Throughout the spring economists have voiced disappointment in the U.S. economy. Recovery from the recession appears to have been losing steam. The Dow Jones barometer of the stock market has lost 500 points over the past month. The S&P has also dropped significantly. Some economists are beginning to talk of a double dip recession.

 

The rosy view most economists had at the start of the year has given way to a more sober reality. U.S. gross domestic product increased at just a 1.8% seasonally adjusted annual rate in the first quarter, and is likely to post a similarly disappointing 2% pace in the second, according to Barclays Capital. That is a far cry from the average 3.5% first-half pace economists polled by The Wall Street Journal expected as recently as February.

 

Meanwhile many major corporations are sitting on cash hoards of billions of dollars. These aren’t being distributed as dividends to shareholders who might spend some of them thereby stimulating the economy. Will this cash eventually be spent on mergers and acquisitions? Short-term, mergers and acquisitions do little to stimulate the economy and often result in job cuts that increase unemployment.

What does this mean for lab managers?

 

Lab managers can be caught flat-footed by a major change in the economy. For example, in 1982 a sharp drop in crude oil prices resulted in oilfield service companies laying off field engineers and other field personnel. However, all seemed serene in their laboratories and new employees were still being hired. Apparently high level managers thought any industry slowdown would be short lived. Then a wave of lab layoffs hit many oilfield service laboratories. I saw the lab climate shift from hiring to firing in less than one month. This sharp turnaround made the emotional shock of job losses greater for lab staff members who found themselves unemployed.

 

The sudden pressure on lab managers to reduce spending and cut employment resulted in some poor choices being made. Lab cuts were by a set percentage, often 10%, in all departments and programs without strategic decisions being made on the best programs to keep and to cut.

 

All is not doom and gloom

 

Natural gas produced from low permeability shale formations is improving the competitive position of U.S. petrochemical producers vs. their international competitors. Increasing U.S. production has reduced prices. Stephan Arbogast, a University of Houston finance professor and a former in Exxon Mobil’s chemical business goes so far as to say, “There’s been a startling revolution in the competitive position of the Gulf Coast chemical industry. Right now, what the Gulf Coast has is cheap feedstock and strong demand.” The weak U.S. dollar has improved the competitive position of U.S. chemical producers both at home and in the U.S. export market. Longer term, political unrest in the Middle East is delaying chemical investments there.

 

On the Gulf Coast, "Capital investment is now being reconsidered," said Kevin Swift, chief economist with the American Chemistry Council. "Ten years ago, it was largely being written off." Among the chemical producers putting shutdown U.S. ethylene production units back in operation are Cow Chemical, Bayer, ChevronPhillips and Eastman Chemicals. Nova Chemicals is considering building a new plant in West Virginia.

 

Lower prices for basic petrochemical building blocks will promote lower prices for downstream chemicals made from them also improving the competitive position of some U.S. chemical producers.