« March 2008 | Main | May 2008 »
The weak economy is causing stress for many workers. In the Businomics Audio Magazine, Dale Collie, a former Army ranger and corporate executive talks about how to deal with stress, including lessons from both his business experience and Vietnam service.
Dale's website is Courage Builders.
Our taxi driver from the Amsterdam airport longed to return to Turkey. He had lived in the Netherlands 36 years, since age 2, but would go back to Turkey in two years, when his son graduated from high school. He had nothing good to say about Holland: too expensive, to many kids hanging out in bars and coffee houses.
He had returned to Turkey to visit family, but had not lived there since he was a toddler. I couldn't help but think that he might be disappointed by Turkey. Yes, it's cheaper to live there, but a prosperous northern European city has many amenities that he may miss in a poorer country.
I think he--and the Netherlands--are missing out in something because he has not assimilated. He says he is a Turk. If you ask my wife, who moved to America from Sweden as a young girl, she'll tell you she's an American. Fully assimilated (except that on Thanksgiving she tells me that if we're having turkey, I have to do the cooking because "it's not a Skandinavian dish.")
If this is what it means to have foreign immigrants in your country, I would be skeptical about immigration. However, our record has been much more positive: most immigrants have come to think of themselves as Americans.
That's the title of a short article from Tatum Group. My first reaction to the title: it's a little late.
But the article may be very valuable because they point out that at this stage, the signs of distress may be very subtle. If your financial statements don't look too bad, it may be time to look more carefully for the first signs of trouble. Of course, it's quite possible that you really are not in bad shape. But if there's ever a time to milk all possible insights from your financials, that time is now. The article offers some warning signs:
Then the folks at Tatum offer some valuable insight: "Early corrective action denotes strong leadership." I'll say!
Tatum has provided many companies with CFO services (and they do other stuff I have not bothered to delve into). They have a strong basis for understanding financial management. Heed their advice.
Here's a little puzzle for you: why are energy prices NOT bleeding over into core inflation? Most goods on the shelf are delivered by truck, and fuel costs have skyrocketed. Yet inflation outside of food and energy isn't so bad. Yes, it's edging up, but still is below the inflation rates of 2006.
The answer is within the transportation industry. Tonnage has generally been declining since late 2006, according to the American Trucking Association. The chart shows a surprising bump up in the last two months; I'm still pondering that.
The Association of American Railroads reports a decline in rail tonnage.
Here's why inflation is not spreading due to fuel costs. At the peak of the transportation boom, truckers and rail companies boosted prices in response to soaring demand. One truck company president told me that his fuel surcharge was larger than his total fuel bill. He did not say higher than his incremental fuel bill, he said higher than his total fuel bill. So the "fuel surcharge" of two years ago was simply a way to raise prices.
Now costs are up for truckers and railroads, but freight volumes are down. The transporters are not able to boost prices, because excess capacity in a competitive industry pushes prices down. The companies are facing lower profit margins, so inflation is NOT bleeding over into the non-fuel sectors of the economy.
Business planning implications: if you ship goods, you'll be very vulnerable to a freight cost increase when the economy rebounds. At that time, look for the double whammy: higher fuel costs and rising profit margins. In the meantime, enjoy this temporary respite.
I recently posted a comment to the effect that banking markets have calmed, as evidenced by the return to normal spreads between LIBOR and the Fed Funds rate. Now the Wall Street Journal has a story (subscription required) suggesting that LIBOR may not be accurately reported these days, as banks decline to admit how high an interest rate they are paying in bank-to-bank transactions. If this is the case, then there's more nervousness than I had thought. We don't have the full story at this point (and maybe never will).
The newspapers are featuring dreadful stories about economic hardships. Keep in mind when you read the news that at ANY time it's possible to find people in hardship. To know whether you are seeing a trend of just an unfortunate anecdote, you have to look at the data. Today's data is 1) bad but expected, 2) bad but not as bad as expected, and 3) so-so. Let's start with bad but expected:
New housing construction continues to fade. Bad news, but a necessary correction in a land with significant excess supply of housing (note: if you hit that link, the first chart's Y-axis is mislabeled).
Now for the not as bad as expected:
The inflation rate outside of food and energy is not as bad as I expected. I'm very worried that we'll see inflation rising not just in food and energy, but generally across the economy. This isn't happening right now. (Reminder: we look at inflation excluding food and energy because those two categories have a lot of transitory changes. I'm not saying they are unimportant. Please don't rant on the subject.)
Finally, let's get to the so-so news:
Manufacturing production is basically unchanged in recent months. That's not good, not bad, but consider this: Any news that isn't bad these days, is good.
