A year ago I posted an article about what I believed were the seven indicators of a looming recession.  Today the U.S. Government announced what many already knew was coming, the U.S. Gross Domestic Product contracted .3 percent during the third quarter of this year.  The economy went into reverse as consumers pulled back at the fastest rate in 28 years.  The question for many analyst has moved from whether or not we are in a recession to how long this downturn will last.  In what was likely a premeditated move the U.S. Federal Reserve cut lending rates by one-half point yesterday.

Over the next few days I expect we will have a plethora of talking heads on TV wringing their hands about the downturn, and what to do next.  I am optimistic that we are already more than halfway through this economic slowdown, I posted an article earlier this week pointing out my logic.  A year ago we were speculating on the rough economic environment ahead, today we are planning for next phase of economic growth.

Yesterday I posted an article about some reasons we can be optimistic in regards to the U.S. economy going forward.  One of the things I mentioned was the bottoming out, or at least nearing the bottom, of asset prices.  It was reported yesterday that new home sales for September rose 2.7 percent, and inventory dropped to 10.4 months versus 11.4 last month.  This data was on top of Friday’s report which indicated existing home sales rose last month as well.

Although these are just two pieces of data in a sea of information that has not been uplifting, they do indicate that the housing market, the primary driver of the current downturn, may be near the bottom.  People are wading in to take advantage of being able to buy undervalued assets at attractive prices.  Hopefully we are now closer to the end of this slowdown than the beginning. 

There are only eight days left until the 2008 presidential election, although according to news reports many people have already participated by taking advantage of early voting in their states.  I have watched this election closely since the primaries started last January.  I watched every debate, both Democratic and Republican, and read about the key issues of the day.  I have stayed in tune to the most recent polling data, and decided to give my readers an objective feel for where things stand at this point.

• The Polls – Senator McCain has not led in a national poll since the third week of September, and has only led two polls since September 12.  During this time things appear to have settled in with Senator Obama hovering around 50 percent, and Senator McCain hovering around 45 percent.  Both campaigns are telling their supporters to disregard the polling data.  Senator McCain is insisting the polls are wrong, and he will pull it out.  Senator Obama is warning against complacency, and reminding everyone he was ahead in New Hampshire before he lost to Hillary Clinton.  The spin from both campaigns should give a pretty clear indicator of where things stand.  The Democrats are working to hold down expectations, meanwhile the Republicans are working to keep their base engaged.
• The Impact of Early Voting – There has been a tremendous surge of early voters in states this year where it is allowed.  Many of these are battlegrounds like Florida, Ohio, and North Carolina.  This bodes well for whomever is in the lead, in this case Senator Obama.  A surge in early voting helps the leader lock in votes, and limits the impact of any last minute gaffes, or negative press reports. 
• The Electoral Map – According to Real Clear Politics, as of today Obama has 255 electoral votes which look solid, and McCain has 137.  Obama has several paths to the magic number of 270, if he just holds his solids and picks up the states leaning his way he will crest 300, that would beat the 270 with 36 to spare.  The states leaning Obama are Colorado, New Mexico, Ohio, New Hampshire, and Virginia.  McCain has not led a poll in Colorado, New Mexico, New Hampshire, or Virginia in the past month.  Of the states leaning his way, Obama could lose New Hampshire and Ohio and still beat 270 with a little room to spare.  On other side McCain’s path to 270 is not quite as clear.  There are seven toss-up states according to RCP with 75 electoral votes.  McCain must win all of these to have a shot, despite being behind in recent polling in three of the seven.  He could win all of the toss-ups, and he will still be about 38 electoral votes below the magic number, that means he has to pull states that are leaning Obama or solid Obama to his side.  This is a real challenge for any campaign, much less one operating in an unfavorable environment.

The bottom line is that if I were running I would much rather be in Obama’s shoes at this point than McCain’s.  It appears that the rest of this campaign is going to be fought on turf won by George W. Bush in 2004, not a good sign for the GOP.  The McCain team cannot afford anything to go wrong, and must have a significant number of things to flip and go their way to pull out a victory.  It is certainly not impossible, but it is a stretch.  The Obama team must guard against complacency, and focus on getting its voters to the polls.  Given the discipline this campaign has shown over the last several months, I get the impression they are taking nothing for granted!  

I was in a board meeting last week, and after the meeting I had a conversation in the parking lot with another member of the same board.  We were having a discussion about the economy, and he was expressing his concern that we are headed for a deep recession.  Although I do agree that the U.S. economy is currently in a recession, and is likely to be there for the next several months, I am starting to see some things that give me hope about our economic future.

