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The US Economy Is Leaving Midsize Companies Behind – Harvard Business Review

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Despite low interest rates and a generally stable economic environment, 2010–2019 saw the slowest growth among midsize companies and a continual deterioration of their financial performance. That may have to do with the last decade’s winner-takes-all economy. Bankruptcy filings shows that the pandemic made this trend even worse. It’s never been more important for midsize businesses to understand that a booming stock market is not an accurate reflection of the reality for most American corporations.

When the Covid-19 pandemic hit, a record number of companies, many of which had survived for more than 50 or even 100 years, had no other option but to file for bankruptcy. Recent trends don’t bode well for midsize companies that are the bedrock of any nation’s economy.

We used a database approach to show the current plight of midsize companies and examined the recent period of 2000 to 2019, culminating in the pandemic year 2020. We defined midsize companies as those in the middle 40% of all companies listed on the U.S. stock exchanges by market value and identified them on an annual basis based on their market value at the end of previous fiscal year. (The top 30% and the bottom 30% are classified as big and small, respectively.)

Data suggests that a perfect storm has been brewing for midsize companies over the past 50 years. In every successive decade since 1970–79, the annual growth rates of assets, sales, and profits have been declining for midsize companies, which are increasingly struggling to earn profits.

To show the slowing growth trend, we calculated year-on-year percent-growth rates of three financial indicators — sales, assets, and profits — for each midsize company. Sales is the top-line number in income statements and indicates the market size for the company’s products and services. Sales growth indicates whether the company’s business is growing or diminishing. Asset growth shows whether the company is increasing or decreasing its total resource deployment. Profits is the bottom-line number in income statements and shows whether the company is generating a net surplus in its operations. That surplus is used to finance further growth and pay dividends to shareholders.

We calculated the annual percent-growth rate in those three financial indicators for each midsize company and year. We then calculated their medians for the decades 1970–1979, 1980–1989, 1990–1999, 2000–2009, and 2010–2019. For 2000–2009, we removed the fiscal years 2008 and 2009 because of the great recession. We calculated median values because, unlike averages, medians are not affected by any company’s extreme performance. The results are shown in the following figure.

The figure shows that the growth rate in each of the three measures has declined over the past 50 years and was lowest during the decade 2010–2019, despite that period’s having been labeled as a decade of economic recovery. This last decade showed rising population, decreasing interest rates, growth in the hourly wage rate and household income, improving education attainment, and growing GDP. You would expect those factors to have enabled rapid growth for corporations, yet such growth seems to have bypassed midsize companies.

It’s difficult to pinpoint the exact reason why midsize companies haven’t benefited from the past decade’s economic progress, but we offer a few hypotheses. One plausible reason is that businesses that could scale their virtual operations without the need for physical assets benefitted most from the technological progress and economic conditions. As a result, digital disruptors like Amazon, Airbnb, and Uber ate into the growth and margins of midsize companies’ business. Amazon needed large infrastructure, but it could integrate across physical and virtual platforms seamlessly, disrupting many businesses simultaneously. In contrast, midsize companies, particularly those like hotel chains and retail stores that operate with physical assets and infrastructure, lacked not only the dynamism of small companies but also the R&D investment and scaling capabilities of large companies. Furthermore, the last decade was a winner takes-all-economy, with large companies like Amazon and Apple getting even bigger. We previously showed that the economic benefits that came about since the financial crisis of 2008 largely accrued to large companies.

In 2019, we described the changes in market values of midsize companies. The new statistics we present in this article highlight midsize businesses’ struggles in the past decade. During the 2010–2019 period, 39.8% of midsize companies reported a loss, 33% reported year-on-year decreases in sales, and 47% reported declines in annual profit. After removing the influence of outliers, the average earnings-to-price ratio was negative 3.86%. The average return on assets was also negative at 2.36%. The median change in return on equity, a measure of profitability on shareholder value, was negative 4.04%. These results indicate that midsize companies increasingly struggled in the last decade despite the stable and growth-conducive economic conditions.

What happened from 2010–2019 didn’t portend well when the pandemic hit in 2020. We don’t yet have financial reports for the fiscal year 2020 because it typically takes three months to prepare and audit the financial statements before they’re reported. However, we do have another indicator of financial distress: the number of bankruptcies filed by midsize companies. For this information, we rely on the UCLA-LoPucki Bankruptcy Research Database, which tracks bankruptcies filed by companies with assets exceeding $100 million in 1980 dollars (about $310 million in today’s dollars). The database also includes economically important midsize companies. The following figure shows a trend in the number of midsize companies that filed for bankruptcy from 2010–2020.

