Beyond Hope, Into Reality

President Barack Obama took office in January and the country seems filled with hope.

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I have no desire to dash those hopes, but I cannot suspend the analytical process inherent in economics. We have not changed our forecast for 2009 and 2010. We expect the recession in the United States and in the world to get a little worse in the first half of 2009, with some lessening of the pain in the latter part of the year. An overt recovery is not expected to begin until we have passed through the first quarter of 2010 and we expect that the recovery will be quite mild. That has been our forecast for quite a while, and you may note that it was in place before the presidential election.

Many are clamoring for massive federal bailouts, but we must ask, can we point back to a prior period when massive government intervention has brought about a quick recovery? Hint: the answer is “no.” Then there is the question of the deficit. If the money is borrowed, the carrying costs must be dealt with by transferring money from the private sector into the hands of the government. Increased taxes on individuals and on businesses today will have a dampening effect on economic growth in the years to come, leading to slower job growth.

Let’s shift gears. What shall we do to protect our companies and employees through the rest of the downturn? Remember the Cs.
 
Cash. Cash is king in a downturn and this one is not an exception. Not only having enough cash on hand to get you through the tough times but also having enough cash on hand to take advantage of all the buying opportunities that will be evident in a year, is imperative.

Consolidate/cut/conserve. Pare down fixed expenses and be ready to pull the trigger on variable expenses as well. Things are not going to get better soon, so prepare your cash flow for the long haul.

Credit. Strengthen your banking relationship(s) and develop new ones if necessary.

Customers. Strengthen those relationships as well. Meaningful value-add service will be key.

Courage. It will be a time when your leadership abilities will be tested, and it will take real courage to make tough decisions when most of your peers may believe differently and may even be heading in another direction entirely.

How can we tell when the economy will be turning up? Look for the tried and true leading indicators to post rising trends that are very subtle at first. Look for rising trends in the ISM’s Purchasing Managers Index and the Conference Board’s U.S. Leading Indicator. Watch for good news to come from business news sources, particularly news that inventories are coming down and new orders are moving up.
 
We will all be able to take heart when the U.S. Housing Starts 12/12 rate-of-change (go to our Web site, ecotrends.org, for more information on rate-of-change) begins to move upward in a few months. This will be an important indication that the low in the housing industry is coming in late 2009/early 2010. The U.S. economy will not get better until the housing market reaches a low and begins the long climb back.

Here are three thoughts in summary. There is no free ride and someone must pay the bill. There are definitive Management Objectives that are applicable to the downturn that will help many protect profits and jobs. Lastly, there will be real, solid indicators of the coming economic recovery. We can move beyond hope and into the realm of reality.

Alan Beaulieu, alan@ecotrends.org, is Senior Analyst, an economist and a Principal with the Institute for Trend Research, in Concord, N.H. He invites your comments. Visit ecotrends.org and subscribe to monthly updates on EcoTrends.
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