I ran across this article in USA Today’s Small Business Section, which gives business owners some ideas of what to expect from the economy in the coming year.  The bottom line, be prepared to weather a difficult first half in 2009.  Most forecasters are expecting the first half of 2009 to be the culmination of the longest U.S. recession since The Great Depression.

In our view, an uptick in the U.S. economy in the second half of 2009 is probably not far off the mark. By July we will likely start to feel the effects of any stimulus package the new administration implements early in the year. Although, the job picture may not see any improvement until late in 2009, the housing market should be pretty close to bottoming out early in the year. It is very likely to be a year of mixed signals as the economy begins to regain its footing.

Hopefully by this time next year we will be speaking of the downturn in the historical context, although beware of the bears! The same people who were the last to buy into the idea that the U.S. economy was slowing, will likely be the last people to jump on the growth bandwagon! I believe we will look back on this time as a major inflection point in the U.S. economy, and I believe those who have found themselves in position to capitalize on attractive asset prices, are going to be the winners of this economic crisis.  

Sorry about the lack of post over the past couple of weeks, we are in the midst of a major project that needs some additional “tweaking.” Regardless, everyone here at Rough Air Associates, and Hooper Concepts wishes you a very Merry Christmas, and a Happy New Year!

I received a phone call from a former colleague yesterday, he let me know the company he works for had to let go of some people due to the tough economic environment.  The company has suffered a pretty significant drop in sales in the last year, in the neighborhood of 12%, and had to take the steps to keep their cost down.  This was their second reduction in force of the year.

In the thirty years I have been working I have been fired from one job. I was fired two days before getting married. Although I can’t say whether the manager who let me go was right or wrong, I can say it takes a real special kind of “jerk” to let someone go two days before one of the most important days of their life. This guy could have waited one week until I got back from my honeymoon, but he decided my negative impact on the organization was so severe that he needed to act immediately.

So when my friend called me yesterday to let me know that his company had let go of several people two weeks before Christmas, that thought of poor human judgement crept back into my head. I do not begrudge any employer who has to let an employee go, whether it is because of performance, or due to the economic realities of the business, I understand employers have to make tough decisions. The ones who put those decisions off usually don’t survive. I also understand the difference between right and wrong, and in most circumstances letting people go two weeks before Christmas is simply wrong.

Had this employer waited two more weeks, until after the holidays, they would have spent roughly an additional $10,000 to cover the two weeks of payroll, benefits, and taxes. The company in question is a multi-billion dollar, global organization with sales in excess of $20 billion. I feel confident saying that waiting two weeks would not have put the company under. They just needed to look like they were doing something before the end of the quarter to make the markets and the analyst happy!

The irony is that this is a company that was recently recognized by the government where they are located as being an “ethical employer committed to creating sustainable employment opportunities.” If this is ethical, I would sure hate to see what unethical looks like!

It never surprises me how difficult it is to implement change in any business, no matter how large or how small. The owners of a business may look at an opportunity, and see a huge potential benefit for their company. It never matters how hard you sell it, the employees always seem to be a bit cautious when it comes to any major new initiative. Perhaps that is because too many times big projects fall flat due to a lack of commitment or focus. The more likely reason is because people are always concerned about how change will affect them, and their job!

Although you will see this wariness in any major initiative, it is extremely prevalent for people working in a business that gets sold. When a company gets acquired by another, the first thing that goes through every employee’s mind is, “Will I keep my job?” This is a natural reaction, since every time two large companies get together, the CEO wants to capitalize on all of the cost synergies, which usually means job cuts!

I have witnessed this common concern from both sides of the transaction table, as a seller, and a buyer. Only time can alleviate the fears of employees when a transaction takes place. New owners can talk until they are blue in the face about how they don’t want to destroy the value of the business they just acquired. The majority of the time that value is the employees working in the business, but at the end of the day, the proof will be in the pudding! You should expect a slow transition process, and a slow acceptance process when you buy a new business. You will have to earn the trust of your new employees, that trust is earned through action not words. Buyers should be prepared for this challenge when they take the helm of their new company!

The retail sales data for November was released yesterday, and with another overall drop the media narrative has become one that the economy has gone to hell, and we are all going to be standing in bread lines by Christmas! As I mentioned last month when retail sales were reported, you need to dig deep into the data to truly understand what is going on before drawing any dire economic conclusions.

Retail sales for November were down 1.8%, this was within projections, but still signaled a drop in consumer spending. Much of the mainstream media is playing this drop as a sign of just how dire our economic circumstances seem to be. The data tells a different story. The two biggest areas of decline were automobiles (2.8%) and gasoline (14.7%). These two items make up more than 30% of the total figure.

