick start some recovery momentum to an economy aching for relief from systemic malaise.
The US economy has grown overly dependent on a few industry sectors that include services, real estate, banking and construction. The SME service sectors have been devastated by the contraction of credit, unemployment and the curtailment of consumer demand brought on by the recession. During the good times, these sectors were driving economic growth and expansion. Unfortunately these sectors remain conspicuously absent as leading drivers in the new emerging economy.
Macroeconomic factors unpinning recovery continue to be negative for these sectors. Hi tech and manufacturing seen as critical to a lasting recovery have also been a bit lethargic. These industries are capital intensive and with the capital markets still seeking a firm recovery footing these sectors will remain weak. Health care and pharmaceuticals are key sectors in the US economy, but political uncertainty around reforming industry practices and much needed restructuring hampers the sectors ability to assume a leading position in recovery scenarios.
Last year Sum2 published The Hamilton Plan, a Ten Point Program to incubate small midsized enterprise (SME) manufacturers. At its core, the plan seeks to encourage capital formation initiatives from public and private sources. Manufacturing is key to any sustainable economic recovery. Our ability and desire to link manufacturing to the entrepreneurial capabilities and business skills of SME’s to address targeted needs could well be the drivers that finally steer us out of the recession.
Risk: recession, SME, manufacturing
Job Loss Decelerating?
ADP has released its National Employment Report for July reporting a 371,000 decrease in non-farm private sector jobs. ADP has also revised its numbers for May from a decline of 473,000 to a decline of 463,000.
The ADP report states, July’s employment decline was the smallest since October of 2008. As a trailing economic indicator, unemployment is expected to continue to rise for the next few months. As the recession recedes and the economic recovery takes hold employment is likely to decline for at least several more months, albeit at a diminishing rate.
Highlights of the report include:
The report estimates non-farm private employment in the service-providing sector fell by 202,000.
Employment in the goods-producing sector declined 169,000, with employment in the manufacturing sector dropping 99,000, its smallest monthly decline since September of 2008.
Large businesses, defined as those with 500 or more workers, saw employment decline by 74,000, while medium-size businesses with between 50 and 499 workers declined 159,000.
Employment among small-size businesses, defined as those with fewer than 50 workers, declined 138,000. Since reaching peak employment in January 2008, small-size businesses have shed nearly 2.4 million jobs.
In June, construction employment dropped 64,000. This was its thirtieth consecutive monthly decline, and brings the total decline in construction jobs since the peak in January 2007 to 1,483,000.
Employment in the financial services sector dropped 26,000, the twentieth consecutive monthly decline.
The full report can be accessed here: ADP National Employment Report
Risk: unemployment, recession
For the Want of a Nail: Lennar Homes
for the want of a nail
Community developer Lennar Homes lawsuit against drywall manufacturers reminds me of the old Mother Goose nursery rhyme, “for the want of a nail.” The rhyme begins with a nail that was not available to affix a shoe to the hoof of a horse. The loss of the nail loses the shoe, which loses the horse, which loses the rider, which loses the battle, which loses the war, which loses the king which loses the kingdom. For the want of a nail is an instructive tale of how seemingly insignificant or minute events can create consequences that escalate into a catastrophic incident that impacts and endangers many.
The Lennar lawsuit is yet another egregious example of supply chain contamination that has recently come to light. The discovery of toxic substances within drywall manufactured in China and used in the construction of Florida homes has prompted the lawsuit against manufacturers and a number of installation subcontractors that purchased the contaminated drywall on behalf of Lennar.
Lennar’s lawsuit alleges that subcontractors it employed to install dry wall, substituted high quality domestic brands with the less expensive contaminated drywall. The subcontractors imported the contaminated drywall from China to save on costs of materials in an attempt to boost profits for their contracted work. The drywall was discovered to contain toxic substances after a number of homeowners began to complain of foul odors, product deterioration and in some cases sickness due to exposure to the contaminated product.
