Podcast: executive sessions – 2023 economic retrospective – MiddleGround Capital
December 7, 2023

Podcast: executive sessions – 2023 economic retrospective


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On MiddleGround’s seventh episode of Executive Sessions, Clayton Gullett leads discussion with MiddleGround’s Founding Partner, John Stewart, and the Director of the Center for Business and Economic Research, Associate Professor of Economics at the University of Kentucky’s Gatton College of Business and Economics, Dr. Mike Clark. This episode covers:

  1. 2023 Economic Status
  2. A Resurgence in US Manufacturing
  3. Economic Resilience
  4. Looking Ahead to 2024


2023 Economic Status

Economic ebbs and flows impact all industries, but private equity is especially beholden to these trends. It’s key to remain aware of economic trends and adapt to them. At the beginning of 2023, the US Economy was feeling ripple effects from the Covid-19 pandemic. Notably high inflation was caused by supply chain disruptions and rounds of government stimulus; people had a lot more cash on hand and limited ability to spend it due to quarantines.

The Federal Reserve aims to maintain the inflation rate around two percent, but when that number started creeping up early this year, it was fought with significantly increased interest rates, causing loans and mortgage rates to become noticeably more expensive. The increased interest rates have significantly affected many firms’ ability to borrow money therefore impacting the M&A market. In this climate, cash flow is being directed towards debt servicing rather than investments, impacting employees and growth. There is added apprehension when it comes to CapX projects or other large uses of capital injections. Following an economic climate that offered lower prices for capital allocation, firms are more wary when it comes to taking on any incremental debt.

Our primary focus is generating free cash flow in any environment. Maintaining strong proportions of capital in our investments ensures that our cash isn’t consumed with interest payments. We are consistently putting 50, 60, and sometimes 100 percent equity into deals and this approach has played to our benefit.


A Resurgence in US Manufacturing

Historically, manufacturing employment has experienced a downward trend due to factors like international trade and the relocation of plants outside the US. States like Kentucky have seen notable declines in sectors like textiles and automotive over the past three decades. However, recent trends indicate a resurgence in specific industries, specifically automotive, shifting manufacturing employment patterns. These changes can be attributed to changes in the manufacturing landscape itself.

Unlike the historical trend of companies offshoring their manufacturing facilities, we’re starting to see a comparative advantage in US-based manufacturing jobs because manufacturing is becoming more advanced. Investments in modern technology and automation for more mundane tasks may require less manual labor but still require many highly skilled employees in capital-intensive tasks. There are a higher number of better jobs that are better paid.

Innovations in technology and rising overall costs have redefined the industry, and the cost of building new manufacturing facilities from the ground up has increased drastically. Companies that invested in US facility development decades ago, like Toyota, have aided the resurgence of manufacturing by utilizing older, existing facilities with excess capacity to meet the demands of today.


Economic Resilience

Despite doom and gloom predictions for 2024, it’s important to recognize the resilience of the US economy. All things considered; our economy is doing remarkably well compared to historical recessions. Contrary to historical recessions that were characterized by high unemployment, companies are now retaining their workforce during financially turbulent periods rather than resorting to layoffs (especially in industrial manufacturing). This stability has increased employee confidence that they will bring home a consistent paycheck and gives them the confidence to maintain their current consumption levels. Additionally, the widely publicized difficulty many companies faced maintaining production during the pandemic has helped consumers be more accepting of price fluctuations.

Metrics like GDP (the value of goods and services) and job growth are key indicators of our economic status, and both have held up throughout 2023.


Looking Ahead to 2024

Unfortunately, we don’t have a crystal ball that can predict the economic landscape of 2024, the US Economy has defied the expectations of many economists by maintaining relative stability despite fluctuations in interest rates/inflation and we are expected to continue growth, albeit at a much slower pace than prior years and a cooling effect on the economy is expected. That said, it could take years for inflation to reduce to the “goal rate” of 2% and the Fed seems comfortable keeping rates high until the second half of 2024.

Another significant influence on the economy will be the 2024 Presidential election. With candidates (and the surrounding scandals) constantly spotlighted by media, it will be a considerable distraction. Despite that, there is hope that the Federal Reserve remains relatively impartial and focused on avoiding a recession. The uncertainty surrounding the election’s outcome may also affect businesses and their decision-making processes based on policies that directly impact their businesses.