U.S. Credit Crisis and the Chemical Industry
Aug. 2 is Looming - As the debate over the U.S credit crisis is coming down to the wire, American businesses are also warily watching the developments. A U.S. default would bring serious economic ramifications worldwide, and American businesses would be at the epicenter. Brandi Schuster asked Society of Chemical Manufacturers and Associates (SOCMA) President Lawrence D. Sloan what a default would mean for American chemical companies.
CHEManager Europe: What's your take on the situation? Do you think the Congress will be able to agree on a compromise before Aug. 2?
Lawrence D. Sloan: SOCMA suspects that there will not be any immediate impact; however, the longer it goes on, the potential for negative ramifications clearly to the U.S. economy as a whole. A less than stellar credit rating on our sovereign debt will trickle down to higher interest rates on everything from capital improvement loans to revolving credit. Hence, companies wishing to expand and who require outside funding could feel the brunt. In addition, those firms with investments tied up in the market could be negatively impacted by a faltering Dow Jones Industrial Average, or DJIA.
We are all globally connected these days and when Greece's debt woes adversely affect the U.S. DJIA, imagine what the U.S. default can do. I would suspect that borrowing costs will likely increase in the short term, maybe not a lot, but somewhat. And this would then cause companies to hold off on new investments. This clearly will then trickle through the economy and could result in a true "double dip" recession if foreign markets sense no clear resolution in sight.
Quite possibly a deal will be cut at the proverbial 11th hour between Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell. I think our debt rating will be downgraded slightly regardless of the ultimate decision because the situation at hand is so massive and will take months if not years to begin to address in any serious manner.
How has the debate in the Congress about the debt affected your member companies?
Lawrence D. Sloan: Like so many small and mid-sized businesses out there, SOCMA members are watching the debate closely and recognize the need to remain flexible for whatever challenges they may face. As one member put it, "We realize that our feet are always based on shifting sand."
What consequences would a U.S. default have on the U.S. chemical industry?
Lawrence D. Sloan: Failure to raise the debt ceiling could weaken the dollar, which theoretically should benefit U.S. exports. However, this would be the first time in our history that our nation's overall credit rating is downgraded, so we are in unchartered territory. What if foreign countries start to lose faith in their U.S. reserves and demand payback now? What if foreign markets start demanding greater assurances from U.S. suppliers that they too will not default? There could be additional restrictions placed by our export markets that counter the weaker dollar's export-boosting benefit. Coupled with this is the fact that imports, which many of our members depend on as raw materials for their operations, may skyrocket. In other words, cost of raw materials could far outpace export boost and profitability suffers.
Here's what some SOCMA member companies have to say about the debt crisis and its affect on their business. Check back for updates as they come in.
Concerned About Customer Reaction to U.S. Default
Our company's primary concern has more to do with how our customers will react to the U.S. defaulting on our debt and the impact of raising the debt ceiling. Either event could trigger an unhealthy reaction in consumer and government spending.
If the government were to prioritize and lower its spending, there would likely be a domino effect throughout the economy. We could (and probably will) see unemployment rates increase as well as housing prices continue to decrease.
A significant concern is how the stock markets will react to either of the two decisions to be made (default or raise the ceiling) and the impact that either decision will have on corporate and individual spending and investment decisions. Although it's possible that interest rates may remain "low" in many areas, there is much concern that rates on mortgages and other items of significance such as vehicles may climb higher resulting in reduced purchases of both. As many of the end uses for products manufactured by our company end up in the automobile and construction industry, we expect to feel some of the fall out.
On the other hand, we remain optimistic that our customers will depend more on the utilization of our existing assets in lieu of making investments of their own at this time.
Please keep checking back for updates as they come in.
