New Normal

So what’s with all this talk about a “New Normal” economy and what are the implications for mid-market companies?

The term “New Normal” was coined by bond-fund CEO Mohamed El-Erian. He notes that it represents a fundamental change in the structure of the global economy. Prior to the financial crisis we categorized countries into Industrialized and emerging. Emerging countries were prone to crisis. The financial crisis changed that – China, India & Brazil, emerging economies, helped stabilize the world economy. Today these countries play a much bigger role in the economy. El-Erian went on to say that consumers with high debt will reduce their spending and cause economic growth to stay around 2% for years.

The Deleveraging of America

According to Ian Davis of McKinsey & Company the New Normal will result in a business environment of significantly less leverage due to the scope and broadness of the financial crisis. Companies that required significant amounts of leverage will find their costs growing dramatically, while companies that focus on increasing shareholder (owner) valuation will be “rewarded”.

Consumers continue to deleverage. The recent recession has led to a significant change in attitude. In an ABC news poll last year fewer than 15% indicated that they were more willing to invest in stocks, spend more money, and secure a mortgage or loan. 67% said they were more willing to save. This sentiment continues today as consumer sales are still anemic.

Expanded Role of Government

In addition, Ian Davis predicts that businesses will be increasingly faced with an expanded role of government. The Healthcare and Financial Reform bills are prime examples of this expanded role. Almost every business will see an impact from this expansion of government. The uncertainty of these changes are already leading businesses to take a “wait and see” position on expansion.

Changing Role of Emerging Countries

A recent Business Week article noted another view from Joseph Carson, an economist with AllianceBernstein. His view is focused around a US economy based on more exports to the emerging economies of China, India, Brazil, etc. instead of housing and consumer consumption. He believes this could result in growth of around 3.7% per year.

Implications for Mid-Market Companies

So with all this uncertainty, what should a mid-market company do? Here are a few suggestions:

• Deleverage – reduce your debt load. The cost of money has nowhere to go but up.
• Manage Performance – ensure your company is operating at the highest performance
• Keep up with Regulation – understand the impact of new regulations on your business