4 Economic Headwinds and How to Tack Against Them

When the wind is blowing against a sailor, he makes forward progress by tacking close-hauled at an angle across the oncoming headwinds. Progress may not be as steady as running with the wind to his back, but he nevertheless moves forward, though in a zig zag pattern. Plumbing contractors will likely need to learn how to tack across the wind to progress in 2019.

The 4 Economic Headwinds

The past couple of years were good ones. Thanks to reductions in the regulatory stranglehold on business and the reductions in the corporate tax rate, economic growth was robust, far exceeding the European style slow growth delivered by the previous presidential administration. And yet, increasing headwinds may tamper economic growth and even reverse it. Here are the four main ones.

1. Interest Rates – The Federal Reserve used monetary policy to recover from the last economic crisis and continued to deploy it throughout the Obama administration’s tenure, as the economy crept along despite zero interest rates. With a resumption of economic growth, the Fed became concerned about inflation and announced plans to raise short term interest rates through 2019 to try and modulate inflation.

The Federal Reserve has used the economic interest rate club in the past and almost always overstruck. They tend to not just beat inflation out of the economy, but they beat growth out as well. Hope the current Fed will get it right.

In addition to the Fed’s bump in short term rates, it is reversing the quantitative easing of the Obama years with quantitative tightening. Instead of buying government debt, bringing down long term interest rates, it is selling government bonds or letting them mature without replacement, pushing long term rates higher.

The combination of higher rates and changes in the tax laws are directly impacting the housing markets. Higher rates make new homes more expensive. The higher individual tax deduction also reduces the potential for tax benefits for millennials considering their first homes. A slowdown in housing has far reaching implications for the rest of the economy.

2. Tariffs – A tariff is nothing more than a tax on imports. China does not pay tariffs on the goods we import from China. Businesses and ultimately, consumers pay the tariffs. Think of the tariffs as a 25% sales tax and the punitive nature of tariffs is more apparent.

China’s retaliatory tariffs on U.S. farm products are likewise, a tax on the Chinese consumers. However, farmers from other countries are rushing in as the tariffs make them more competitive. Purchases are shifting in the direction of competitive agriculture, further impacting the U.S. economy.

While there is little question that China is a bad actor on the economic stage with little respect for intellectual property rights, the way to address their bad behavior is not to punish the domestic economy. Yet, the administration seems set on pursing this path, no matter the consequences. If the Chinese premier remains resistant and our president remain equally stubborn, tariffs will hurt everyone.

3. Global Economy – While dark clouds appear on the horizon of the U.S. economy, the world economy is facing thunderstorms. Emerging markets are suffering. The Eurozone, which is somewhat stagnant in the best of times, is battered by Brexit, the United Kingdom’s attempt to leave the E.U., and by Italy’s debt problems. When the U.S. economy is strong, we pull the rest of the world along. When the U.S. economy weakens, a flailing world economy can pull the U.S. under with it.

4. Animal Spirits – The sentiment on Wall Street is decidedly negative. The combination of tariffs and interest rates have flattened returns, making 2018 a lost year for investors that might turn outright bearish if the negativity feeds on itself and becomes a self-fulfilling prophesy.

While Main Street is largely immune to Wall Street, a wealth effect from declining 401Ks will affect the small business community. When consumers see their 401Ks in retreat, they feel less wealthy, become scared, and reduce personal spending.

Tacking on a Close-Haul

Wall Street may panic in this environment. Investors may panic. Even consumers may panic. You cannot afford to. Remember, a deep recession may only be a three percent reduction in GDP. Can you overcome a 3% decline in business by working a little harder and marketing a little more?  Of course you can!

If the economy does turn down, your competitors are likely going to retreat. Good for you. They are expending less effort to get customers at the exact moment business is harder to find. This means it is time to step up your marketing and networking. If nothing else, ramp up social media and join a service club and networking group.

If people are not selling homes because they want to hang on to their current mortgage, they will be more open to remodels. Put together kitchen and bath makeover options that involve new brass and porcelain. Promote dual flush toilets. Push tankless water heaters. Start offering water alarms with shut off valves. Be open to tacking into new opportunities.

During the last downturn, we counseled Service Roundtable members to step up their marketing. Those who did experienced phenomenal growth rates despite the economy. It was like they were running a race into the wind and their competitors found the going too tough, so they sat down or walked. The contractors who exerted greater effort in the face of the economic headwinds all but sprinted past the competition.

Will there be a recession? Yes. Absolutely. The only question is when. It might be in 2019 or 2020. Then again, it might be a decade from now. No one knows. But even when the economy is in recession, you do not need to be. Just refuse to participate. It may not be easy, but it is simple.

For the tools you need to prosper, join the Service Roundtable. Visit www.ServiceRoundtable.com or call 877/262-3341 and ask for a success consultant.