There will be a plethora of economic news this week to watch, and one number will stand above all the others as the most indicative of where our current economy is headed. On Monday we will see the Institute of Supply Management’s (ISM) manufacturing index for September, the consensus forecast is 52.9, which is the same as August. On Tuesday we will get data on motor vehicle sales for September, the expectation is for a slight drop from the strong showing in August. The ISM non-manufacturing survey will be out Wednesday and factory orders will be released on Thursday.

Fasten your seat-belts, because we will get the “mother of all economic numbers” on Friday when the Department of Labor releases the employment numbers for September. The consensus forecast is for an increase of 115,000 jobs. The forecasted range is anywhere from an increase of 50,000  to 147,000 new jobs.

If the forecasted numbers are hit we can expect many analyst to hit the financial airwaves this week and tell us that the slowdown from the subprime fallout is over, and happy days are certainly here again. These same analyst will also opine that the Federal Reserve went to far in lowering rates .5 percent in September, and the real issue facing the economy is inflation not growth. If the forecast is missed on the low side, then we will have many of these same analyst telling us how the Fed got it right.

I am not holding my breath for a great jobs report, although I would like to see one. The three month rolling average of new jobs has been trending down since 2006. At some point, I would expect this data to start trending the other way, although I am not expecting it just yet. A number below 65,000 will cause that three month rolling average to fall a bit more, and give us more data indicating that the economy has slowed over the past few months. The jobs number is the number to watch this week, stay tuned for Friday! 

The problem with gauging economic activity is that we are never able to judge what is just ahead of us, and we can’t seem to agree on what is just behind us. I am starting to see a significant increase in the “chatter” from analyst about a possible recession. Some have even indicated that we could be in a recession already. It is certainly safe to say the U.S. housing market is already in a recession.

Here is another article discussing a looming recession. I think they hit quite a few key points, although I am perplexed about the comments in regards to labor markets. The Bureau of Labor Statistics shows that job growth dropped over 40% in the first eight months of 2007 versus the same time period of 2006 (that is about 700,000 fewer new jobs). I am mystified about how that can be interpreted as a resilient job market. Perhaps the September jobs number will prove some resiliency, we will know at the end of this coming week. 

As business owners, we have no say into whether the economy is booming or busting. All we can do is structure our business to take advantage of the economic environment around us and be prepared for what we think may lie ahead!

We are now approaching my favorite time of year. College football is in full swing, the leaves are changing, and the weather is generally beautiful. The only downside is that autumn reminds me that soon small business owners all over the country will be getting their annual increase in health insurance premiums.

For our business this was always a crap-shoot. I felt like I was going into a Vegas casino when we would sit down with our insurance provider to discuss where premiums were headed. We always knew there would be an increase, sometimes it would be 5 percent, sometimes it would be 25 percent. It was one of the few vendor meetings I would have where I would actually hope for a 5 percent price increase.

The premium increase would be followed by several management discussions about what we were going to do with rising insurance cost. In most cases it meant more bad news for employees, because it meant more of the burden of paying the premium would fall to them, their plan benefits would decline, or both.

I ran across an article in the Financial Times about health care costs being the Achilles heel of U.S. business, and how the burden of figuring out how to handle the problem was likely to fall to employers. There are many ways to reduce your insurance cost, HSAs (Health Savings Accounts) have become increasingly popular because they put more of the decision making in the employee’s hands versus the employer’s.  VEBAs (Voluntary Employee Benefits Associations) are also becoming more popular. This was the method General Motors used this week to resolve their dispute with the United Auto Workers. Some employers are even taking a proactive approach by instituting wellness programs.

No matter what approach you take, if your business is like ours, you will get the usual complaints about the rising cost of health insurance, and the decline in benefits. This is one of those business problems where we seem to be making incremental improvements, but we have no solution. We tell our clients to do their homework and make sure they are balancing their employee’s needs with their business’s needs as they tackle another year of rising health insurance premiums.

Consumer spending and incomes rose in August while the Core PCE price index declined. Many of the talking heads are on TV and celebrating today. They say these numbers indicate the economy is in great shape, inflation is low, and consumers are still spending money.  Although these numbers look good, keep in mind they are a snapshot of one point in time. 