Gasoline prices have fallen dramatically over the last several months as global demand has declined, much of the drop in sales of gasoline is just a reflection of major price deflation in the price of a barrel of oil. A strengthening dollar also has some impact on this. As credit markets tightened over the last several months it is only natural that auto sales would drop. Combine that with extremely high gas prices over the summer, and consumers were put in the position of not being able to afford to buy or operate those big trucks and SUVs that are the hallmark of the American automobile industry.

There is even some positive news in the retail data. In an economy where every consumer in the country has supposedly snapped their wallet shut, electronics, furniture, food and beverages, sporting goods, clothing, and restaurants all had gains for the first time in the last several months. The gloom and doom narrative is now being driven by the same media and analyst, who 12 to 18 months ago were telling us global growth would keep the U.S. out of recession, and the decline in housing would not ripple to other sectors of the economy. They were behind the curve then, and they are behind the curve now!

It strikes me that when everyone gets on the same page, then that page is just about to turn! That is how economic bubbles are created, people see others making lots of money in a particular sector and everyone jumps in to make a quick buck. Once everyone is in the pool, and the water is being shared by a larger group it gets quite crowded. That is when people get out, the price of entry falls, and the last ones in tend to lose big!

I don’t doubt that we are in a recession, and I don’t doubt that many people are being hit hard by the downturn in the economy. I think unemployment is likely to go up in 2009, and the economy is going to continue to meander through some very rough air. With all of that said, I believe we are closer to the bottom than the top. Things may get worse, but I don’t believe it will be to the same magnitude as they have fallen already! Just the idea that we have reached a point where everyone seems to agree is a pretty good indicator that something is about to change!

I woke this morning to the news that the U.S. Senate failed to pass an automotive loan package last night, paving the way for GM and Chrysler to declare bankruptcy sometime in the near future.  As I was driving to work this morning I heard Mitch McConnell, a Senator from Kentucky, declare that the problems within the automotive industry were not Congress’ fault, and therefore they should be left to die.  Stock markets around the world are taking a nosedive on the news, with U.S. futures pointing to a big drop when markets open later this morning.  When are some of our political leaders going to realize that they have already driven this bus into the ditch, they can either leave the bus there, or they can step up to the plate and do something to help.

The big issue here was not whether these companies needed the money, or whether their downfall would hurt the economy, it was the lack of a big wage concession from the UAW.  My memory is not that great anymore, but as I recall, the guys that are refusing to support this agreement because blue collar manufacturing workers don’t want to take a wage cut, are the same guys who are against caps on CEO pay.  Can they be anymore out of touch? The last time I looked it takes a lot more strong backs, dirty hands, and hard hats to build a car than executives. When is Washington going to start focusing on a bailout for the middle class, and small business?

I have no doubt that many of the problems in the U.S. automotive industry are self-inflicted. For years Ford, GM, and Chrysler have focused their energies on bigger, faster, and less efficient. They allowed their labor cost to get out of control by giving up too much, and asking too little. They fell behind in the war on quality and service, and now they are paying the price. Under normal circumstances any business, large or small, that makes these mistakes is going to lose, it will fall to the competition. These are not normal circumstances!

I live in a town that has been decimated by the decline in the U.S. automotive industry. At one time we had nine Delco plants in Dayton, along with a plant building small SUVs, and diesel engines. The Delco plants are all but gone, 4,000 jobs that have moved to Mexico or China. The Duramax diesel plant keeps cutting its work force as fuel prices go up, and the small SUV plant, one of the few IUE plants within GM, will close in 2009. The small machine shops that supported these plants have been dying off, the distributors that sell them equipment are scrambling for new customers, and communities that benefited from the tax base are facing a severe financial crunch.

If the senators who are so opposed to bailing out the Big Three, based on their capitalist principals, want to see first hand what the impact of their decision will be, I suggest they climb on their private jet, and take the short hop from D.C. to Dayton. They will get a first hand look , at what their actions (or inactions) are doing to the industrial heartland. They can get a bird’s eye view of what happens to a community when one of its pillars falls. They don’t need a crystal ball to see what the impact of their indecision will be, they can come and tour the empty buildings where America once flexed its industrial muscle.

In the past 15 years these guys have given us NAFTA, MFN status for China, and $700 billion for Wall Street. They killed the manufacturing sector of the United States, which they are now disowning, and refusing to pay for the funeral!

This past week I sat in a meeting organized by a group within the local chamber of commerce. This is a small group of business owners that I have met with monthly for the last ten years, our presenter last Friday was a financial analyst from Cincinnati. He painted a pretty bleak picture of the economy, so much so that after listening you almost felt like tossing a chair through the window and jumping out!

The next evening I was at a black tie function having a discussion with another business owner. We were discussing the economy and she told me that she had sat through several banker’s forecast presentations in the last few weeks, and none of them were rosy. We chuckled about the fact that even these economic bulls were not trying to paint a better than actual picture of the economy. The dominate view is that the economy stinks, and it will for several months going forward.