It is believed that the Chinese drywall was found to contain a quantity of dry ash which was used as a filler substance in the manufacturing process. Dry ash is a waste by product of coal fired power plants that are so prevalent in China. The dry ash is known to contain concentrations of heavy metals that are considered dangerous to humans.
This event is certainly unwelcome news for the beleaguered construction and real estate industries. Particularly so in deeply distressed markets like southern Florida. It has heightened the risk profile of all parties involved and could spell catastrophic consequences for some of the involved manufacturers, homeowners, and contractors. This event can also impact the profitability of banks that may be forced to write off non-performing mortgages and construction loans sold to affected homeowners and contractors. Insurance companies may be required to pay off clams for product liability and homeowner policies. Municipalities are also at risk due to this event. Tax ratables and property values are threatened due to property abandonment and the suspicion that toxins have been introduced into the community.
This risk event will require the drywall manufacturers to face severe legal liability. It will impact profitability due to the financial stress of remediation expenses. Most significantly these types of events do severe damage to the company brand and reputation. A great deal of company and product branding is about trust. This types of events compromise the trust of brand consumers. Once that trust is violated it is very difficult to win it back.
Lennar violated its customers trust by allowing its supply chain to be contaminated. This violation of trust will result in financial loss and may create a long term health risk for Lennars customers and their families.
The municipalities that welcomed Lennar with the anticipation that development will serve the citizens of their communities have now been scarred by an ecological hazard. This will continue to haunt the reputation of these towns for many years because it threatens the value of both contaminated and non contaminated homes.
The drywall installation contractors face a high probability of bankruptcy and potential criminal prosecution. This event will fire a deepening distrust of Chinese manufactured products. It will certainly add stress to the delicate political balance of the highly codependent China USA trade relationship. Instigating calls for more protectionism and “Buy America” mantra by American based manufacturers. The prospect of added strain with China is particularly delicate due to China’s important roll in financing government spending through its large purchases of US government bonds. All because some subcontractors wanted to realize a little more profit margin. For the want of a nail indeed.
The unfortunate realization is that this risk could have been prevented. Master contractors need to put in place service and supply level agreements that prohibit the use of substituted materials. Master contractors need to manage supply chains by insisting that all materials used by subcontractors meet quality specifications and are sourced from trusted and thoroughly vetted providers. Adherence to international product quality and testing standards must be ascertained before those are accepted into the supply chain. This is just one aspect of ascertaining weather a supplier meets acceptance criteria into a company supply chain.
The Profit|Optimizer helps manufacturers, developers, contractors and lenders conduct a risk assessment of their supply chain. It is something that many businesses often take for granted yet holds the potential to become one of the most dangerous risks to the financial health and stability of the business enterprise.
Sum2 sells nails. The Profit|Optimizer helps business nail down risks that can deconstruct your business. It is a great set of tools to build profits and construct a healthy sustainable business.
Next time you read Mother Goose “for the want of a nail” to a child remind them to pay particular attention to its sage advise. It may be the first lesson in effective risk management that they will receive.
You Tube Music Video: Peter Paul and Mary, If I Had A Hammer
Risk: supply chain, product liability, reputation risk, ecological
Kashi’s Kismet
salmonella
Last night as I was researching the Peanut Corporation of America’s (PCA) peanut paste recall, my wife received an urgent telephone call from our local supermarket. The caller informed us that the Kashi products we purchased were subject to recall. I was a bit astonished by the call for several reasons. The first being notified of the unhappy news that a premium brand product that I so enjoy has the potential to kill me or make me very ill due to Salmonella bacteria. It goes without saying that it was a most bracing experience. I was also a bit bemused about the ability of my local supermarket to track me down to inform me that my favorite breakfast cereal might endanger me. At the very least letting me know that this is no breakfast for champions.
Though this is a positive example of how consumer product data mining and customer tracking business intelligence is employed; the realization that your breakfast eating habits are tucked away in some giant relational database remains a bit unnerving. But that is a different subject for another day.