1. Asset Values – A report came out late last week that existing home sales had picked up last month.  I rarely put stock in one piece of data, I believe it all has to be taken in context and analyzed, but this news as well as other comments I have heard have me wondering if we have reached the point where asset values are starting to become more attractive.  I have heard from more than one person lately that they believe that stock prices are starting to appear a little undervalued.   There is also some anecdotal evidence that the housing market is reaching that same point.  It appears that people with cash, or with the ability to raise capital are now thinking in terms of wading in to buy undervalued assets.
2. Companies are taking action – Over the last few weeks we have heard quite a bit of news about layoff announcements.  That is not good news for many people, and will have a negative impact on the economy in the short-term.  I would expect the job market to contract by 200,000 jobs in October.  The positive news is not in the layoffs, but in the evidence which points out executives understand they need to reduce cost to stay competitive.  This always results in a fair amount of short-term pain, but it helps drive earnings and cash, which will give businesses more capital to invest by late 2009.
3. Consumers are taking action – This is also not great short-term news, but as consumers tighten their belts and reign in their spending they are positioning themselves for a positive rebound in the future.  As the average American adjusts to the new economic reality they change their buying habits.  They are less likely to buy on credit, and more likely to only buy things they need.  Although this does not bode well for consumer spending in the short-term, when asset values begin rising, and credit loosens, many consumers will have positioned themselves well for the next growth phase.
4. Oil prices – Oil prices are falling primarily because the U.S. dollar has gained some strength, and global demand for oil has weakened.  If demand falls, and supply is relatively consistent, then prices will drop.  The economic slowdown in the U.S. is hurting demand for products and services made in China and India.  The falling demand in China and India is hurting crude prices, which is impacting economic conditions in Russia, and other oil producing conditions.  None of this is great news; however, prices falling at the pump is providing some much needed relief to American consumers.
5. LIBOR – The London Interbank Rate has stabilized in the last week as the bailout efforts around the globe have taken hold.  As credit unfreezes businesses and people with strong balance sheets and credit ratings will be able to take advantage of lower asset prices, and invest.  This is the start of rebuilding what has been torn down!

To many, at this stage of the game, this may seem overly optimistic.  Some may think I am straining to find a silver lining in a very dark cloud.  Perhaps that is true, but more than a year ago I was pointing out the inherent trouble I saw coming in the economy, and what organizations needed to do to manage the rough air.  Today, there appears to be a clear understanding that we have a major economic issue to address, getting everyone to recognize the problem is generally the first, and most important step, in developing a long-term solution! 

This morning I updated the Rough Air Demand Index, and the Rough Air Cost Index.  When looking at the data there are a couple of very striking things.  In regards to demand, the steady decline in new job creation is the first thing I noticed.  The other item I noticed is the continual drop in our index, it has been falling since March, and it does not appear to be ready to reverse course just yet.  The bottom line is that the Rough Air Demand Index indicates that we are currently in a recession.

The Rough Air Cost Index improved slightly last month, primarily due to the impact of lower oil prices.  As demand has steadily fallen, oil prices have receded due to expected declines in global demand for energy.  This is a great example of how lowering demand for oil can help bring prices back to a more reasonable level.  There is nothing like a little competition to keep all of the players honest.

Not many experts would disagree with my layman’s analysis, the economy is not doing well!  We are certainly in a challenging environment, and we are likely facing a recession over the next few quarters.  Small business owners need to ensure they are doing the right things to prepare for an expected economic slowdown.  I recently posted this article with some suggestions on how business owners may be able to manage the current downturn.  No matter what, remember that although we may be in a recession, that does not mean business stops, you will just have to work harder to maintain those margins and grow your business like you want. 

Global stock markets are in absolute turmoil, the Dow Jones is now 5,000 points below its high of more than 14,000 last year.  The volatility is on full display today as the trading range has fluctuated from up 200 to down 230.  The credit markets around the world are barely functioning, businesses are having trouble raising the capital they need to finance new projects.  Some are having trouble raising the money they need to make payroll.  All of this is going on while asset values around the globe are plummeting faster than Newton’s apple from a tree.  It would appear that we are now faced with a much different future than any of us had planned just a few months ago!

