June 23, 2022


The Fed vs. Inflation: A Losing Battle?

Annacaroline Caruso, editorial associate

Talks of a recession have been swirling for months. Economists started off somewhat conservative with their predictions of if or when the economy could slip into a crisis. But those same experts are raising their expectations of a recession … and fast.

“Our worst fears around the Fed have been confirmed: They fell way behind the curve and are now playing a dangerous game of catch up,” Bank of America (BofA) said in a note to clients, following the Federal Reserve’s interest rate hike of 0.75% last week—the biggest increase in 27 years.

In an effort to tame rising prices, the central bank has raised rates three times this year. And more rate hikes are likely to come, Federal Reserve Chairman Jerome Powell hinted during a meeting with lawmakers Wednesday. “We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so,” Powell said. “We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy.”

The aggressive rate hikes have caused several economists to sound the alarm bells. BofA analysts predict U.S. economic growth to slow near zero by the second half of 2023, putting the probability of a recession at 40% next year. Citigroup raised its recession prediction to 50% in a note to clients.

“The global economy continues to be afflicted by severe supply shocks, which are pushing up inflation and driving down growth,” wrote Citigroup Chief Global Economist Nathan Sheets. "We conclude that central banks face a daunting challenge as they seek to wrestle inflation down. … Central banks may yet engineer the soft—or 'softish'—landings embedded in their forecasts (and in ours), but this will require supply shocks to ebb and demand to remain resilient.”

And Goldman Sachs doubled its prediction of a recession this year, from 15% to 30%. It puts the risk of a recession at nearly 50% in the next two years. “The Fed has front-loaded rate hikes more aggressively, terminal rate expectations have risen, and financial conditions have tightened further and now imply a substantially larger drag on growth—somewhat more than we think is necessary,” wrote Jan Hatzius, chief economist for Goldman Sachs, in a note.

But leaders from the White House insist a recession “is not inevitable,” including President Joe Biden and Treasury Secretary Janet Yellen. Yet, inflation remains strong at 8.6% despite the Fed’s actions. “Inflation has become entrenched and a sharp moderation in demand, if not an outright contraction, would need to occur to bring price growth to more sustainable rates, in our view,” reads an economic commentary from Wells Fargo. “Economic data released this week add to evidence that the chances of a soft landing are fading.”

Inflation also is eating away at the profits of infrastructure projects. A foot of water pipe in Tucson is up 19%; a ton of asphalt in a small Massachusetts town is up 37%; and it is estimated that the cost to build a new airport terminal in Des Moines is up 69%, the Associated Press reported. These four-decade high prices are eating into the $1 trillion infrastructure plan President Joe Biden signed seven months ago.

 “Those dollars are essentially evaporating,” Jim Tymon, executive director of the American Association of State Highway and Transportation Officials told the news outlet. "The cost of those projects is going up by 20%, by 30%, and just wiping out that increase from the federal government that they were so excited about earlier in the year.”

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Massachusetts Appeals Court Strictly Construes Prompt Payment Act

Douglas Mackin, associate, Robinson & Cole LLP.

On June 7, 2022, the Massachusetts Appeals Court issued an opinion of first impression regarding the Massachusetts Prompt Payment Act, G.L. c. 149 § 29E (Act). In Tocci Building Corp. v. IRIV Partners, LLC, Appeals Ct. Nos. 21-P-393, 21-P-733, the Appeals Court affirmed the decision of the Superior Court, which held that when an owner objects to a contractor’s payment application, the owner must strictly follow the Act’s protocols in order to preserve its right to withhold payment. The Act likewise applies to the contractor/subcontractor relationship.

The case concerned whether an owner had wrongfully withheld payment on seven of the contractor’s invoices because it failed to comply with the Act’s protocols, namely, that the rejection be timely, explain the factual and legal reasons for withholding payment, and expressly certify that the decision to withhold payment is made in good faith. The Appeals Court found that the owner failed to timely respond to the seven applications at issue or, for those it did respond to timely, failed to include a certification of good faith. Accordingly, each pay requisition was “deemed approved by operation of law … and the defendants were not entitled to withhold payment as they did.”

A focal issue on appeal concerned whether the owner’s failure to reject the payment applications in accordance with the Act represented a waiver of both its right to withhold payment as well as its right to argue that the contractor’s work was defective. The Appeals Court held that the owner’s noncompliance with the Act resulted only in a waiver of its right to withhold payment, not its right to later argue that the contractor breached an important contract obligation.

