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Raymond D. MatkowskyPart of the problem was that it wasn’t taken very seriously. For example in the January 10, 1931 issue, the Economist journal wrote the following in an editorial: Economic declines do not happen all at once. They occur slowly over time. The reasons behind the Depression of 1930 began in the 1920s. The possibility of an economic downturn in 2019-20 is not taken very seriously by the present United States officials just as it wasn’t in 1930-31. The result may not be as severe, but it will be painful. I will also remind my readers that economists in general have had a 100% track record. 100% wrong! Form your own opinions based upon your individual circumstances and not what you are told. Similarities In The Two PeriodsOn June 17, 1930, The Smoot-Hawley Tariff of 1930 was passed. We are now in a tariff war with China. The damage to the United States economy is more severe than initially anticipated. This especially true for the supply trains of the very industries it was said to protect. The negative effects will surely turn up in future economic data.Recently, the United States government announced an interim agreement with China to buy a large quantity of agricultural products. However, when you look at the details you see such large loopholes that you have to wonder whether the agreement is worth the paper it is printed on. For example, China has agreed to purchase up to forty billion dollars of agricultural products in the next year if they are competitive. The word “competitive” can have many different meanings to business people. It is not always a reflection of price and represents an easy way out of the terms. The interim agreement is no guarantee of trade normalization. Not counting the Depression of 1930, there have been 33 United States recessions since 1854. The causes of each can be grouped under the umbrella term “financial issues.” The United States Recession of 2007 was brought on by an over leveraged housing market. Much of the world has an over leveraged housing market now, but this will not happen again in the U.S. There are many more safeguards in place. However, these safeguards do not extend to the corporate world. The corporate world is very close to bringing the economy down just like over-stressed mortgages brought the economy down in 2007. Right now corporations in the United States are swimming in debt. The U.S. government instituted easy credit policies. These policies will backfire just like they did with easy mortgage policies. Just as in the housing crisis, this corporate debt has the potential to bring the whole economy to its knees. It is already happening. There are many businesses that have already closed their doors and lay off many people. Many more companies are just hanging on by a thread because of difficulty in servicing their debt. Many people argue that the economy is in fine shape. They point to the stock market and raising employment numbers as proof. To this I answer that the stock market is not the economy and that every one of the last eleven recessions have been preceded by rising employment numbers. Again, in 1930 the stock market was regaining much of its 1929 losses. Although most people have some ties to the stock market, much of it is indirect and minor. There are very few major players and they do not constitute a major portion of the U.S. population. An advancing stock market does not guarantee an advancing economy. The Bureau of Labor Statistics (BLS) reported that the latest unemployment rate was 3.5% in December of 2019. At the end of 1929 the unemployment rate was 3.2%. At the end of 1930 it was 8.7%. By 1933 it was 24.9%. Measuring the economy by its unemployment rate can be very tenuous at best. There is one further problem with the employment numbers. According to the BLS the average 2019 monthly job growth in the United States was 180,000. Many of these jobs however were only part time or paid minimum wages. 180,000 jobs sound impressive until you realize that the U.S. has to have a job growth of 150,000 per month just to keep even with population growth. We actually grew the job market by only 360,000 new jobs in 2019. This is additional growth only represents a tenth of one percent of the population. As we have said before, many of these jobs pay wages that you cannot raise a family on. Marching Toward RecessionOn December 1, 2008, the National Bureau of Economic Research declared the United States entered a recession in December of 2007. A full year after it started. If you wait for the government of declare a recession this time around, it may be too late for you to do anything about it.Just like events leading up to the Depression of 1930, a recession does not just happen overnight. At Data Stats we believe that we entered a recession in the second quarter of 2019. We make this conclusion based on the decline of the Gross Domestic Product (GDP) from the first quarter of 2019 to through the third quarter of 2019. During the first quarter the growth in GDP was 2.7% (Year to Year, seasonally unadjusted). It was 2.3% during the second quarter and 1.9% during the third quarter. This is a steady downward slope. We contend that you do not have to have negative growth for a recession just a large reduction of growth. Some will cling to the belief that only negative growth counts. In order to estimate when we would reach zero GDP growth, we ran a regression analysis on the above numbers. The result suggested that if GDP remains on the present rate of decline, zero growth will be reached in July of this year with a degree of confidence in excess of 91%. However, three data points is the minimum needed for an analysis. There are other scenarios that give slightly less confidence but are still relatively high. The best that we are willing to say now is that we will reach zero Gross Domestic Product growth between April and July of 2020. Of course, as we continue to gather data, we will be able to more accurately predict the point of zero growth. Tips for Recession SurvivalThe first and most important thing is that “Cash is King.” Don’t let anyone tell you otherwise. Pay down any debt as long as you could do it without depleting your reserves. Boost your reserves if you can. Identify ways to cut back on your expenses. There are always ways. By doing this you will be in a much better position once the recession is over.The next thing is try to retain all of your present employees. Employers have known that the fastest way to cut expenses is to cut employees. This is faulty thinking. You may cut expenses quickly, but you will pay dearly in the future. A better option is to put these employees to use by making improvements to your business that can be done cheaper with your present employees now than prior to the recession. Examples would be painting your warehouse or bring out a new product. Your weaker competitors may be willing to supplement their business by filling some of your orders at a lower cost than normal. The difference in what you pay your competitor and what you charge your customers can become added profit. You can supply your competition with your labeling or if you have proprietary ingredients, they could send the unfinished product to you for finishing. There are many ways to save money. Many of these are unique to individual companies. Identify them. Recessions Are Part of the Business LandscapeRecessions are painful, but they are a necessary part of the business cycle. They correct the excesses of today so that we could have a stronger tomorrow. Learning to live with it is a skill that not only allows you to survive one, but also makes you a better business person.If you have any further suggestions, do not keep it to yourself. Help your fellow readers! If you have any questions, comments or suggestions drop me a line at rdm@datastats.com. |
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