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Our GDP contracted very severely this recession. To understand the severity of this contraction the Federal Reserve of St. Louis data shows that the Annual Percentage Change in GDP has not been negative this last 50 years, until 2009, but the Quarter to Quarter Percentage Change in GDP has 4 times.


Economic Outlook
There is some good news though. It is not all bad. Figure 1 shows that the updated moving average of Home Price Growth will likely turn positive 4Q 2009, which is about 1Q earlier than my original forecast 2 months ago. That is Home Prices will bottom in 4Q 2009. Lets hope.


Figure 1: Home Price (Composite-10 CSXR) Growth & Total Non-Revolving Credit Outstanding

However, the Total Non Revolving Credit is still contracting, but the lag to Home Prices appears to be around 2-years, or we can expect Total Non Revolving Credit to bottom in 4Q 2011. This is much better news than my preivous forecast. But we are not out of the woods yet.


What to do?
The necessity for caution is reinforced by the lack of near term job recovery & non-revolving credit in my forecast. Here are several suggestions on how to reduce business risk:

1. Manage your cashflow: Cash flow is what pays the bills, not profits, so watch your cash flow.

2. Be careful: Cost cutting is temporary and will unravel the moment you stop wacthing and it can affect what little revenue you are generating.

3. Manage labor wisely: Reduce your man hours but not your manpower. Seek voluntary temporary pay cuts with the biggest cuts at the top and reducing amounts to the lower ranks. This will allow you to bounce back quickly when your sub-segment of the economy turns around because the human asset of your company is still intact. Remember it takes 3 years to bring a fresh graduate engineer up to par. Therefore though it looks cheaper, it will take that much longer to recoup any costs or savings.

4. Reduce dependence on debt: Non Revolving Credit Outstanding shows that banks will continue to have difficulty lending for at least until 4Q 2010 and more likely until 4Q 2011. Pay down your debt as much as you can because it reduces your costs and it gives banks more breathing room to lend to someone else and thereby hastening the turnaround of the Non Revolving Credit Outstanding and the unemployment situation.

5. Watch your A/R: A/R is how your customers borrow while you pay the interest on their credit. A/R is also reflective of your downstream customers, so take care. I have seen companies go under because they did not manage their A/R until it was too late.

6. The Goldman Sachs mini case study shows that we can change the how and why we do things to be more successful, and that we don’t have to wait for eveyone else before we make internal improvements. If we wait we still incur the cost but have lost the competitive advantage.

 7. Slope of the Pay Cuts: Biggest proportion at the top and smallest proportion at the bottom. Why? First, that is how risk-returns (or risk-reward) works there are no two ways about this. Second, large pay cuts at the top of the company have a bigger impact on saving the company but small impact on consumer spending. Pay cuts at the bottom of the company add up to real slow down in consumer spending, save the compnay in the short term but generally leads to negative future effects. There was a study done some time in the 70’s or 80’s (I forget the name and year) that showed that companies that retrench/layoff labor on a regular basis generally don’t last very long.  

Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

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