What will cause the next recession? In 2014 I wrote The Next Recession: Cause and Timing and said, “The Federal Reserve’s unwinding of its stimulus is the most likely cause of the next recession. For a while Europe was the most troubling threat. Although risk still comes to use from Europe and the Middle East, the Fed is now the greatest concern.” I continue to believe that European financial instability is a risk, along with and China’s economic deceleration. At this point, November 2016, though, the greatest risk to the U.S. economy is that businesses hold off spending and hiring until the Trump administration’s policies are clear. (That is not the same as saying that Trump’s policies are bad, just that companies may delay decisions until future policies are more certain.)
How likely is a recession? In October 2016 I wrote Recession Likely in the Next Four Years using “likely” as more than 50-50 odds, but not certain. I continue to believe that. I think the probability of a recession beginning in the next 12 months is about 20 percent, but that’s a judgment call.
Are we already in a recession? I wrote Are We Already In A Recession? (2012 Edition) because I was reading people argue that way. Because of time lags in publication of data, it’s possible for the economy to be in recession before the data show it. And there’s always somebody saying that we are already in a recession. In January 2016 I wrote another such article Are We In Recession Now? quoting a couple of analysts who thought the worst. And since that article was written, we’ve learned 2015 4th quarter had positive growth, as did the first three quarters of 2016. So no, we weren’t in recession already.
How to prepare for recession? Back in 2008 I was quoted by The Florida Times-Union: “For Conerly, preparation should include evaluating how vulnerable your business or family is to a recession, understanding where you are in your own economic cycle and figuring out what you'll do if things get worse.” And then, of course, I wrote a book on this theme, The Flexible Stance: Thriving in a Boom/Bust Economy.
Update: I just answered the question What Is A Recession on my Forbes.com blog.
Is there a small competitor about to clean your business’s clock? Will your sales be Amazoned, iPhoned or Ubered? Is there a Leicester in your league?
The Leicester City Football Club just won the Barclay’s English Premier League, the world’s top soccer league. Over the years they have bounced back and forth between the Premier League and minor leagues. (In England the worst teams are relegated to a lower level and the best teams are promoted to a higher league.) Leicester have been playing since 1884 and this is their first championship. (The English refer to the team in the plural, so they write “Leicester have ….”)
At the beginning of the season, bettors and pundits predicted victory by one of the perennial favorites: Arsenal, Chelsea, Manchester City or Manchester United. Leicester City was doomed to another relegation to the minor leagues according to the experts. Under the category “surprises,” Barney Ronay of The Guardian wrote, “The Premier League doesn’t do surprises.” He predicted Leicester would “probably” by relegated.
And now Leicester is on top. Surprise.
This reminds me of the building supplies dealer who told me that contractors would never buy from Home Depot. Of the fight for cellphone dominance between Nokia and Blackberry.
You can’t run your business worrying about every start-up in every garage, but you can wonder what would drive your customers to an alternative supplier. Try to ignore current structure of the market and ask what the customers or end-users really want to accomplish. Are there other ways to achieve those goals or aspirations? Is there an off-the-wall approach that just might work?
Upstart competitors have an easier time than ever today. Capital needs for startups are lower. New technology allows companies to test the market with small production runs, and globalization enables foreign competitors to more easily enter you market. (These forces are explained in more detail in The Flexible Stance.)
The possibility of new competition should be considered in developing strategic plans. Key risk areas can be identified and contingency plans developed. The failure to do so is most often due to executive hubris: the belief that management knows what will happen in the future.
The key lesson from Leicester City and successful business startups is humility. The top experts on English soccer mostly put Leicester in the bottom three places in the league, with optimists predicting a 15th place finish. The fans of Leicester City are today celebrating total victory, and the rest of us should be looking over our shoulders at what other forecasts could go wrong.
We're still months away from the election, but my favorite political forecaster, Larry Sabato, has drilled down to important realities in The Electoral College: The Only Thing That Matters. He notes that it's too early to call the contest, but he finds Hillary Clinton to have a strong lead over either Donald Trump or Ted Cruz.
As I noted in my Forbes.com article, How Bad Will The New President Be For The Economy, a President Clinton would have difficulty implementing her program if at least one house of Congress is held by Republicans. If Clinton has coattails long enough to pull both houses to the Democrats, then it's time to re-think our economic and investment forecasts. But I'm not there yet.
Steve Levitt, author of Freakonomics, gave a presentation on big data in corporations. It should be watched by all CEOs and wanna-be CEOs. It's discouraging in that it shows many companies' unwillingness to use the data they have, but it's encouraging. You don't need to be perfect to beat your competition, just have a willingness to make decisions with data, and spend a little in resources to make it happen. It's also a fun presentation with lots of chuckles.
We've heard it (and I've said it) thousands of times: correlation does not mean causation.
Yet we still make the mistake (and I do mean "we").
Tyler Vigen has developed a correlation machine. He has scraped lots and lots of data series, then gone searching for correlation. Take a look at the Spurious Correlations website, and watch Tyler's video down at the bottom. (Hat tip: Greg Mankiw)
The Bureau of Labor Statistics just announced an increase in the number of job openings. Coming on the heels of last week's announcement that total employment had regained the level held before the recession, this is good news.
The Federal Reserve's latest survey of senior loan officers has some cheery news. I like to look at the percentage of banks tightening credit standards, versus easing credit standards. Keep in mind that banks are very hesitant to admit that they are easing. Any figure below 0 on the chart is good news for borrowers.
The survey also said that spreads (the difference between the interest rate charged to borrowers and the bank's own cost of funds) continues to narrow.
All businesses should have regular conversations with their bankers. Even you don't have bank credit, get to know a banker. It's vital to know if you could be bankable, and what your financial statements would have to look like.
Free Monthly Newsletter The Businomics(TM) Newsletter keeps you up to date in a simple graphical format. We'll email you two or three pages of charts once a month, with Bill's comments. Skim the newsletter for two minutes and you're up to date. View a sample and then sign up.