More specifically, the Court reasoned that while each of the contractor’s payment applications were, by operation of law, due and payable, the owner’s right to assert claims for breach of contract are unaffected as “they may recoup any money they may be owed.” Joseph A. Barra, Esq., a construction attorney in Robinson & Cole’s Boston office, submitted an amicus brief on behalf of the Associated Subcontractors of Massachusetts.

Douglas Mackin is an experienced construction attorney who counsels owners, developers, contractors and subcontractors in all phases of a construction project from contract negotiation through to completion. 

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Roots of Supply Chain Disruptions Run Deep

Annacaroline Caruso, editorial associate

Supply chain disruptions, transportation challenges and rising costs play a major role in today’s economic uncertainty.

During October and November 2021, “shipping carriers rejected U.S. agricultural export containers worth hundreds of millions of dollars … instead sending empty containers to China to be filled with more profitable Chinese exports,” CNBC reported. “The export container refusals came as U.S. agriculture exports were entering their peak season,” according to the cable news outlet.

In response to issues such as these, businesses and leaders are trying new strategies to handle the fallout as best they can. President Joe Biden last week signed into law the Ocean Shipping Reform Act of 2022, aimed at lowering the cost of shipping goods by establishing additional requirements and prohibited conduct for ocean carriers.

The Ocean Shipping Reform Act will:

  • Stop international ocean carriers from unreasonably declining American cargo, as determined by the Federal Maritime Commission (FMC) in new required rulemaking.
  • Direct the FMC to self-initiate investigations of ocean carrier business practices and apply enforcement measures.
  • Shift the burden of proof regarding overcharging certain fees, called “demurrage and detention” charges, from the complainant to the international ocean carriers to help level the playing field and improve the FMC’s enforcement capacity.
  • Improve transparency of movement of U.S. agricultural and other exports by requiring international ocean carriers to report to the FMC regarding how many empty containers are being transported.
  • Stop retaliation by international shipping companies against exporters and importers.
  • Formally establish the FMC Office of Consumer Affairs and Dispute Resolution Services to improve the complaint and investigation process for American businesses seeking assistance from the FMC.
  • Improve management of chassis, the specialized trailer used to transport ocean containers over the road, by authorizing the Bureau of Transportation Statistics to collect data on dwell times for chassis; and initiate a National Academy of Sciences study on best practices of chassis management.
  • Provide the FMC with temporary emergency authority to collect data during times of emergency congestion, among other improvements.

However, the new law’s success depends on whether it can be enforced by the Federal Maritime Commission. The FMC works with a limited budget and resources, which makes regulation difficult, Carl Bentzel, commissioner of the FMC, told Supply Chain Dive. “We have one investigator for every trillion dollars of commerce.”

But even if the law does help bring down freight costs, that is only one part of the problem, Bentzel continued. “A lot of the problems are really problems of supply and demand, and those may be beyond the ability of any agency to handle.”

Port congestion and backorders continue to create serious challenges for businesses and their credit departments. “We thought this year we would turn the corner with supply issues, but it is clear things are getting worse,” one NACM member said.

The gap between fronting the money to build enough agricultural equipment to meet demand and get paid is growing larger. “We will be waiting on one small component to finish a piece of equipment before it can be shipped,” he explained. “Once it’s out the door, the money comes in, but sometimes it takes a while to get to that point.”

Supply disruptions have been especially painful for Jeffrey Borgens, CBA, senior manager of operations and finance at Aiphone Corporation (Redmond, WA), because his company is an importer/distributor that either resells product or makes small modifications before selling it.

“Our parent company is located in Japan, and we have various source factories throughout Asia, which is where we get roughly 95% of our product; so, 95% of our businesses is then impacted by these supply chain disruptions,” he said. “If our parent company ships to us by boat, we are looking at anywhere from 90 to 120 days before it gets here. So instead, we are doing a lot more airfreight but that can be costly.”

Borgens estimates his company has about $1 million in backorders per month on average, and this month the backorders have reached roughly $2 million. “We anticipate this will get worse before it gets better,” he said. “Once the air freight comes in, we get caught up on the previous orders, but then the backorders continue to build.”

Supply disruptions are causing another major issue for many businesses. With the cost of goods quickly changing, companies can lose out if a customer buys product months before it gets shipped. “If customers understand there is a price increase coming in 60 days, they will look to order as much product as they can before the prices go up 6%, which makes supply backorders worse,” Borgens added. “They may lock in the price of a future shipment if they place the orders strategically, so our costs won’t be recouped when they are buying goods at last month’s rate.”

