What Does the Potential of "the Mother of all Meltdowns" Mean for Procurement?

Posted At : February 28, 2008 3:14 AM
Related Categories: Spend Management

I'm usually an optimist, but I've been reading enough economic forecasts of late to start making me look at the US economy's glass not as half full, but nearly empty. As one example, consider this story from the Financial Times. Quoting and citing the research of doom and gloom economist Nouriel Roubini, the article offers up a 12-step plan to economic disaster for North America. The scary thing is that it's already possible to see elements of a number of these steps beginning to occur. According to the FT, "Professor Roubini's scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006. At that time, his view was extremely controversial. It is so no longer. Now he states that there is 'a rising probability of a 'catastrophic' financial and economic outcome."

If you combine this with the recent Fed concerns over Stagflation -- essentially a combination of stagnate economic growth combined with inflation -- then things are looking dire if you subscribe to the Roubini camp. But from a Spend Management perspective, what does this all mean? Late last year, I wrote a four-part series on how procurement organizations can prepare for an economic downturn. In this analysis, I suggested a number of Spend Management actions companies can take to minimize the impact of a downturn. I still stand by the advice that procurement organizations should consider five key items at the moment giving the recessionary environment. These are:

1) Reinvigorated efforts around sourcing (and re-sourcing)
2) Greater consideration of moving from fixed to variable cost structures (which will also, in theory, help companies scale up and down procurement efforts more quickly)
3) A newfound mandate to focus on overall supply chain risk
4) Ongoing and increased efforts to cut services procurement and non-production related expenditures
5) A greater embrace of the words in Lord Byron's famous quip: "Cash is virtue"

For greater detail on each of these -- and how to take action -- you can click on the above link. Considering the overall situation, I believe that it would behoove all of us to take the situation seriously. As the FT so rightly suggests, "the connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable." From a Spend Management perspective, it's our job to take preventative action before the metaphorical equivalent of a morphine IV is required to dull the "wretchedly uncomfortable" economic pain.

- Jason Busch

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More bad news at the market open this morning.

http://www.bloomberg.com/apps/news?pid=20601087&am...

"U.S. Economy Grew Less Than Forecast Last Quarter (Update2)

By Courtney Schlisserman

Feb. 28 (Bloomberg) -- The U.S. economy grew less than forecast in the fourth quarter, relying on exports as consumer spending slowed and the slump in homebuilding deepened.

Gross domestic product rose at a 0.6 percent annualized rate, unchanged from the initial estimate last month, after a 4.9 percent gain in the third quarter, the Commerce Department said today in Washington. The median estimate in a Bloomberg News survey of economists was for a 0.8 percent increase.

Excluding exports and imports, domestic spending contracted, a change from the first estimate, the department said. Combined with figures today showing claims for unemployment insurance jumped last week, the report reinforced traders' expectations for the Federal Reserve to cut interest rates again next month.

``We have absolutely no momentum going into the first quarter,'' said Josh Shapiro, chief U.S. economist in New York at Maria Fiorini Ramirez Inc. ``Things are looking pretty grim for the economy. If we're not in a recession already, we're very close.''

Fed Chairman Ben S. Bernanke yesterday signaled he's ready to lower interest rates again to sustain the expansion. Traders see a 100 percent chance of a half-point reduction to 2.5 percent by the end of the next meeting on March 18. Odds of a three-quarter point cut rose to 36 percent, from 10 percent.

Jobless Claims

The Labor Department said initial claims for unemployment insurance climbed 19,000 last week to 373,000, higher than forecast.

The dollar, which had risen as much as 0.3 percent earlier today, erased its gains after the reports and reached a record low against the euro. It traded at $1.5127 at 8:39 a.m. in New York, after touching $1.5147 earlier.

The median GDP estimate was based on 74 economists surveyed. Projections ranged from gains of 0.5 percent to 1.3 percent.

An improvement in trade prevented the economy from contracting last quarter. The gap narrowed to an annual pace of $506.8 billion, adding 0.9 percentage point to GDP.

Excluding the improvement in trade, the economy would have shrunk at a 0.3 percent annual pace, the first decline since the last recession in 2001.

``One could argue that the domestic recession began'' last quarter, Neal Soss, chief economist at Credit Suisse, said in a Feb. 21 note to clients. ``But there would be no debating that the rest of the world kept U.S. GDP growth above water at the end of last year.''

# Posted By Jason Busch | 2/28/08 7:30 AM

Here's a link to the article that works:

http://www.rgemonitor.com/blog/roubini/245171

# Posted By Eric Strovink | 2/28/08 7:35 AM

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