Economic Futures Facing Larson Inc.

¶ … economic futures facing Larson Inc. are a U-shaped economy characterized by uncertainty; a V-shaped economy characterized by a sharp recovery and a W-shaped economy characterized by a double dip recession -- from the first of which we are just now emerging. The U-shaped economy is characterized by uncertainty -- the economy's future is relatively unknown. Economic recovery is delayed, leading to adverse consequences such as stagflation that gripped Japan in the early 1990s and lasted for several years. This possibility has the lowest probability of the three given that the GDP has increased strongly in each of the last two quarters, indicating that the economy has pulled out of the bottom of the U. already.

The GDP increases hint at a V-shaped recovery over the course of the next five years but do not guarantee it. Two quarters of economic growth does not a recovery make. However, the probability of a V-shaped recovery if high, for a couple of reasons. The first is that the credit crunch has eased. The second is that the Fed has kept interest rates at rock bottom in order to spur borrowing and investment (Federal Reserve Bank of New York, 2010). In addition, major American trading partners like China and Canada did not suffer the same intensity of downturn and are ahead of the U.S. In the recovery curve.

This does not preclude the possibility of a W-shaped "double dip" pattern in the next couple of years. There are a couple of reasons why this could come about. The first is the problems with the euro -- especially Greece and Spain -- which could destabilize the European currency union (Kirschbaum, 2010). This would lead to a flight to the U.S. dollar, making American exports uncompetitive on world markets, exacerbating the trade deficit. In addition, instability in Thailand, while country-specific at the moment, could have a destabilizing effect on Southeast Asia (CNN, 2010), or all of Asia, to the detriment of global economic growth. Lastly, China's capitulation on its currency peg appears to be only partial, and may only be for show. If the yuan is kept high, gains in the U.S. economy could be offset by increases in the trade deficit and decreases in savings rates, evidence of which has already emerged -- down from 5.4% in Q2 2009 to 2.7% today (BEA, 2010). This is to say nothing of the jobless recovery. In short, there is substantial cause for concern about the course of the global economy recovery in the next couple of years, a double dip is a strong possibility, just behind the possibility of a V-shaped economy.

The economic climate has not affected demand for batteries, so Larson's sales have not been hit hard. However, if the economy improves, demand for new electronic products will increase. In tough economic times, people may still need batteries, but they are less likely to buy new equipment. With economic recovery, new equipment sales (computers, cell phones, mp3 players, smartphones, etc.) are expected to increase. With this increase will come an increase in demand not just for batteries, but for improved battery performance.

It is worth noting that two economic consequences are likely to occur, particularly in the event of a V-shaped recovery. The first is that the Federal Reserve is going to wait to increase rates until the last possible moment, in the hopes of spurring greater investment and therefore job growth. This means that inflation is expected at some point this year. This inflation means that factor inputs will increase in cost. Larson can gain advantage over competitors if it can hold its wholesale cost stable in the face of an increase in the cost of factor inputs, since competitors may be forced to increase their prices. Careful control over its cost structure will allow Larson to do this while maintaining profitability.

Another potential economic consequence is a decline in the value of the Euro. Normally, Larson exporting products from America to Germany would be fairly easy given Germany's current account balance, but the troubles in the Eurozone are putting downward pressure on the value of the Euro. This will make American exports more expensive in Germany, reducing the attractiveness of this or any other European market from an export perspective. It is unlikely that Larson will be able to differentiate its batteries to a degree that would give it pricing power strong enough to overcome the exchange rate disadvantage that it would face vis-a-vis Eurozone producers. The following chart illustrates the decline in the Euro since the crisis with Greece has hit full force:

courtesy Yahoo! Finance