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Two Handed Economists Forecasts Prudent Management

November 22, 2009

Despite the continuation of moderately positive economic indicators, questions about an economic slowdown and possible recession are frequent topics of conversation.

Why the concern? Well, perhaps it’s because nothing lasts forever and we all realize that the current period of economic growth has been one of longest. Every winning streak eventually comes to an end.

Forecasting the economy is risky business. Even the most successful economists have a tendency to be ambidextrous. You know, “on one hand the economy may improve, but on the other hand it might not.”

Not being ambidextrous, I’m reluctant to make economic forecasts. However, there are some observations that can be more useful than crystal ball gazing. Whatever the future economic environment, your business must be prepared to successfully operate in it.

While the economy as a whole has been enjoying a long period of prosperity, certain sectors of the economy have had problems. During the early days of the expansion, the manufacturing sector of the economy was in the doldrums. It wasn’t too many years ago that economists were talking about a service based economy and the permanent decline of the basic industries. As things have turned out, it has been the manufacturing sector that has showed exceptional strength and prolonged the expansion.

What about those service industries? The financial services industry has had a difficult time these last few years. Don’t try to tell the many unemployed Wall Streeters that everything been robust during the last two years.

The point is that although the economy as a whole has continued to prosper, certain sectors of the economy have had their own “industry mini recessions”. These “mini recessions” that have hit the manufacturing, financial, farm, and other industries at different times may be one of the reasons that the overall expansion has lasted so long.

With the exception of economic disruptions brought about by government policy, a recession is the normal self correcting mechanism to the excesses that are created during a period of growth. The inefficiencies that develop during a period of expansion are brought back into balance during a period of recession.

The same factors that cause the whole economy or a sector of it to enter a recession will cause your business to have problems. Don’t wait for a recession to trim the fat in your budget. The responsible fiscal measures that are taken at the beginning of a slow down often could have been taken earlier.

Companies don’t get into trouble during times of recession, they get into trouble during times of prosperity. If excesses and inefficiencies have accumulated in your business during this period of sustained prosperity, start eliminating them before a recession does it for you.

Most of the specific actions that you would take to weather a recession are prudent management action at any time. Effective cost controls, improved productivity, lowering overhead, debt reduction, and good inventory management are good practices for all seasons.

Too often the cuts that are necessitated by a slow down in business are the ones that “I should have made a long time ago.” When a number of companies in one sector of the economy haven’t made those decisions “a long time ago”, a recession occurs. After they do make them, the seeds of a recovery are planted.

Why wait? Good companies prosper in good times and bad. Be vigilant to eliminating the excess and inefficiencies in your business and you will be prepared for the future, whatever that may be.

If a broad based economic recession were to occur it most likely would be induced by government monetary policy. The very painful back to back recessions that occurred in 1980 and 1981-2 have been largely attributed to the policies of then Federal Reserve Chairman Paul Volcker. In an effort to collar inflation, the Fed shrank the growth of the money supply and drove up interests rates.

The monetary policy of the Federal Reserve Bank is again being closely watched as it continues to balance on the high wire of economic growth between that bridges the gaps of inflation and recession. The Fed policy making committee pushed rates upwards during much of the last year but has let interest rates drop slightly during the summer months.

Read all the economic forecasts and prognostication for insights, information, and entertainment. Because its your business, you best preparation for the future is to run a tight ship. Eliminate the excesses and inefficiencies that exist in your business. You’ll prosper in good times and bad.

My view of the future is positive. But on the other hand, I’m always an advocate of prudent management.

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