The highest number of annual bankruptcy filings between 2010 and 2019 was 32 in 2016, and the median and averages during the decade were 11 and 13.2, respectively, per year. That number jumped to 43 in 2020, which is a 226% increase from the annual average and a 291% increase over the median. These numbers are based on data up to November 2020 — if December 2020 data had been included, the picture would look even more stark.

These companies include well-known retail stores like J. C. Penney, Pier 1 Imports, Tailored Brands (brands like Men’s Wearhouse and Jos. A. Bank), and Ascena Retail (brands like Ann Taylor and LOFT). The other large industry groups filing for bankruptcy included oil and gas companies, such as Gulfport Energy; lodging and entertainment companies, such as Marcus Corporation; and travel corporations, such as Hertz. Bankruptcy filings would have been even higher but for the U.S. government’s $2.2 trillion dollar stimulus plan, which included $500 billion earmarked for public corporations.

Each company is pursuing a different path to recovery. Consider the outcomes of a few companies that have been around for more than 50 years. The 120-year-old retail pioneer J. C. Penney was sold to Simon Property Group and Brookfield Asset Management. Similarly, century-old engine maker Briggs & Stratton entered into an agreement with a private equity firm to assume all of the company’s assets. The car-rental giant Hertz is selling 180,000 of its roughly 500,000-car fleet while borrowing an additional $1.65 billion in new financing, to be added to its existing debt of $19 billion. In addition, it’s changing its business model by offering an all-inclusive maintenance, liability, and premium roadside assistance package for a fixed monthly subscription fee. The 80-year-old McDermott International Ltd., which provides engineering and construction for the energy industry, emerged from bankruptcy by selling its assets and eliminating about $4.6 billion of debt.

In sum, despite its low interest rates and stable economic environment, the most recent decade witnessed the slowest growth among midsize companies and a continual deterioration of their financial performance. As shown by bankruptcy filings, pandemic shock made this trend even worse, shaking to their core companies that had survived harder economic hits during the last century. Leaders of midsize businesses must understand that the booming stock market is not an accurate reflection of the on-the-ground reality for most American corporations.

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Economy

Spinning waste into gold: Victoria, Nanaimo councillors call for 'circular economy' strategy – Times Colonist

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When people talk about a circular economy in which materials get reused and less waste ends up in landfills, they’re really ­talking about entrepreneurs such as ­Meaghan McDonald.

The 31-year-old Victoria woman has launched a new venture that aims to make money and protect the environment at the same time.

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Her brand, Salt Legacy, plans to give new life to discarded or “dead” sails from sailboats by using the durable, water- and sun-resistant materials to make backpacks, surfboard bags and other outdoor gear rather than burying all that nylon and polyester underground.

“I’ve always been really eco-conscious and always wanted to create something that would kind of help within the circular economy,” McDonald said.

She has a background in biology rather than business, so she got help from an eight-month incubator program run by Victoria’s Project Zero — a partnership between the non-profit Synergy Foundation and Vancity that assists start-up businesses looking to operate in a circular economy.

Project Zero envisions a Vancouver Island where, by 2040, “our waste will be our greatest resource” and hundreds of people will be working for small independent businesses that, like McDonald, will be “upcycling” materials into new products.

Municipal politicians are getting on board.

Victoria Coun. Jeremy Loveday describes the circular economy as an immense opportunity “to create good green jobs and live on this planet in a way that will actually be sustainable.”

That’s why he got Victoria council to endorse a resolution to the Union of B.C. Municipalities, calling on the provincial government to develop a circular-economy strategy.

Loveday said such a strategy would allow the province to encourage and mandate that governments, businesses and residents adopt circular-economy practices.

“And, I think, local governments are at the heart of it because cities are where the population, carbon emissions, waste and innovation are all occurring.”

His motion, which emerged from the Climate Caucus, a non-partisan network of more than 300 elected officials across Canada, received final approval from Victoria council on Thursday.

In a related move, council also backed Loveday’s resolution to the UBCM asking the province to adopt right-to-repair legislation, which would ensure citizens have access to the parts and information they need to fix items, rather than being discouraged by ­companies that claim ownership over the ­intellectual property of their ­products.

“The idea, essentially, is that it’s time for the era of planned ­obsolescence to be over, and that consumers should have the right to receive information about their products, have access to spare parts, and that we should be able to repair the things that we purchase, rather than having a product that is designed to have an end of life,” Loveday said.

Nanaimo Coun. Ben Geselbracht won approval from his council for similar motions last week, as well as a third resolution calling for a provincial strategy to deal with demolition and construction waste.

