2016 is off to a rocky start and some economists are predicting a recession. Over the first two weeks of the year, the markets are trading down over eight percent. Chinese stocks have dropped more than 20 percent and have entered into bear-market territory. As the second-largest economy behind the United States, a slump of this nature will have an indisputable effect. Regardless of the direct fiscal impact to the U.S., the volatility in China will continue to send ripples through the global economy.
The dramatic decline in oil prices will also play a large role in the instability of the US economy. The price per barrel has dropped below $30; a 12-year low. The past year has seen prices plummet nearly 39 percent and almost 17 percent in just the past month. This has certainly been met with glee by consumers, as the price at the pump has dropped below an average of two dollars nationwide. However, the players on the world stage aren’t nearly as elated. China’s woes have further exasperated the market while oil producing states, such as Saudi Arabia and Russia, have seen dramatic declines in profits. Many smaller fracking and energy companies in the U.S. may be forced to shut down as well.
Furthermore, the fiscal policy of the Federal Reserve has amplified volatility. Continued tightening of monetary policy will reinforce the dollar’s strength and weaken U.S. exports. In turn, this could negatively impact the manufacturing sector, which represents over 12 percent of the U.S. GDP, and nearly nine percent of total employment (in 2013). Many news outlets have cited a December Citi Research report projecting the likelihood of a recession in 2016 at 65 percent, the highest odds in several years.
As the economy continues to foster uncertainty and instability, I am advising many of my clients to begin taking steps to protect themselves against a potential recession by years end. Here are four industry tips to get you started.
1. Evaluate Existing Contracts
• Review in detail all your current and proposed equipment maintenance and service contracts. Be sure all maintenance and service agreements have significant returns on investment. Don’t simply allow contracts to roll over; instead negotiate for the best terms possible.
• Evaluate your gas and electric generation contracts. Be knowledgeable on the current state of the market. It is extremely likely there has been a dramatic shift in market conditions since your last contract. Review with your energy advisor if you are uncertain on prevailing market value or contract terms.
2. Modify Behaviors: Little Changes Can Cause Big Savings
• Turn off ancillary office machines and lighting when not in use.
• Shut down non-essential equipment during down-time in production.
• Evaluate facility energy systems to remove vampire power in standby mode.
3. Institute Controls and Energy Management Systems
• Install a comprehensive controls platform and dashboard to enable you to monitor and manage your energy systems from one devise.
• Mount sensors when possible to ensure systems such as lighting aren’t in perpetual use.
• Incorporate variable frequency drives (VFDs) on mechanical equipment to control the speed and energy output of motors.
4. Create a New Income Stream-Take advantage of the suite of utility rebates, tax incentives and financing structures that will increase your energy portfolio’s return on investment.
• Enroll in the “RIGHT” demand response program that will compensate you for curtailing energy usage at times when the grid is overly taxed.
• Talk to your advisor about maximizing energy related tax deductions (EPAct 179D) and capitalizing on accelerated depreciation.
• Take advantage of the many financing solutions available that provide immediate net savings for energy related projects. These are offered by many traditional banking institutions, Port Authorities, PACE financing agencies, and in the form of Energy Service Agreements (ESAs) by reputable energy planning companies.
The markets and the economy are cyclical. It is inevitable that we will have downturns and recessionary periods. We cannot predict what the next recession may look like, but we can take steps to lessen its effect. Working with an energy advisor, instituting long term energy management plans, and making low-to-no-cost investments, will better protect your business, resources and most importantly your wallet.