Many years ago I learned an important lesson about analyzing data in business. My business was having a poor year, we were behind forecast, and just barely beating the prior year. We were in the last of the month of the quarter and we had a record month. Our orders and shipments looked great, our profits were fantastic. At the quarterly board meeting I confidently reported that the year had turned, and we were back on track. I was almost right, our turnaround lasted one month. Suffice it to say I had a considerable amount of egg on my face.

Never look at data in isolation. A month’s worth of data only indicates how your business did in that particular month. Always look at the trends and what all of the data combined is telling you. Never celebrate until both you and the ball are in the end zone! 

The first step in resolving a problem is getting everyone to recognize there is a problem in the first place. There is a serious growth issue facing Main Street and many analyst don’t want to recognize it. Many businesses have not yet felt it, but they will over time. Every day I hear a few more stories of businesses that are running into issues due to a slowing economy. The CEO of Freddie Mac is close to the point of impact, so they are feeling the effects of the housing downturn and subprime problems early. Even former Federal Reserve Chairman Alan Greenspan believes the odds of a looming recession have increased.

The only thing I can say for certain is that I (and every other economic handicapper out there) do not know if we are headed for a recession or not. The indicators I look at seem to be telling me we are, so as I have said before be prepared.

It is raining here today. Perhaps the gray skies and wet streets are contributing to my rather foul mood, or maybe it is the fact that I have spent the last couple of hours reviewing economic data, and the data is painting a picture that I really don’t want to see. The information is piling up and the odds of a looming recession are growing quickly. I was having coffee this morning with a local business reporter and something she said triggered a thought that our current economic crisis may get much worse before it gets any better.

I hate to be a pessimist, because it runs counter to my beliefs; however, it is getting harder and harder to ignore the information in front of me. Currently we are faced with a housing market that has not reached the bottom, new job creation has been trending down for seven months, oil prices are rising, stocks are confused, and consumer confidence is trending down. I hate making predictions because none of us can predict what is going to happen tomorrow much less what will happen in the next 12 months, and the optimist in me says this is just a slowing economy, no big deal! The realist in me says we are headed for a recession, and it will begin to show its ugly head within the next three quarters.

So if a recession is where we are headed, what should a small business owner do? I remember the recession of late 2000, early 2001. Our business declined about 5 percent, while the market we were in declined 25 percent. We were insulated from the decline because of some new products that were helping us grow in other areas (hopefully your business is insulated as well). Many of our competitors were not insulated and it took considerable time for them to recover. As a small business owner, we suggest you start talking to your employees now about what might be down the road.

I have posted several articles in regards to contingency planning, and now is a good time to get your managers together and create a plan to help deal with any downturn in your business. This would be a good start, but as a leader you cannot forget your employees. I am not suggesting you take the “sky is falling” approach and scare everyone into looking for new jobs, although I am suggesting you have a candid conversation with all of your employees about the current economy and your concerns. Keeping your employees informed about any potential slowdown the business faces not only raises their awareness, it also prepares them for any changes you may have to make in the future.

In 2001, I already had a process in place for keeping the employees informed about how the business was doing, and where we saw it going. Early in 2001, we began talking to our employees about the potential of a slowdown in the economy. When that slowdown hit and we were forced to reduce our expenses, no one was surprised. That still did not make reducing our workforce easy, but having everyone prepared ahead of time made it easier! Keeping the employees informed and engaged helped them understand why we were taking the actions we did.

Here are some tips for leading your employees during a downturn:

1. Be Open and Honest - If you expect your business to slow, make sure the employees understand.
2. Educate Your Teams - Make sure your employees know this is not an isolated business issue, but an overall economic issue.
3. Listen to Their Concerns – The business is just a part of their lives, don’t neglect the broad personal impact of an economic downturn.
4. Reassure Them  – Have a plan, you don’t need to lay it out there, just make sure they know you have a plan for dealing with a downturn.
5. Make the Tough Decisions – If the time comes, be prepared to do what is necessary to move the business forward .

A broad downturn in the economy will have far reaching consequences. Your employees will feel stress on the professional level, and on the personal level. Make sure your business is prepared to deal with the challenges that may be looming on the horizon.  

New home sales fell 8.3% in August to the lowest level since June 2000. This news came on the heels of the announcement by KB Homes of a loss for the third quarter. They have indicated this is the worst housing market they have seen in years, and they do not see it hitting bottom any time soon. It seems, given our earlier post on oil prices, that I am just full of good news today.