Geselbracht said that the more municipal councils sign on to the resolutions, the stronger the case for them receiving serious ­consideration at the next UBCM ­convention.

“Then, hopefully, when it gets passed to the minister, there’s a pretty clear mandate that this is an important issue and we really demand action on it.”

As for McDonald, she’s forging ahead with her business plans and collecting old sails from marinas and sailing clubs that are only too happy to donate materials destined for the landfill.

She has the prototype for her backpack complete, work is underway on a fanny pack and a surfboard bag is in the design stage.

McDonald is also gathering the history of each discarded sail, so that she can attach stories of adventure and world travel to her new products.

“Then the new consumer can kind of have a bit of that history and that connection piece to the backpack they just bought,” she said.

In that way, her products will keep stories circulating as well as the economy.

lkines@timescolonist.com

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Economy

The Economy, Oil Demand And Prices – Forbes

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Given data lags and uncertainty, it is often said that the Fed guidance of the economy is like someone driving through a tunnel with the windshield painted black, relying on the rearview mirrors and bouncing off the walls. Given current divergent views amongst the political tribes, I would add as a corollary that there’s a child in the backseat hitting the driver with a pillow, screaming slow down they’re scared, while another child does the same, except screaming they need a bathroom and the car should speed up.

Current debt levels now prevailing in most of the world’s governments are outside of historical experience, so far as I know, and could have a significant impact on future growth and interest rates. Continued stimuli to promote economic recovery could mean low interest rates and rapid growth, which would certainly fuel stronger oil demand. Or it could result in inflation and thus high interest rates, leading to a new recession. Similarly, attempting to pay down the debt could slow economic growth and depress oil prices.

Aside from growth levels, interest rates have an impact on energy investment and could influence future fuel mixes. For example, low interest rates theoretically favor capital-intensive types of energy, including nuclear and renewables, along with long-term projects like deepwater oil and gas fields. (High interest rates favor shale oil and gas, because of their shorter payoff period.) It is possible that the recent surge in solar and wind power investment reflects recent low interest rates, although mandates and subsidies are probably more influential.

The heavy debt levels could, on the other hand, reduce subsidies for renewables including electric vehicles. Although it has become a cliché to claim that solar and wind are cheaper even than coal power, this is very misleading: at the least, new investment would be required to replace fossil fuels with renewables. The International Energy Agency, in its latest World Energy Outlook, projects investment needed in its scenarios, and the difference between the Stated Policies Scenario and the Sustainable Development Scenario would be $340 billion a year in the 2020s and reaches $1 trillion per year in the 2030s. (I’ve railed against the injustice of giving well-to-do citizens large grants to buy electric vehicles, which are one of the most expensive ways of reducing GHG that is given serios consideration.)

And where some talk about a new commodity supercycle, I worry that there is a good chance that instead there will be a collapse in asset values, with markets possibly entering bubble territory. One famous, possibly apocryphal story, is that Joe Kennedy (patriarch of the political dynasty) sold off his stock holdings just before the crash of 1929 after hearing a shoeshine boy give a stock tip: that convinced him the market was overbought. Similarly, it would seem that the roaring bull market for certain stocks such as Gamestop

GME
and Tesla

TSLA
might not be the result of fundamentals but rather the current expansionist monetary policy, which cannot last forever.

And the growing use of SPACs and the surging value of Bitcoin also reminds me of the late Charles Kindleberger’s book, Manias, Panics and Crashes which describes how the invention of new forms of credit led to an expansion of the monetary supply, which caused asset bubbles followed by crashes. This could lead to a reversion to value stocks, such as oil and gas producers as well as utilities, ESG notwithstanding.

To be honest, though, I feel kind of like I’m in the passenger seat of the Fed’s car shouting, “Go left! No, Right! No, Stop!” Perhaps the next killer app will be a GPS for monetary policy.

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UK's Sunak says vaccine passport idea might help the economy – TheChronicleHerald.ca

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LONDON (Reuters) – British finance minister Rishi Sunak said the idea of giving people vaccine passports or certificates to allow them to enter venues or events might be a way to help the country and its economy recover from the coronavirus pandemic.

“Obviously it is a complicated but potentially very relevant question for helping us reopen those parts of our country like mass events,” Sunak told BBC television on Sunday.

Prime Minister Boris Johnson said last week that the government would hold a review to consider the scientific, moral, philosophical and ethical questions about using vaccine certificates for people who have received a coronavirus shot, which could help entertainment and hospitality venues reopen.

(Reporting by William Schomberg and David Milliken; Editing by David Clarke)

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