The economy is NOT collapsing, despite all the doom and gloom in the press. The economy is certainly not booming, and some folks are in distress, but overall things are not so bad. Yesterday about four million people in the United States went to McDonald's to eat. That wasn't news, because most days there are about four million people going to McDonald's. It's not an economic boom, but neither is it a bust.
Business planning implications: don't hunker down too much. In fact, it's time to do your economic contingency planning for an upturn in the economy.
After a huge panic late last year, bankers are again willing to lend money to one another at fairly low interest rates. "LIBOR" is the London InterBank Offered Rate. The spread over Fed Funds widened when banks got very nervous about . . . other banks. Now things aren't so bad.
Bond markets, in contrast, have gotten more and more worried about risk. Baa-rated bonds are the lowest quality that is still considered "investment grade."
Pure junk bonds are also showing very wide margins. (I have not found a source for junk yields going back before 2006; sorry).
What's this all mean for the economic outlook? The narrowing LIBOR spread means that financial institutions are much less worried about a near-term financial panic. The widening bond spreads shows there's still a lot of concern about risk. It's the old saw that "return OF principal is more important than return ON principal."
The rate at which employees are voluntarily quitting their jobs is down from its peak, but still much higher than in the aftermath of the 2001 recession.
We only have data since December 2000, but this appears to be a lagging indicator, meaning that it hits bottom well after the overall economy hits bottom. It always takes a while for folks to figure out that the economy is soft. Nonetheless, it's a good measure of employee attitudes.
I say that when an employee quits just because his boss is a jerk, he's probably just trading in one jerk of a boss for another. I've said that to my own staff. (They said they were willing to take that risk.)
Although the quit rate is not at its peak, employers should continue to focus on increasing employee retention. You might want to check out my 7 Steps to Better Employee Retention.
The Wall Street Journal published a list of starting salaries for college graduates by major (subscription required).
At the top of the list is engineering ($49,707), followed by computer programming ($46,775), mathematics ($46,405) and economics ($43,419).
What's critical here is that we're talking first job, not lifetime earnings. Now it's probably true that over a lifetime, engineers make more than philosophy majors (the major at the bottom of the list) on average. But there are plenty of philosophy majors who have done very well for themselves--just not in theie first jobs.
My experience in economics is that the highest paid starting jobs went to those with the best quantitative skills. But the best second or third jobs or positions went to those with the best communication skills and understanding of "big picture" issues. Some of those folks with majors farther down the list may look stronger ten years out.
However, one factor that could be at work is how challenging the course work is. There are harder courses and easier courses. No one with a chemical engineering degree is ever accused of taking only easy courses. The job market may be rewarding not specific skills, but proof that the student went into the very hardest courses and came out alive. That's a valuable trait even if the subject matter is not terribly important.
So employment was down again, for the third month:
Although the unemployment rate is rising, it's still below the long-run average. However, unemployment tends to be a lagging indicator; that is, it will hit bottom after the overall economy (measured by production and employment) hits bottom. So we almost certainly have worse news coming.
It's most likely that this is a recession (and I'll explain below why I have to say "likely" rather than "definitely.") Not only is the direction of change negative, but the damage is widespread. These major sectors had declines in employment last month:
So that's the bad news. Now for some--no, it's not good news, let's just call it perspective. The magnitude of the employment decline is pretty small: less than 2/10s of one percent from the peak in December through March. So don't think of massive layoffs; think of minor adjustment. (I know that to people who have lost their jobs, it feels pretty massive. Sorry, but I'm looking at an economy with 300 million people living in it.)
Some sectors have rising employment: high tech manufacturing, health care, restaurants.
The Wall Street Journal was more inane than usual. They noted the 80,000 decline in jobs and said, "Had it not been for a rise in government jobs last month, payrolls would have fallen by around 100,000." Let me add that had it not been for the drop in construction employment, payrolls would only have fallen by 29,000. Did you learn anything from this? I didn't think so.
How should business plans be adjusted now? Now that you've looked at the forest, spend more time with your trees. Look at your own sales, by segment and geography. If you sell to other businesses, watch your customers' sales closely. There's plenty of variety of there; you need to know whether you are in the happy side of the economy (and there certainly is one) or the sad side. This might be a good time to listen to my Economic Contingency Planning CD.
Final note: why is this "likely" a recession instead of definitely a recession? Next month we could (not likely, but possible) see an expansion of employment, followed by nothing but expansion for the rest of the year. If that happens, then we'll look at these three months of decline and say "blip" rather than "recession." So anyone who says that we are definitely in a recession now is making a forecast about the next few months. He is probably right, but he's making a forecast, not reading hard data.