After checking with the Kashi website the cereal products I purchased were not listed on the recall list. Kashi website lists granola bars and cookies as its only products that are subject to recall. As a committed consumer of the brand I remember when I purchased the cereal a free granola bar was included in the package for product promotional purposes. When I returned home I eagerly consumed the free granola bars. I am happy to report that I have not fallen ill. I’ll have to go back to the supermarket and ask if the non contaminated cereal I still have in my cupboard remains subject to the recall. An interesting product bundling dilemma.
The mechanics and execution of the product recall seems to be effective. The sophisticated use of data mining technologies and the ability of the manufacturer to contact a retail consumer through a digital trail that includes customer loyalty cards, credit card, and product bar codes is pretty impressive.
What is of concern about Kashi and other processed food manufacturers that are dependent on an expanded and complex supply chain is their failure to uncover the risk associated with the supplier. In this case PCA. It is alleged that PCA had a leaky roof that played a role in contaminating the peanut paste. A simple walk through of the facility may have uncovered this risk factor. Certainly if a company fails to perform the most basic facilities maintenance functions (like a leaky roof) odds are that the company has other issues and businesses functions that it is not addressing. This is the cockroach theory. Where you see one there are usually many others. A simple walk through may have revealed that all was not kosher at PCA.
Supply chain risk is becoming more prominent as manufacturers and service providers aggregate components and ingredients from numerous providers to deliver a finished product or service to end user consumers. The implementation of a sound practice program that addresses risk associated with supply chains is a key ingredient for a sustainable business enterprise.
The Profit|Optimizer devotes a section to supply chain risk. All process manufacturers must require suppliers to conduct a thorough risk assessment of processes and functions as outlined in the Profit|Optimizer. The Profit|Optimizer also includes a section on facilities risk. The risk assessment tools offered by the Profit|Optimizer would have uncovered the dangerous risk factors at PCA and may have prevented the fatal and costly release of contaminated products.
The kismet of commercial enterprises like Kashi will continue to be bright so long as the mantra of sound risk management is practiced with more vigilance. In doing so the health and well being of its loyal customers will flower as will the value of its product brands and the sustainability of the business.
You Tube Video: Vince Guaraldi, The Peanuts Theme
Risk: reputation, brand, product liability
Honda Motors Practices Enlightened Capitalism
Amidst all the layoffs, business closures and shutdowns the hard edge of capitalism is a painful experience far too many people are forced to endure. During times of plenty, the relationship of labor and capital is harmonious and symbiotic. Both parties recognize the value that each bring to the corporate community and each parties enrichment and well being is served by the degree of harmony present in that relationship. During down business cycles management may resort to layoffs to preserve the enterprise. Unfortunately this often causes resentments and hard feelings on the part of workers who have lost the means of earning a living. When workers return to their jobs this can cause problems and hurt an affirmative corporate culture that is critical to maintaining a sustainable business enterprise.
In the face of the meltdown in the automobile manufacturing sector, Honda Motors is one of a very select few that is not resorting to layoffs. Honda Motors known for product quality and leadership in product innovation and business processes is also highly respected for its treatment of employees. Honda Motors places great emphasis on the creation and maintenance of an affirmative corporate culture to sustain profitability and market leadership.
Honda Motors decision to restructure the work force, and give workers a period of paid leave until business conditions improve speaks volumes about how management respects and values the contribution labor makes to the long term sustainability of the enterprise. Any remuneration workers receive during the leave will be paid back to the company with unpaid overtime when the workers return to the production line.
The value of good will on the Honda Motor balance sheet has increased exponentially. The sustainability of an affirmative corporate culture will drive profitability, product innovation and market leadership for the many years to come.
We applaud Honda Motors for this innovative and enlightened response to the current market challenges.
You Tube Video: June Carter Cash & Johnny Cash, One Piece At A Time
Risk: sustainability, labor relations, corporate culture
