Imagine the unthinkable happening again: Another bust in the housing industry. If this happens, will you be ready?
I have been in the building material industry for more than 34 years, and during my tenure, I have been told by many executives that this business is on a seven-year cycle of boom-and-bust. The last bust was in September 2008. If the cycle holds true, does that mean housing is poised for another bust in 2015? Have the last six years been all of the recovery we will see? Or is this something far worse, like the economic roller coaster our country experienced during the 1930s’ Great Depression?
Many economists believe the Federal Reserve has created a huge asset bubble, with more than $1 trillion being pumped into the economy each year in an effort to keep interest rates artificially low, stimulate the economy, and ensure banks remain solvent. At some point, the artificial pumping of money has to stop. When this happens, pessimists believe, the markets will collapse. Like morphine to a terminally ill patient, the Federal Reserve may well be masking the true, fragile condition of the U.S. economy.
Once the money stops, the unmasked reality could swiftly take hold. Mix in shifting political winds and a world in upheaval, and might 2015 be a replay of 2008? If so, the first problem for many companies will be a lack of cash reserves. Smaller companies that survived the Great Recession a few years back did so at a cost of decades’ worth of retained earnings or investor equity. Another hard, sustained collapse of the economy could result in a quick end for many in our industry.
Most companies have adjusted to their "new normal" with reduced headcounts, frugal expense structures, and smaller capital requirements. If not for the improvement in business over the last couple of years, however, upwards of 30% of them would probably not be here today. The decimation of the industry’s talent pool, coupled with aged and antiquated equipment, offer little incentive for business owners to continue should a repeat bust occur.
How does an executive manage this potentially devastating risk of another economic collapse?
First, like a shrewd poker player, now is not the time to go "all in." Rather, leave some chips in your pocket. Frankly, I am not a fan of expansion right now.
Second, start shoring up your workforce with new talent who have not been beaten up for the last seven years and who are willing to fight.
Next, strategically replace or add capital equipment that could help you survive another five-year downturn.
Finally, and most importantly, build relationships with your banker and try to pay down debt. If you are unable to pay down debt, renegotiate notes, extending them out at lower interest rates and payments. Once a collapse happens it is too late to fix banking problems.
Uncertainty continues. The only difference between now and 2008 is that this
time, we know a collapse can happen. Be prepared.