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Beyond Hope And Into The Realm Of Reality

When President Barack Obama took office on January 20, the country seemed filled with hope. I sat in on several meetings in the subsequent few days where a number of folks gave voice to this hope. It was as if now that Obama was through the door, we would have no more problems.

I had no desire to dash those hopes, but I could not suspend the analytical process inherent in economics. That process requires me to ask a few questions and to point toward the future.

The Institute for Trend Research has not changed our forecast for 2009 and 2010. We expect the recession in the United States and 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. Even then, we expect that recovery to 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.

The U.S. economy will not get better until the housing market reaches a low and begins the long climb back. It would be a mistake to look for this to happen quickly.

Questions to Ponder
Many folks in and out of Congress continue to clamor for massive federal bailouts that will make everything all better. A couple of questions must be asked in that regard. One, can we point back to a prior period where massive government intervention brought about a quick recovery? (The answer is no.) You may be tempted to think of FDR and the New Deal, but analysis of that time period shows that the actual recovery did not begin until World War II. In the early 1980s, it took years before the economy regained its rising trend.

Another issue relates to the deficit. These massive transfers of money come with a cost that must be borne by taxpayers if the funds are borrowed, or by all Americans if the money is printed (inflation takes away purchasing power and standard of living increases). 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. That means the money will be raised by taxes and that money will no longer be in the hands of ordinary Americans to use as they wish. Increased taxes on individuals and on businesses will have a dampening effect on economic growth in years to come, leading to slower job growth. Someone looking for a job in the future may well shoulder the cost of today’s efforts by remaining unemployed.

A third question relative to the deficit relates to the eventual repayment of our massive debt. How will this huge sum-$10.4 trillion and growing by about $2 trillion in 2009-be repaid? Perhaps it will be by us; perhaps it will be by our children. Either way, there is a cost. Lest I be accused of being overly negative, let me just say that I hope the best for our nation, but I am troubled by these questions that do not seem to be aired in the public sector.

How to Cope
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 no exception. It is imperative not only to have enough cash on hand to get you through the tough times, but also to have enough cash on hand to take advantage of all the buying opportunities that will be evident in a year. Many competitors and capital assets will be on sale at attractive prices for a willing buyer with cash.

Consolidate/Cut/Conserve – Pare down fixed ex-penses, 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-added service will be key.

Courage
– It is 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.

When Will It End?
How can you 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 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. It would be a mistake to look for this to happen quickly, given the amount of inventory still out there and the hesitancy of many banks to lend.

That leads us to the credit crisis. It will be resolved, but it will be resolved slowly through time. Banks will do what they need to do to become profitable, and that means they will lend money to creditworthy applicants. An early indication of thawing in the credit markets was GMAC’s announcement in January that it lowered the required credit rating for a car loan from 700 to 621.

Be on the lookout for consumers to re-enter the economy through increased consumer activity. A pick-up in retail sales will be one of the last things you notice, but it will be extremely important. This will take time given the current condition of home equity and personal balance sheets.

To sum up, three things come to mind. First, there is no free ride, and someone must pay the bill. Second, there are definitive management objectives that are applicable to the downturn that will help many protect profits and jobs. Third, there will be real, solid indicators of the coming economic recovery. We can move beyond hope and into the realm of reality.

The U.S. economy will not get better until the housing market reaches a low and begins the long climb back. It would be a mistake to look for this to happen quickly.


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Meet the Author
Alan Beaulieu is an economist with the Institute of Trend Research, located in Concord, New Hampshire, and on the Web at www.ecotrends.org.

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