Midyear-Review-2019-Storm

Midyear Review: 2019 - The Storm that Never Came

R.A. Scotti’s Sudden Sea: The Great Hurricane of 1938 tells the story of the infamous and devasting storm that formed in early September that year off the coast of Africa. As it headed west, warnings went up along the Eastern Seaboard from Florida to the Carolinas, predicting it would hit the United States by September 15. Given the lack of radar technology, the eyes and ears of the sailors and merchant marine vessels were the only forecasting tools available. The warnings scattered boats and their crews back to safe ports and harbors. September 15 came and went with no storm in sight. 

What wasn’t known was that the storm had taken a hard right toward New England – and was moving rapidly. With the “eyes and ears” in port, a Category 5 Atlantic hurricane was headed straight for Long Island, Rhode Island and Connecticut, but no one knew it. The storm hit on September 21. As Scotti describes it, people were enjoying a pleasant, partly cloudy September day when, within a few hours, the sea surged 12-20+ feet, catching everyone by surprise. The storm devastated the southern New England coast, causing more than 400 fatalities and today’s equivalent of more than $50 billion of damage. 

Eighty years later, in the fall of 2018 – in a digital era much different than 1938, when we can measure and track nearly everything – many companies predicted a recession starting in the third quarter of this year. The economic storm was coming, or so the thinking went, driven by rising tariffs, rising interest rates and unsustainable economic growth, and the storm would hit in the second half of the year.  Economists and the Federal Reserve believed that interest rates needed to rise so there would be room to cut them when things slowed. (This was interesting logic: raise rates to cause a financial slowdown so we can lower rates to fix it.) The stock market dropped 18 percent, and caution led many companies to hit the brakes. Those economists should have read Jim Grant’s The Forgotten Depression: 1921: The Crash that Cured Itself. He calls the downturn of 1921 the “last unmedicated financial crisis.”

Now, here we are at midyear. U.S. interest rates have been cut slightly and are likely to stay flat over the next several quarters. The uncertainty regarding tariffs is as difficult for many companies to manage as is the impact on demand given potentially higher prices. The GDP is growing, wages are improving, unemployment is low, and inflation is benign. 

How did the U.S. economy find itself in such a good spot? One word:  innovation.

Innovation is driving new businesses, and new ways of doing business, which creates competition and jobs. Examples of leading companies driving growth through innovation abound: Apple is building digital platforms and leveraging wearables, Verizon is rolling out 5G networks, food and beverage company Mondelez is conducting strategic customer targeting, healthcare manufacturer DexCom is refining continuous glucose monitoring, and technology company Nvidia is rolling out new artificial intelligence-powered tools for business and consumers alike.

And, while innovation reigns supreme, the question emerging for senior executives today is how do we measure and extract value from our digital investments? Why are our competitors seeing higher returns on investment, assets or equity than we are? The focus for large enterprises across industries will be to extract, capture and measure value from their digital transformation journey. They need to know they are on the right path – and they need digital benchmarks that show who is leading the way. 

Is the storm out there? Well, while the Chicago PMI business barometer registered a somber 44 for the month of July, the Manufacturing Index was 51, which signals growth. The tariff battle, as of today, seems more like checkers than chess.

This ambiguity poses one question that can’t be ignored: over the last century, has a recession started during a presidential election year? The answer is yes – in fact, three times – in 1920, 1960 and 1980. In 1920, a recession followed as part of the post-World War I drop in economic activity. In 1959, after a period of solid economic growth, the Federal Reserve raised interest rates, spurring a recession in 1960. And then, in 1979, following a Federal Reserve meeting in October, interest rates increased from 11.5 percent to an eventual peak of 17.6 percent in April 1980. Meant as a tool for halting inflation, it caused an economic recession that lasted into 1981.

Of course, 2020 isn’t 1920 – or 1980. And perhaps the Fed avoided repeating the history of 1959 by choosing not to raise rates this year. Interestingly, the presidential elections that coincided with each of the historical incidents cited above ended in a change of party in the White House.

Ambiguity and uncertainty still sit over the economy in the form of political uneasiness, government debt levels, tariffs, consumer debt and domestic policy, to name a few. It’s at times like these that I am reminded of what the famous 20th century philosopher and baseball player Yogi Berra famously once said, “You can’t think and hit at the same time.” Berra notwithstanding, many leaders today are “swinging away,” driving growth through acquisitions and innovation while they continue to tamp down costs and prepare for uncertainty. It’s this innovation that gives them the 21st century capability to better see what’s on the horizon and better prepare for the potential economic storms of the coming months.  

About the author

Todd Lavieri is Vice Chairman of ISG, working closely with the executive leadership team on corporate strategy and governance matters. He also is responsible for ISG Americas – the firm’s largest region, encompassing half of ISG’s revenues – and ISG Asia Pacific. He joined ISG in July 2014.