Some supply issues are more unique than others. Peter Hall, credit manager at Crystal Cabinets Works, Inc. (Princeton, MN), has a lot of customers who are “mom-and-pop type dealers, and a lot of our jobs ship directly to warehouses. The type of driver who delivers our product leaves the middle of the country to go to the East or West coast and then drives back.” Those types of carriers are a “dying breed,” Hall said. “Our trucking company is having a hard time getting drivers to do those kinds of routes because there is no work-life balance.”

Hall’s company ships with a six-month lead time and tacks on a surcharge to accommodate the rising fuel costs, which some customers are not happy about. “It’s scary because if customers are mad, the only option they have is to go elsewhere,” he said.

If staple materials needed to build his company’s custom cabinets do not arrive in time, they are forced to use more expensive substitutes. “If we can get cherry wood but not plywood, we use that to build parts of the cabinets instead just to avoid backorders and delays,” Hall explained. “But when we do that, we can’t recoup the cost difference.”

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4 Great Questions to Help with Your Decision-Making

Suzi McAlpine, The Art of Leadership

Not long ago, I was coaching a leader who was faced with a big decision he had to make. The decision had huge implications not only for the organization—but also, if he was honest, for himself. The stakes were high. The pressure palpable. And he was in a pickle. Stucksville.

So, when he turned up for his coaching session, he wanted to find a way through. To become clearer on what to do next and which route he should take.   

Below are some of the questions we used in his coaching session and that helped him find a way forward. I’ve also used these questions on myself when I’m facing a big decision, and they’ve been super helpful for me too. And now, I’ve decided to share them with you in this week’s post of The Leader’s Digest.

You may not be facing a decision as big as my client but, as a leader, you must make decisions every day. It’s a skill worth working on.

Here are the 4 questions we used:

1. Is there a third option?

In their excellent book Decisive, Chip and Dan Heath warn us to beware the binary. Narrow framing is a common decision-making trap. To escape narrow frames, we need to be aware of “whether or not” decisions. Instead, they suggest that when facing a decision between two options, ask:

“Is there a third option? Or “Is there any way we can do both?”

And another strategy they refer to as vanishing options, urges us to say:

“You cannot choose any of the current options you’re considering. What else could you do?”

Although my client had already explored the options, asking these questions one final time, gave him confidence that the two options left on the table were the right ones given the information he had. It also helped to clarify his thinking around his messaging to key stakeholders as to why the third (obvious) option was a no-go.

2. If this was happening to a good friend of mine, what advice would I give them?

This is one of my favorite coaching questions because so often when we’re in our own head, we can’t see the wood from the trees. But this question gets us outside our head long enough to adopt a more objective perspective. Almost every time I have asked a client this question, they’ve come up with a useful piece of advice for themselves! After the first answer, ask yourself again, “and what else?”

My client’s answer to this was brilliant and so simple, but he hadn’t been able to access this gem until he used this question on himself and answered out loud. It didn’t give him the answer to the decision, but it gave him some useful next steps to help him reach that decision.

3. If I was following my values in this decision, what would they say to me?

I’ve written about it before here and here. Values act as your compass in leadership. My client was very clear about his values (bonus) and when I asked him this question, he immediately found clarity to an important aspect of his decision. It wasn’t the easiest path, but he knew it was one which aligned the most with his values. This brought him comfort. And he reckoned years later, that’s what he would remember when he thought about having made this decision.

4. What decision-making biases might be at play here?

Decision-making is awash with biases. Sunk cost bias, anchoring bias, confirmation bias. All the biases.  We all suffer from them. The trick is knowing which ones might be at play when you’re faced with a decision. This article by Psychology Today has a disconcerting little list of the common ones we fall prey to.

During this client’s coaching session, we explored which decision-making biases might be at play for him. Uncomfortable as it was, he uncovered several that he’d been unaware of. He also identified a key stakeholder whose opinion he had not sought yet and whose thoughts would be valuable for him to hear before he made his decision.

My client has found a way forward. He’s made his decision. In his mind it’s still too early to know if it’s the right decision, but he feels some comfort from the fact that in making the decision, he’s been thoughtful and thorough to the best of his ability. Asking these questions helped him get clarity.

So, the next time you are faced with a decision as a leader, ask yourself these coaching questions.

This article first appeared in Smartbrief. Reprinted with permission.

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