The Economy, US Credit Downgrade and Little Fish

I was working on a new Little Fish Tales (on dealing with manufacturers as a Little Fish… stay tuned!) when news broke on Standard & Poor’s decision to downgrade the US Credit Rating from AAA to AA+ for the first time ever. As the economy has been on everyone’s mind for the past, oh, 3 or 4 years anyways, I felt it important to postpone the other topic and address this one.

So, how has the economy been treating us Little Fish?  Anecdotally, we’re taking a beating. Corporate installs have slowed to a trickle over the past two years and competition for the government and education projects has skyrocketed. Big Fish who never bothered with some of the smaller projects that kept Little Fish fed are suddenly circling them with a hungry gleam in their eyes, while new players join the battle from other ponds – residential AV, security, telecom, IT.  One #AVTweep who participated in the February 2011 #AVChat on ‘The Economy’ said, “(We) started doing smaller jobs we normally wouldn’t have messed with.” It is becoming harder and harder for the Little Fish integrator to get a nibble.

The anecdotal tales of woe described in the February #AVChat are backed up by hard facts. Every quarter, Infocomm International releases an Economic Snapshot report based on hundreds of industry survey respondents from around the world.  Both large and small integrators report low performance in the January 2011 and May 2011 surveys, but across the board in those reports, the Big Fish are reporting fewer problems and better business.  Interestingly, in both 2011 reports, the Little Fish are far more optimistic in their reported forecasts, yet in both reports, they end up with a greater gap between expectations and results.  Perhaps they are victims of jittery customers panicking over negative economic news. One of the #AVChat participants detailed this phenomenon: “In 2010, had quite a few customers (5-10) who put off projects we had essentially signed off on starting, had them pull the plug.”

Overall, the last two Economic Snapshot reports showed much better performance by the Big Fish across the board, however all sizes of AV company appeared to be doing “Somewhat better” in the self-assessment. The general gist of the reports is that, while the economic trends in the business world overall were down, or lean, the AV industry is persevering – toughing it out and even showing some growth despite slowing customer payments, increasingly tightening manufacturer credit requirements and a general hesitance of the business world to shell out for capital expenditures and improvements, an area that usually includes AV installations and integrations, during the uncertainty.

Of course, all of this great news for AV companies could be moot now. On Friday, August 5, 2011, Standard & Poor’s downgraded the US Credit Rating, throwing world markets into disarray. On Monday, the first trading day after the downgrade, the US stock market dropped more than 600 points.  The S&P 500 index and the Nasdaq composite index both lost 6% of their value in a single day. Other world markets have been equally volatile in the two trading days since the announcement. So, what sort of impact will this have on our Little Fish small integrators?

According to Small Business Trends (www.smallbiztrends.com) lending expert, Rohit Arora, the first major effect that will hit Little Fish is the inability of the US Government to pump up the economy as it has in the past many times.  For many of us Little Fish – particularly those of us in the Mid-Atlantic – Federal government projects are what have kept us afloat during the first few years of this possible “double-dip” recession. With the reduced credit and mandatory spending cuts that will result from the downgrade, these lucrative and vital projects will slow significantly.

Next, inflation and higher interest rates are expected in the wake of the downgrade, further hindering the already-difficult ability of Little Fish to access credit, raising the cost of capital for small businesses already having problems in this area. Little Fish who haven’t tightened their belts and streamlined cash flow for efficiency will suffer, as will some of those who are just “hanging by a thread” prior to this news. Arora does cite some positives to be gained from the downgrade, including increased competitiveness, growth for exports and long-term business stimulation, however those benefits are potential pros that will only be felt after several years of little to no growth, and only if businesses play their cards right.  Not necessarily shiny happy news for many Little Fish.

So, what’s the upshot? In the words of Margo Channing, “Fasten your seatbelts. It’s going to be a bumpy night.” Because the US Credit rating has NEVER BEFORE been downgraded, even the experts can only speculate what’s going to happen in the long run.  Our customers are going to continue to be buffeted by conflicting projections, tight credit situations and panicking accounting departments who will hesitate to approve purchases and will delay payments as long as they humanly can. Likewise, I see no end to the trend of eroding margins due to online equipment list shopping in a budget-conscious economy that just isn’t aware of the value added by using established AV professionals. The Big Fish will likely continue splashing around in our ponds, while the life-sustaining Federal work will slow to a trickle.  It could be ugly, but like the Infocomm surveys have shown, AV pros – particularly the Little Fish – are a hardy, optimistic bunch.  Just keep the focus on doing quality work while improving business processes for efficiency and agility, and all should be well.  After all, AV has become so integral to modern society that we aren’t going anywhere.

Then again, what do I know? I’m just a little fish. ^_^

To read the January 2011 Infocomm Economic Snapshot Report, go to http://www.infocomm.org/cps/rde/xbcr/infocomm/2011JanSnapshot.pdf

To read the May 2011 Infocomm Economic Snapshot Report, go to http://www.infocomm.org/cps/rde/xbcr/infocomm/EconomicSnapshotMay2011.pdf

To read the transcript from the February 10, 2011, #AVChat on the topic of “The Economy,” go to http://frembes.com/February-10-2011-AVchat.pdf

To participate in the upcoming September 1, 2011, #AVChat revisiting the topic of “The Economy,” log on to Twitter (or your preferred Twitter client) on September 1 at 12:00 pm PDT/3:00 pm EDT and filter #AVChat.  Visit http://frembes.com/index/ for other upcoming #AVChat topics, #AVChat FAQ and other #AVChat transcripts.