This morning I picked up The New York Times, and ran across this article, about how bad our current economy is, and that it is likely to last awhile. The article pointed out that the current downturn is already longer than the last two, and will continue well into 2009. No one seems to have much positive to say about the current economic environment, it is what it is, a tough economy.

At this point I have stopped paying attention. I am not in denial, I know we are in a recession, and I have no idea when it will end. Along with the volatility in the markets this is today’s big story, and for the most part I have tried to stop reading about it.
I know and understand the conditions we face, I also know other than understanding the current environment, there is not much I can do about the macro economy. As long as I understand the environment, I can position my business to move forward despite the tough conditions. I will follow my strategy and manage my business for the long term.

During 2009 we will focus on our broader strategies, and we will continue to push execution of the basics. We will watch our cost, manage our cash, and fight for new customers. We believe that whether the economy is up or down, at the end of the day it is all up to us. Who knows, 2009 could just be our best year yet!

The economy shed 533,000 jobs in November as unemployment rose to 6.7 percent.  Numbers for September and October were revised downward, with September now showing a drop of 403,000, and October a decline of 320,000.  The U.S. economy has shed 1.85 million jobs this year. Although manufacturing and construction have been hit hard, the financial sector is getting its share of the pain at this point as well. The data also indicates that even though unemployment continues to rise, wages are continuing to rise as well.

I sat through an analyst presentation this morning. The presenter outlined a pretty grim picture for the economy over the next two quarters. His firm’s belief is that the fourth quarter of this year, and the first quarter of 2009 will likely be the low points for the current contraction with slight improvement coming later next year. I think that is a pretty accurate assessment of where we are headed. The next few months may be challenging, but everything is finite, and this downturn is not an exception!

There has certainly not been a lack of major business crisis for people to absorb lately.  Unemployment is rising, as demand for manufactured goods falls.  The housing market has tanked, and many business owners find themselves scrambling to raise capital for their going concern.  The analysts and experts are now convinced we are in the middle of a recession.  With all of these challenges piling one on top of the other we have gotten a first hand look at how our corporate and civic leaders deal with a major problem.

I was considering all of this on my morning walk, and I began to think about the different ways people have attacked these issues.  I began to think about some of the common mistakes I believe leaders make when confronted with a major crisis.  Here are my top three:

1. Denial – Over that last year how many times have we heard someone tell us there was nothing wrong with our economy.  Despite all the data, and overwhelming evidence to the contrary, we had many who insisted the main issue with the economy was a media machine over-hyping the story.  Too many leaders when confronted with a crisis refuse to recognize it.  I think they do this because acknowledging the problem means they have to create a solution, and it means they may be admitting a prior mistake in strategy.  It is difficult for any of us to be objective, especially if it means admitting we were wrong.
2. Inaction – How many times have you taken a problem to your boss, and the boss agrees there is a challenge, but refuses to allow you to do anything about it.  Many managers and leaders when confronted with a major challenge freeze.  They get that “deer in the headlights look,” and can’t seem to move themselves to action.  This may be because they just are not sure what to do, or it may be fear.  Either way they stand back and let a big problem get much worse.
3. Impulsiveness – Some leaders are quick to confront major issues when they arise, but take a ready, fire, aim approach.  They don’t think through the solution, and make the problem worse with their quick fix.  Taking the time to understand the impact of your resolution to the problem, before pulling the trigger, can save a business leader a lot of headaches down the road.

As we think back over the last year we can all point to examples of poor crisis management.  Our hope is that the leaders who have steered us into this crisis, are learning as they go, and can steer us back out in the near future.     

The National Bureau of Economic Research, a non-partisan group charged with pin-pointing the start date of an economic downturn, announced today that the current recession started in December 2007.  The news came as a shock to many investors as U.S. markets dropped more than 400 points by mid-afternoon.  These particular investors are the ones who have been living in a cave in some remote part of the world with no TV or internet access for the past eighteen months. Anyone who is surprised by the current state of our economy is probably not a person you want making investment decisions on your behalf!

We have been discussing the possibility of a recession in the U.S. since September of 2007. I have posted dozens of articles, and some videos, about the potential downturn, and what business owners should be doing to position their business for long term growth. Perpetuating the idea that this is a big surprise, which is causing market turmoil is irresponsible. The real story that needs to be discussed, and brought into the open, is who really benefits from chaos in the equity markets. It is not the average Joe with a 401k trying to make his way to retirement, it is the fund managers, traders, and advisors who make billions in fees when investors are provoked into executing transactions.

The benefactors of market turmoil are setting themselves up to learn a hard lesson. If they continue to drive the ups and downs in equity markets they will find that many “regular Joe’s” will pull their money and look for safer waters. More and more people are going to search for alternative investments or fixed income opportunities. As that happens the purveyors of market chaos may soon find themselves with no money to invest but what they have left of their own!