Some people are calling this the worst economy since the Great Depression.  Some are saying we are in for an extended slowdown, much like Japan went through in the 1990s.  I do not know how far we will fall, and I do not know how long it will last, but I can tell you what I will focus on in my businesses over the next year as we muddle through this crisis.

1. Expenses – We will be (and are) watching expenses very closely.  We have put together rough plans, which indicate what we may face going forward, and what expenses we can trim if needed.  I have already taken steps to cut discretionary cost, and to ensure our returns are as strong as possible in a difficult environment.  I suggest you take the time to go through your P&L line by line, and decide what you will cut if needed.
2. Cash – We are working to build our cash base.  We want to be able to carry the business for a period if we have to with cash we have built up in the business.  This means holding off  on any capital investments (new equipment), or additional marketing efforts.  Now is a good time to re-institute good cash flow procedures.
3. Sales – When times are tough the temptation is to pull-back, and focus on cost alone.  We are not going to fall into the trap of the dichotomy of the “or.”  I believe we can watch our cost, and push our sales.  We are continuing to challenge our sales team, and push them to bring more new customers in the door.
4. Flexibility – During challenging times some of our better customers may require us to be slightly more flexible in regards to payments, and pricing.  Although I would never give away the store, I do believe we need to listen to our customers and do what we can to support their business today without hurting our business in the future.
5. Opportunities – I know everyone is getting into a duck and cover mode; however, I am in the mode of searching for opportunities.  I am focused on keeping our balance sheet strong so we can continue to search out new acquisitions.  We are pushing forward our efforts to seek out new business opportunities in areas of interest.  I would rather have control of my money than leave it to the will of the global equity markets!

What we are doing may not work for your business in this uncertain climate.  The most important thing you can do is to take the time to determine how you will weather the storm!

The U.S. Federal Reserve joined other central banks around the world in an effort to limit the negative impacts of a global slowdown.  The Feds announced a 1/2 point rate cut to both the fed funds rate and the discount rate.  This is an unprecedented global effort to keep the wheels on our economic wagon, as credit markets continue to move at a very slow drip.  The cost of borrowing continued to soar as the Libor rate jumped to 5.38 percent overnight.

It seems to me that we are now entering uncharted waters.  The slowdown in the credit markets is causing many small and large businesses to temporarily pull back, hopefully this will start to ease as the actions being taken by governments around the world takes effect.  It is important to take the long view with your business at times like this.  Keep a watchful eye on expenses and cash, and be open to potential opportunities that may pop-up along the way.  

The U.S. economy lost 159,000 jobs in September, this is the ninth month in a row that the economy has shaved jobs.  The unemployment rate held steady at 6.1 percent.  During 2008 our economy has shed almost three-quarters of a million jobs, this is the weakest job market since 2001.  All of the data is now pointing to a third quarter with GDP growth going negative, probably in the -.5 percent to -1 percent range.  The big elephant in the room is now the credit crisis, and how the U.S. House votes today on the $700 billion bailout package.  If banks continue to turn a cold shoulder to businesses in regards to new credit requirements, then the weakness we are seeing in today’s job market will seem paltry in comparison to coming months.

In the past few days I have begun to hear more and more stories about small business owners having their credit lines held, converted to longer term debt, or pulled.  The news is full of information about how the credit freeze is impacting both larger business, and smaller business.  The economic data continues to point to a climate in the U.S. that is becoming increasingly difficult.  Whether it is the slowing pace of manufacturing, the increasing pace of unemployment, or consumers who are concerned about the future there is certainly some unease in the air.

It would now appear that the downturn in housing, and the sub-prime problem has come full circle, from Main Street to Wall Street to Main Street.  The problem we have now is the domino effect.  Tighter credit markets force businesses and consumers to pull in the reigns due to lack of capital and discretionary funds.  As credit tightens, it doesn’t just impact those considered high credit risk, it impacts people and businesses with solid credit histories as well.  Higher lending rates force business owners to reconsider capital projects due to higher loan payments.  As the reigns get pulled back demand across the board falls, and things continue to domino until we reach the bottom of the cycle.

When we will reach the bottom no one really knows.  Business owners and investors are bracing themselves for an extended downturn.  The question to ask is what opportunities will present themselves during this downturn, and how can you take advantage of them? 

U.S. workers filing for unemployment benefits hit their highest level since September 2001.  The 517,000 new claims for the week were well above econmist forecast, and are another indicator of our challenging economic environment.  Analyst are projecting that tomorrow’s release of September jobs data will show a job loss of at least 100,000 jobs for last month.