The new home sales data was at the bottom end of analyst forecast, I am not sure that makes me feel any better. The data keeps mounting, although the final GDP numbers for the second quarter came in today at a healthy 3.8%, there is still considerable pressure on the current economy. It strikes me that we are still at the start of this economic saga, and not at the end.  

I hate to start everyone’s day with something so gloomy, but analysts are expecting oil prices to hit a record in 2008. This article indicates that next year oil may average $67 a barrel, and go as high as $95 a barrel by the end of next year. That is the bad news! The good news is that analyst expect oil prices to peak in 2008, and come down in 2009 and 2010 (I am not exactly sure what miracle is supposed to cause prices to retreat).

My primary concern is what impact higher oil prices, and higher prices at the pump, will have on an already sluggish economy. I heard a report the other day which said that most recessions were preceded by peaks in oil prices. These reports combined certainly cause one to think about things for a moment.  I must admit, I have had days which started better.

At the end of the day, it is what it is.  As I have said before, cash is king! We are telling our clients to ensure their business is prepared for a possible slowdown, so they can come out a stronger, better business when all is said and done! If they do that everything else will be irrelevant.

Every small business owner knows, cash is king! Regardless of the environment around us, our primary concern is always cash flow. The question our clients are asking, “Given the current condition of the economy, how do the rules of the game change?”

The data pointing to a softer economy continues to mount. It seems as each day passes, someone puts another nail in the coffin of strong economic growth. Are we headed for a recession, inflation, or both. No one really knows, and don’t let anyone convince you they do. Too many of us work very hard to assign predictability to unpredictable events. That said, we still need to figure out which way the wind is blowing, and position our business to manage the rough air.

As we head into a uncertain future (as if any future is certain), we are suggesting to all of our clients the best offense in this environment is a good defense. If a slower economy has the potential to hurt your top-line, it can hurt you competitor’s as well. If you are proactive and position your business to build cash you will be better positioned to sustain an extended downturn, as well as invest for growth. Here are five simple things you can do to build cash during a slowdown.

1. Cut Discretionary Cost – Advertising, promotions, sales travel, bonuses, magazine and newspaper subscriptions; these are all expenses on the income statement that we believe we need, but in the short-term we could possibly live without. I am sure for your business there are discretionary costs that can be cut, and the business will survive. If you want to build cash during a downturn, this is a place to start.
2. Capital Equipment – Are you thinking about a new computer system, or a new machine for the shop floor? Capital Equipment sucks up cash. Many businesses operate in a Cap Ex = Deprecation model. This means they try to limit their capital spending to an amount equal to their equipment depreciation. Lowering your capital outlays has two benefits, you use less cash on capital, but you are still getting a tax benefit from current depreciation. A temporary hold on capital equipment can help build a healthy cash base.
3. Accounts Receivable – How do your customers pay? Do they pay in 30 days, 45 days, or 60 days? Depending on the level of your receivables, reducing the days sales are outstanding, or how long it takes for you to get paid, can help supplement your cash flow. Don’t become your customer’s bank during a downturn. Always remember when it comes to collections, the squeaky wheel gets greased. If you ignore your receivables you will get paid when your customer is ready. A little extra effort on receivables can improve short-term cash flow and reduce bad debt.
4. Inventory – If you a manufacturing or distribution business, there is always cash to be found sitting in inventory. Getting those inventory numbers down can build cash. If sales growth is slowing or stagnate, your inventory should be coming down in proportion to a slowdown in your business. Bleed off excess inventory, and save some cash. Now would be a good time to obsolete old inventory as well. This is money already spent. If you obsolete it and expense it now, you reduce your income and overall tax liability.
5. Taxes – Explore opportunities for reducing your tax liability. Obsoleting inventory is one way. For many small businesses taxes are a major cash burden. A slowdown will likely result in a natural reduction in revenue and income. If there are other opportunities in your business to increase expenses without sucking up cash, take advantage of them now.

The reason many small businesses fail is not because the economy or the market puts them under, it is because the leaders of those businesses refuse to recognize the environment they are in. Every business owner can manage through the good times or the bad times. The most successful business owners position their business to succeed regardless of the world around them. 

Durable goods orders were down in August after a big rise in July. Demand fell 4.9 percent for the month including transportation. It appears that this is another indication we are currently operating in a softening economy. The real question is how soft do things get, and how long does it last?