The Great Comeback, Part 4: Environmental Assessment: Economy and Business Cycles
In my last post in this Great Comeback series, I explained how companies that want to come back from the recession and increase market share, growth and prosperity need to have a strategy and plan. I outlined a five-part process that business leaders can use to develop this plan and strategy.
In this post, I will explain the first part of this five-part process: The environmental assessment, specifically economic and business cycles. In future posts I will be examining additional aspects of the environmental assessment, such as the role of consumers and investors and also government involvement.
Looking at economic and business cycles to create your environmental assessment means understanding the global and domestic economy. Doing this allows business leaders to find the Great Comeback pattern that may exist for their industry or specific company. Key factors that affect an environmental assessment within economic and business cycles are GDP, employment numbers, imports and investment activity, and consumer confidence.
Gross Domestic Product Projections: Both globally and domestically, the first quarter of 2009 will have an even greater reduction in GDP than the fourth quarter of 2008. The 2009 global and domestic fall in GDP will be about the same as the fall in the recession of 1973-75. The first quarter of 2009 will be the worst quarter for the reduction in GDP, then it will hold steady in the second quarter, then the third will have very little reduction and the fourth will have an increase in GDP. The U.S. percent change in GDP for 2009 will be about minus 4%. The global percent change will be about half of this. China's GDP will be up 6-7%.
Employment Expectations: U.S. job losses will continue throughout 2009, though steadily diminishing over the course of the year. Monthly losses of jobs will be between 400,000 and 600,000 for the first half of the year but will taper to 100,000/month by year's end. The jobless rate will peak at the end of 2009 or in early 2010 at the 10-11% rate.
Imports and Investment: Both U.S. export and import volumes will fall in 2009 by 10-15%. The falling of corporate profits in 2008 and 2009, plus the factory operating rate of less than 70% in 2008 and 2009, will result in limited investment dollars available for capital equipment.
The Consumer is the Key: The Great Comeback from this Great Recession will take place through the actions of the consumer. Consumers will increase spending, which will eventually increase the factory operating rate and thus beget capital spending. U.S. consumer confidence will bottom in early 2009 and will increase spending by mid-year. The U.S. consumer will continue to spend on necessities and will gradually gain confidence as the year progresses to begin spending on discretionary and big-ticket items. The return of the U.S. consumer's confidence will beget an increase in business volume in China, which will beget capital investment in China, which will result in the improvement of the European marketplace.
Cyclical and Non-Cyclical Industries
Viewing industry data from a rate of change basis is very useful to better understand cyclical activity. Cyclical activity applies to some industry segments, but not to all industry segments. Many industry segments follow a cycle of Accelerating Growth - Decelerating Growth - Accelerating Decline - Decelerating Decline and then back to Accelerating Growth.
The Manufacturing Alliance - MAPI tracks twenty eight industry segments that follow the cycle. Individual segments clearly travel at different rates through the cycle.
Other industry sectors do not follow this cycle and are called non-cyclicals. Non-cyclicals include food, beverage and pharmaceuticals. The non-cyclicals will be the first to experience the Great Comeback.
The automobile industry and the housing starts will continue to suffer throughout 2009. Both markets will stabilize in the second quarter of 2009, but real growth will not occur until 2010. For both automobiles and houses the 2011 volumes will still be below the volumes from 1997-2007.
My view on the rest of the sectors is as follows (retail recovery will be in conjunction with the products sold below, e.g. grocery stores will rebound Q2 '09 - Q3 '09 in conjunction with food and beverage):
Where does your sector fall in the recovery chart? Does this match your expectations?
A reader at IndustryWeek left a comment on one of my articles referring to me as the "Prophet of Boom" versus the prophets of doom we've been used to hearing during this Great Recession. I'll be posting more this week on this environmental assessment aspect of the five-part process you need to move from the Great Recession to the Great Recovery, so that the 'boom' is something you are well prepared for within your specific industry.
