If you have seen me speak recently, you can re-live some of those great moments. Or if you have not, you can whet your appetite. If you are organizing a meeting, give me a call about how I can share my expertise (and humor) with your group.
I was invited to testify before a joint session of Oregon's Senate
Finance and Revenue Committee and the House Revenue Committee to discuss
how private sector businesses are dealing with economic uncertainty. I
began with one of my favorite slides, which shows how cyclical the
economy is. When the line is high, then business cycles are coming close
together with high peaks and low valleys. When the line is low, as it
was from 1983 through 2007, the economy is fairly stable, with few
That period was the most stable in all economic history, even going back to the beginning of economic data in the early 1800s. It was also the period in which today's leaders of government, business and non-profits learned how to be leaders. During this era they learned which issues to worry about and which to ignore. This may be why Oregon's elected leaders have consistently budgeted all available revenue, with only minuscule cushion, and why they have a rainy day fund that is inadequate even for a light drizzle.
Private sector businesses are working in several directions to deal with economic uncertainty:
information time lags between when sales representatives hear from customers and when senior executives learn of what's happening. This presumes, of course, that senior executives will act when they hear the news. In Oregon's 2001 recession, leadership failed to act for five months after bad news arrived.
more working capital, less leverage. The state clearly should plan on spending less than anticipated revenue, because revenue is so hard to forecast.
contractors, fewer permanent employees. This one's pretty obvious, but not welcomed by state government.
modular and flexible (with respect to product variations and different batch sizes).
In questions, I was reminded that most state spending is on services rather than capital projects, and the public expects steady provision of these services. The challenge, I explained, is that we have voted for a tax system that produces unstable revenue, though the public seems to want stable services. Managing that mismatch is the legislature's job, which it can do through appropriating less of expected revenue.
Once again let me rant about The Wall Street Journal's headline:
New Home Sales Dropped: Sales of newly built homes in the U.S. fell in June to the lowest level in five months, showing that the recovery of the housing market remains uneven.
Now let's look at the actual data:
The journal got it right. The very last data point (June 2012) is down from May. It is the lowest in the last five months. When you read "lowest level in five months" you know it's higher than six months ago, right? Otherwise they would have said "lowest level in six months."
The big picture is that the housing recovery was never very strong. My chart with data since 2007 shows that clearly. It also shows a tendency for the data to jump around a little bit. The latest data might very well be noise, plain and simple. Sure, it could also be the start of a new trend, but it's way too soon to tell.
I'm a headline skimmer myself, but this story emphasizes the need for us to remind ourselves: the headline writers are trying to promote a story. The more boring the story, the more the headline writer stretches. When I get angry about a misleading newspaper story, most likely I'm ticked off about the headline, not the substance. Be careful out there.
More than 75 years since the system was created, unemployment insurance is still a contentious issue. Whether the problem is a lack of available work or the resistance of the unemployed to seek new work, the unemployment system itself seems to be failing to do its job. However, we could speed the re-employment of the unemployed by using staffing agencies to match people with available positions.
I have released the June edition of my monthly Businomics(R) Newsletter. The economic forecast being revised downward is the biggest news (though it may not sound too much like news to some). On that link is way to subscribe to receive the newsletter for free every month by email.
A construction rebound is coming, but it will be a soft rebound, leading to a mild recovery in wood products demand. Although somewhat better times are coming, businesses need to be prepared for the challenges that improved sales bring—it’s not all beer and skittles.
The rebound has to come because our recent level of construction has been unsustainably low. Our population is growing, albeit not as fast as when we attracted lots of foreign immigrants. The increased population triggers a demand for homes, stores, offices and other places to work.
Don’t get too excited about the rebound, because we are not returning to the go-go days of 2005 when we built two million new housing units. However, we need a lot more than the 612,000 we built last year. Further softening the rebound is the steady decline in average square footage of new housing since 2007, down about five percent for single family houses and ten percent for multi-family.
Attitudes have also changed. People now think of a house as . . . a place to live! Young couples are not speeding to home ownership as fast as they can, preferring to rent for a while.
All things considered, construction and wood products demand will improve over the next two years, but not at a break-neck pace. Even the soft rebound, though, will present challenges to the wood products industry.
Sales: are your sales people ready to book more business? You may think so, but don’t be so sure. In slow times, sales representatives get discouraged and too often become order takers. When the rebound starts, the new business goes to young people too inexperienced to know that times are bad.
Staffing: if you’ll need more people when business improves, do you know where you’ll find them? Too many managers are embarrassed to stay in touch with people they laid off, yet those may be the best potential hires in the recovery. Suppose that a manager calls a previous employee and says, “We are not re-hiring quite yet, but we’d like to know if you’re available when we do.” That former worker is going to feel great, appreciated, respected. Even if he or she has found a new job and won’t return, the phone call is a very positive event. More importantly, you can determine ahead of time how much of a challenge you’ll have if you need to staff up.
Vendor Performance: You rely on other companies for materials, which could range from logs to maintenance, repair and operations supplies. Are your vendors ready to deliver? A little work assessing their ability to supply you can help avoid major headaches down the road.
Cash Flow: Orders come in, which is good news. Suppliers may need to be paid in 30 days, and employees definitely must be paid promptly. Are your customers going to wait 60 or 90 days to pay? If so, you’ll be making money on an accrual basis but hemorrhaging cash. Do some cash flow projections now under a moderate growth scenario to see if you’ll need more financing.
This is a great time to do economic contingency planning for stronger sales. Make sure you’re ready, even if the rebound will be soft.
Is the Facebook IPO a flop? Not on your life. It’s a sign that Silicon Valley has gotten as smart about finance as it has been about technology. I like it.
The smackdown of Facebook comes from the lack of a price pop on the first day of trading, compounded by declines in the company’s stock price in succeeding days. This is not a flop from Facebook’s perspective, it’s a success.
(A separate issue is NASDAQ order execution, which I’m not discussing here.)
What’s bad is not Facebook’s initial public offering, but the old Initial Public Offering model: the stock is sold at some price, let’s say $20. On the first day it jumps to, say, $35. Further upward movement follows on succeeding days, leaving the stock price at $40 a week after the IPO. What’s bad is that the company sold stock for $20 that it could have sold for $40, or at least $35. It’s a violation of fiduciary duty for the officers and directors to knowingly participate in such a scheme, though usually everyone is so happy to have the IPO completed, and to be so rich, that they don’t really care too much.
A company is not helped by the “pop” on the first day of trading, but others are greatly benefited. Those investors who got in at $20 and could get out the next day at $35 were obviously better off. How do you get to be such an investor? You do business with the investment house that underwrote the deal. The sad part of the story is that the corporation going public pays the underwriter a fee that’s usually seven percent of the proceeds for small issues and averages 3 ½ percent for large issues. Imagine paying a fee for the underwriter to favor its investment clients over the company going public. (The Facebook underwriting fee was reported to be 1.1 percent of the money raised.)
Here’s what good about the Facebook deal: the company worked for its own best interest and was not intimidated into favoring the investment banks. It negotiated a low fee and pushed for as high a price as the market would bear. Was it a flop? Not for Facebook. This is one deal to like.
I've described my international economic forecast over on my Forbes site, comparing my views to the recent International Monetary Fund World Economic Outlook, April 2012. For a quick preview, consider the risks to the global economic outlook:
The height of the line shows the probability. "Muddle through" is the most likely scenario. Moving left, there's the risk of a war with Iran, and then an even greater risk that Europe flames out in a financial crisis. More details at Forbes.com.
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