The Recession Is Here? The Recession Is Coming?ByRaymond D. Matkowsky
There are some people that feel a recession will come within the next few months, certainly within the first year of the new United States’ Presidential term. At Data Stats we believe that the recession is already here. There are also many good people that firmly believe that we never recovered from the recession of 2007 and there appear to be many reasons to say that they are right.
However, before we delve into the specifics of each belief, let me first say that in order to solve a problem, you must first admit to and then identify the problem.
On October 28, 2016, The United States Bureau of Economic Analysis (BEA) released its advance estimate of third quarter 2016 economic activity showing that the economy expanded 2.9%. The U.S. government hailed this as a vindication of their economic policy. This, unfortunately, has also dispelled some people’s doubts the economy is about to stall. Don’t believe the rhetoric. The economy has stalled and we will be in a recession, if you don’t believe we are in one now. This report is an example of the opposite of what I said above. One does not have to dive into this report too deeply to discover that this 2.9% is very misleading and true sustainable growth was much less.
The BEA’s calculations include two very volatile components, inventories and trade, that even the BEA admits can skew the results. Also, they freely admit that all the figures are very preliminary and maybe adjusted up or down in future estimates. These two factors alone plus the comparison of the results to an extremely poor previous quarter made the third quarter 2016 look good. If the BEA’s final estimate comes in much lower, it will not be heralded like the first. Even including the questionable data, our year to quarter calculations gives us, what we believe, is a more accurate result of 1.5%. This result is a far cry from 2.9%.
The Bureau of Labor Statistics (BLS) released its preliminary report on third quarter non-farm business productivity. It was a rosy 3.1%. This productivity growth was also compared to a very poor second quarter growth. BLS admits that over the year productivity has grown 0.0%.
To me these are just more indications that the U.S. government and many other governments haven’t admitted to their economic problems. They have no hope of solving the United States’ economic problems if they continue in this manner.
The Recession is Here
We at Data Stats have reason to believe that the recession is here with us now. I would like to refer you to our website section dealing with the Gross Domestic Product versus Productivity for the last four years. It can be found here. You will see that the Gross Domestic Product growth has stagnated over the last three years.
Recessions come and go with regularity. Like clockwork. Usually, they appear about every five or six years. It has been seven years since the last recession had ended.
A recession is defined as follows:
A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
I will submit to you that if you study aforementioned plot and its accompanying data table, you will agree that the above definition has already been met.
The Recession Is Coming
Many of the reasons for assuming that a recession is on the way are the same that many people believe that the recession is already here or that we have never recovered from the one that occurred in 2007. The difference being in a few economic metrics.
Both the stock market and industrial profits have soared in the past few years. I would remind our readers that the stock market is not the economy and that the Federal Reserve Board of Governors has shown a reluctance to upset people in the stock market. This is not part of their congressional mandate and in my opinion has only led to subpar economic performance.
Corporate profits are also seen as a good economic indicator of the present and future. However, according to the Wall Street Journal®, as of the second quarter of 2016 corporate profits have dropped 4.7%. This follows a 5.0% drop in the first quarter. The same article reports that revenue has also dropped an estimated 0.8% during the second quarter of 2016.
There are many other economic indicators that are flashing red: a historically low Labor Force Participation Rate, high rates of Long Term Unemployment and sluggish wage growth are among them. Seventy percent of the United States Gross Domestic Product comes from consumer spending. Workers who earn less spend less, so that puts a major damper on future economic growth.
Never Recovered From The Recession Of 2007
Fifty seven percent of respondents to 2014 NBC®-Wall Street Journal® poll felt that the United States never emerged from the recession of 2007. What makes people so deeply skeptical of the government’s upbeat economic view?
One such reason is the persistent unemployment and underemployment. The latest figures place this number at 9.7%. This is happening while the government is touting near full employment and high productivity.
People see the investor class members getting richer. To them it appears as if this class has pulled up the ladder of success behind them leaving the lower class stuck below. This has bred a great deal of anger among the lower classes.
For the record, at Data Stats we believe the recession of 2007 ended in 2009 and a new one is upon us.
Be Prepared
The Boy Scout® motto is “ Be Prepared.” This is also very true for the small business owner or manager. At Data Stats, we try to give you advance warning of an upcoming recession. We hope you have taken our past warnings seriously and have prepared for any present or future economic downturn.
Your primary rule to follow is that CASH is still KING! Cash is an important method of payment for small and midsize businesses. This will continue to be the case in spite of discussions about people flocking to other forms of payment. You can get a lot further ahead of your competition when you have the cash and they don’t. But, do not take on any new debt! Conserve as much cash as possible. One corollary to this, I do not believe that a reduction in manpower is a cost effective method of improving your cash position. Contrary to common opinion, I believe your employees can be a source of income and cost savings for you. I will have more to say on this later.
The next thing to do is rebalance your inventory and raw material purchases to meet expected demand. Look into “just in time purchasing.” Hopefully, both these steps are taken before the unset of a recession. Many of your competitors will wait until a recession is announced. By that time it will be too late to get a benefit.
Next, talk to your customers and get a feeling as to the type of situation they may be in. Make it clear to them that with any payments on future orders, you will try to work with them in order to keep their business flowing. You could offer them better payment terms or a partial price deferment that ends with the recession. You know what you could offer better than anyone else.
Use your spare capacity to your advantage. Let it be known generally and among your competitors that you have the capacity or equipment to rent out. I was in a position at one time where a competitor approached the plant manager with a request to fulfill orders that for whatever reason they were not able to. We manufactured the goods and place them in the packaging supplied by the competitor. Manufacture goods that you would normally not do.
Lay-Offs
Conventional wisdom holds that downsizing increases a business’s profitability. However, a 1992 report by The American Management Association revealed that only 228 companies out of 547 that conducted a reduction in force (RIF) within previous years had improved profits during a post downsizing period. A similar study of the financial performance of a group of Fortune 100 firms revealed that their performance actually worsen in the two years following layoffs. In the majority of cases a RIF did not deliver an increase in profitability. These companies lost talent that was needed in the future. A small business does not have the flexibility of a Fortune 100 company. How well off would you expect to be?
Do not fall for the line that “this time is different.” It is not! This saying has been used for hundreds of years and in not one case has the time or the outcome been different.
Lay-offs are a lose-lose proposition. The employee who gets separated from his or her job loses. It may even be a bigger loss for you. You’ve lost the services of a trained employee who knows your business, knows your customers, and knows what they want and how they want to be treated. Plus, that employee knows how you want things done. You will need that employee once the recession is over and a new hire will take a very long time to gain the same knowledge. This will be to your detriment. The loss of an employee is also a big security risk.
Employees represent a big investment on your part and lay-offs just throw that investment away! You need to implement win-win situations that capitalize on those investments, not throw them away. Take advantage of slower times. Put employees to work doing jobs that you that you would normally hire an outside contractor to do such as painting your facility, landscaping, or changing the plumbing. Your employees will probably be able to do these jobs much cheaper. You know better than anyone what needs to be done so you could out pace your competition once the recession is over.
In summary, be proactive! Do not wait and be overtaken be an economic tidal wave.
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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