Although the media and the sky-rocketing stock market have been smoking the V-shaped recovery green shoots, folks on the ground see this recovery talk for what it is - Fake. Case in point being this Sunday’s CEO panel on Fox News comprised of Office Depot CEO Steve Odland, FedEx CEO Fred Smith and Cisco’s John Chambers. While we don’t give much credence to anything that John Chambers has to say, the other two CEOs whose businesses have been front and center in bearing the brunt of economic collapse make some very interesting points. We lightly paraphrase here from their interview:
Are you seeing a turnaround?
Steve Odland (Office Depot): Office Depot's customers are small businesses and so the Company is a good barometer of the health of the U.S. economy. What we've seen is that the small business customers have been hurt disproportionately in this downturn. Traditionally, housing has been an important source of liquidity for these people. They start their businesses with a second mortgage and they fund them with home equity lines of credit. As that credit has dried up these businesses have not been able to recover.
Last year the economy went off the shelf, and right now we're rocking around at the bottom but we're not seeing a meaningful recovery at this point. And I'm worried that we're not going to see a meaningful recovery until the liquidity returns to the small businesses.
Steve Odland (Office Depot): The stimulus money has not gone to small businesses. This is an unusual recession in that it has been banking led and housing led. As these sources of cash have dried up for small businesses, they haven't been replaced by stimulus money or any other money. The issue here is that every modern recession is led out by small businesses as they create jobs. All net job creation happens in small business. We are not going to see jobs rebound until we see small businesses get more access to liquidity.
Fred Smith (FedEx): Although the Obama policies are not hurting the economy, I am not sure they get to the heart of the fundamental problem. The economy got way too invested in finance and housing. And it did so because the tax policies of the United States favor debt and speculation in the financial services sector as opposed to investment in the industrial sector. So if you want to improve the earnings power of blue collar folks you've got to stimulate the industrial sector. And our tax policies just don't do that at the present time. So there are two things that need to happen: One, the tax rate in the United States at the corporate level is 38%. Other than Japan it's the highest in the industrialized world. Secondarily interest is completely deductible. So if you borrow money to speculate on Wall Street, the government is basically helping you with that speculation. Whereas an industrial companies like FedEx that buys a new 777 and employs people all over the country in building the plane; we get that airplane and put it in service and we have to depreciate that airplane. In other words the capital investment on that equipment is taxed at a much greater rate than speculation in the financial sector. So expensing capital investment would be huge stimulus to the industrial sector.
Where do you see the economy headed?
Steve Odland (Office Depot): The economy started to go off two years ago and has come down dramatically. In order to create jobs we need to get liquidity to small businesses, and if we do that we will have a slow steady recovery in 2010. However, I think it's going to take 2 to 3 years to get back to where we were 2 years ago, so this is going to be a long haul.
Fred Smith (FedEx): I think in the fourth quarter this year the economy's going to grow over 4% sequentially. Next year our forecast is between 2.5% to 3%. But remember that's off of a lower base which has come down because of the tremendous economic contraction we have had.
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