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The Inevitable Recession Is Coming

November 26, 2009

Recession. November 9, 1987. RECESSION. That’s right, I said it, the recession is as good as here. We will be hearing a lot about recessions over the next few months so we might as well get comfortable with what it is, why it’s happening and what are the best strategies to follow.

Government economists define a recession as two consecutive quarters of a declining Gross National Product (GNP). The GNP is computed each month by the U. S. Department of Commerce by adding the value of all goods and services produced in our domestic economy. Others have defined prosperity as a time when you have some extra money and you spend it, a recession as a time period when your neighbor is unemployed and a depression as a time when you are unemployed.

With the impact of global markets on our domestic economy and the rapid rate of change in today’s world, the historical standards of recessions are probably not reliable guideposts. Just as the world’s financial markets have experienced unprecedented times, the characteristics of the coming recession will not necessarily mirror the classical recession scenario.

The coming recession will be characterized not by a steady and consistent contraction of GNP, but rather by substantial fluctuations where the negatives swings will be of both a greater frequency and magnitude than the positive swings. Regardless of it’s characteristics, however, you can be sure it’s coming.

Changes in the economy are often preceded by parallel movements of a closely watched group of statistics called the “leading economic indicators”. This group of twelve factors includes such items as new business formations, inventory levels, claims for unemployment insurance, stock prices and consumer spending. This index has historically shown a decline approximately six months in advance of a period of declining GNP.

Our economy has been in the process of one of its longest expansion phases in the post war era. It has to slow down sometime. In a prolonged period of expansion excesses occur and a recession is the economy’s way of bringing those excesses back into balance.

The direction of the economy is impacted by the sum total of our expectations and assumptions that influence our economic decision making. The recent turmoil in the stock market, a natural adjustment to economic excess, has caused our perceptions and expectations to be cautious. This cautiousness will result in reduced levels of purchasing and employment.
You don’t need to wait for the government economists to validate the existence of a recession some months from now, it’s here. The excesses that need to be wrung out of the financial markets are present and the cutbacks in purchasing and employment intentions are already being announced.

Recent recessions have had a tendency to hit certain segments of the economy harder than others. While agriculture and basic industries have been hard hit in past downturns, the service sector and others have prospered. The coming recession should be no different in its selectivity except that this time many of the roles will be reversed. While certain segments of the economy will languish and others will actually grow, the financial services sector of the economy will be hit hard.

What should you be doing to prepare for the recession? Well first, if you are in the financial services sector, fasten your seat belt and get ready for a big shakeout. Otherwise don’t be overly alarmed. Most of the specific advice about weathering a recession is prudent management at any time. Effective cost controls, debt reduction and good inventory management are good practices for all seasons.

The generally cautious approach to expenditures in anticipation of a recession can appear to actually bring about the recession itself. Perhaps, but I can guarantee you that a slow down is inevitable. Prudent management is the way to insure that you won’t become a casualty.

The shake out in the financial services industry will be painful but is long overdue. It should bring some needed sanity to the equity markets. After having run a number of businesses I have always had a negative bias towards those investment professionals that have never run a business judging the value and determining the future of companies that they really don’t understand. It’s a bit like listening to a Monday morning quarterback that has never held a tackling dummy, a child psychologist without a family or a bureaucrat who has never worn a uniform making defense policy.

Companies don’t get into trouble during times of recession, they get into troubles during times of prosperity. If excesses have accumulated in your business during this period of sustained prosperity, because it’s your business, start eliminating them before the coming recession painfully does it for you.

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