Mid-Year Gut Check

August 28, 2009 - 12:00

This might seem preposterous, but some economists say it’s highly possible that the recession  — which began in December 2007 — ended months ago. The “end” of a recession typically refers to the month when declines in economic growth reach their bottom, or trough. It’s usually not clear until well after the fact, which is why the National Bureau of Economic Research’s business cycle dating committee, which declares business cycle peaks and troughs, often takes many months or a year to make their announcement. For example, they didn’t announce until December 2008 that the current recession had begun the previous December.

As we look at the remainder of 2009, the economic pluses outweigh the minuses. Consumers are now showing a willingness to spend, despite high debt levels and rising foreclosure rates. And long-term history suggests they’ll keep it up. Consumer confidence, already rebounding smartly, will keep improving, helped by a 25 percent drop in gas prices after mid-July. It seems the biggest economic woes are behind us.

Some banks are raising capital and paying back taxpayers as credit markets recover; lending remains limited but is beginning to revive. Painful decisions have been made in the auto-manufacturing sector, and the industry can now start to reinvent itself. Inventories are declining; firms have cut to the bone. As consumer demand picks up, so will production, and that will boost gross domestic product and, eventually, employment.

Home sales are climbing and housing starts show signs of increasing, albeit slowly, but a bottom in prices is six to nine months away in the hardest-hit markets. Housing will add a point to GDP growth in 2010, after subtracting a point in each of the previous three years.

Exports will likely continue to rise, boosting the bottom lines of companies that sell overseas.

Challenges Lie Ahead

Still, the recovery will be lethargic. We should expect subpar growth of only about 2 percent in 2010 and a bit more in 2011, well below growth after other deep recessions since World War II. Plus, any financial or geopolitical shock to the system could easily derail a recovery. Even without a shock, we are left with a fragile economy, grappling with several recession hangovers.

Many factors will make it a challenge to build momentum for growth. Unemployment won’t start coming down until the second half of 2010, after peaking at well over 10 percent. That won’t feel like a recovery to many workers. But the number of weekly claims for unemployment benefits has declined since March, and that metric has historically been a good indicator of business cycle troughs.

Commercial real estate difficulties started last year, but the dive has gotten steeper. There’s a ripple effect creating problems for many. As more leases expire, renters will demand big discounts to stay where they are, and new construction will stay mired in the doldrums. But if the traditional lag between residential starts and commercial starts holds true in this case, we should see improvement by the first of the year.

State fiscal situations in some regions of the country are in crisis. Lawmakers will struggle with budgets, raising taxes and laying off workers. That’ll slow spending by consumers and businesses. The stimulus helped some, but not enough to get hurting states out of their binds.

Business investment will likely remain stagnant in the first half of 2010. Companies will move cautiously, delaying major projects until they see stronger GDP growth. That may take a while for adequate documentation of such recovery to hit the media and turn around business expectations.

What You Can Do

I’ll close with a short list of action steps to consider in positioning themselves for the rest of the economic downturn heading into recovery (hat tip to Bill Patterson and Kit Webster of BridgePoint Consulting, Inc.):

Love your customers. Get closer to them than you have ever been; understand and aggressively address their issues. In a poor economy, competition will increasingly be based on price, so you need to be able to articulate your value proposition to justify holding your prices above the competition, or to be able to just hold on to the business.

Love your bankers. Communicate with them; let them know what you are doing. Convince them that you are thinking about them and that you will do whatever it takes to make sure their loans are repaid. The biggest mistake companies make with bankers is not staying in constant communication with them and then, at the last minute, surprising them with bad news. Debt will be difficult to obtain so make sure your credibility and communications are in place, so that you will be in line to get your share. Keep your loans in good repair; do not bust covenants. Bankers will be less forgiving in this environment.

Love your shareholders. It is much easier to get additional capital from people who know you than from people who don’t.

Love your employees, particularly your key employees. Although unemployment will increase, there will continue to be demand for key people and for people with skills that are in short supply. Your employees will feel insecure about the company and their jobs. Keep them informed and involved in the process so that they do not make an uninformed decision to leave your company.

Focus. Be relentlessly focused and realistic about your business and its prospects. You are now in survival mode, and you need to be clear about what it takes to survive. Review your business strategy and value proposition to ensure they are in line with the needs of the current market environment.

Cut costs. Then cut costs again, and cut costs for the third time. If you have not implemented a lean flow kaizen into your operation, what are you waiting for?

Be vigilant. Watch your customers’ credit ratings and payment history. Most will attempt to use you as a financing source, and it is likely that several will fail.

Review your payables policies. Take full advantage of the time your vendors will allow you to pay, and do so just before you endanger critical relationships.

Be resourceful. Consider alternative sources of financing, such as asset-based lenders.

And finally, look for opportunities. Crises breed extraordinary opportunities!

About The Author

Charlie Hall is Ellison Chair in International Floriculture in Texas A&M University’s department of horticulture. He can be reached at charliehall@tamu.edu.

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