We have all been gripped by the dreadful downturn for so long now that the “experts,” the economists and the media commentators have now stopped predicting the recovery. They now seem to be spending their time speculating on the SHAPE of the recovery that will occur at some time in the future. It all looks very complicated at first glance, probably because of the terminology or language that has been developed by the “experts” to describe the situation. Whether this has come about to confuse ordinary people like you and me, or whether it is a simple metaphorical means of explanation I will leave you to decide.
The speculation centers on whether or not we will see a V shape, U shape, W shape or L shape recovery. So, let’s start by offering a simple explanation to those four designations. First of all, to do this we have to imagine we are looking at the line on a graph which is demonstrating any of the important economic indicators. The stock market would be a good example.
The V shape recovery is the easiest to explain, the line on the graph falls sharply to a point at the bottom of the downturn and then recovers quickly to the point prior to the drop, hence the line on the graph looks like the shape of a V. We know that this is not a possible recovery shape because we have been down at the bottom for a good while now and haven’t bounced back up.
The W shape is similar in some respects; the sharp fall is followed by a “blip” upwards before it falls back again prior to the line going back up for the real upturn. Hence, the shape of the W. This one’s sometimes referred to as the double dip recession. It’s not going to happen! It’s not going to happen because we didn’t get that blip upwards!
So, that leaves us with the U shape and the L shape and out of the two we need to hope and the decision makers need to ensure that we achieve the U rather than the L. The U is when the line on the graph falls similar to the first part of the V, hits the bottom and then bumps along at that level for one to two years before bouncing back up again. That period when the line is horizontal along the bottom is what turns the V shape into a U shape. Inevitably, this scenario causes a good deal of hardship until the upturn arrives, but it is manageable.
The worst scenario of all is the L shape. This is when the economy drops as we have seen, but when it hits the bottom it simply flat lines for a protracted period of time, perhaps even a decade. In modern economic times this has been seen only very rarely. It happened in the U.S. post 1945 when the manufacture of tanks, guns, etc. suddenly came to an end, but more recently we have seen it in Japan in the 90’s. The “experts” are currently fairly evenly split between the U and the L and as a consequence, I would certainly like to have more confidence that the governments of the European countries and that of the U.S. were as one in the way that this crisis should be treated.
The same economic problems exist on both sides of the Atlantic. Unemployment, depressed housing market, credit problems, etc., etc. The reaction to this, however, appears to be totally opposite, with European governments advocating frugality through cost reduction and cuts in public spending, whereas the U.S. policy seems to be to spend, spend, spend and bring the economy back through investment.
Now I’m not qualified to comment on the correct strategy or course of action to take in order to strengthen the economy and, “move it on up,” but I am confused and extremely concerned that two diametrically opposite approaches to the same problem could cause the biggest economic catastrophe ITHOE.
I hope I’m wrong and I’m missing a big piece of this puzzle. Could somebody please enlighten me?
I am no expert on the matter either. However, if you are seeking comments then, I believe that it will take several more years to get through this.
There is some cause for optimism
1. It would seem that most employer roles have stabilized. We don’t see the shedding of jobs at the same rate we did for a couple of years.
2. Interest rates are low and will continue to be low for some time.
3. There is a tremendous amount of cash sitting on the sidelines, waiting. It won’t sit forever; people will put their money to work.
4. Home prices / affordability is the best it has been in a long time and it will stay that way for a few years.
5. Population growth is steady (all though immigration will taper)
The bad:
1. Deficit spending and the national debt.
2. Expiration of the tax cuts
3. Tighter credit
4. The sheer size of the unemployed labor force
#4 I believe is the biggest contributor to the negative psychology of the consumer and is causing them to hold back. Either they are unemployed, or afraid they will be unemployed. Their wealth was wiped out in the housing crash and they are financially upside down. People are busy surviving and rebuilding I don’t think we will ever see 4-5% unemployment again. The new norm could be 6-7%.
I hate to bring politics into the discussion but it plays a role in this discussion. The current policies and sheer number of them represent sweeping change in our culture which creates uncertainty about the future. It is not just the economy that is uncertain it’s our culture.
Back to your comment; “U” or “L”, if we let the free market system alone, I think it rights itself and we get a “U”. If we keep making these sweeping changes and raise taxes we get an “L”. We are at a crossroads.
Some great comments Charlie but the comments I was hoping for centered around the final question. You are concerned and confused as well huh?
I don’t want to come across as too negative however; I believe there is an economic scenario that you did not mention in your last blog. I will call it the “Double L”. The economy takes a serious drop and levels out for some period of time. It then takes another serious drop and then levels out for a protracted period of time. Based on what has happened in housing over the last two years and what is expected over the next 18 months in housing and commercial real estate, I say hang onto your hat!
I HOPE THAT I AM WRONG!!!
I am more concerned than ever. Confused as to which path to take – your right I did not make it clear above. I think the Europeans have it right this time. It is time for frugality in government spending. It is frugality now, or end up like Greece as part of the European Sovereign Debt Crisis. We (the US) have proven over and over again that government doesn’t manage anything very well especially the markets (which are less and less free). Frugality in government will give citizens the sense that the governemnt is not grabbing at straws, turning knobs and pulling levers out of desperation. Cutting cost (like we as a company have had to do)makes sense to most people. Most people in this country have had to follow that same plan cut costs. Look at the result, record high debt reduction and savings rates at a personal level. The government is a fertile ground cost cutting and would give confidence that our national debt will get under control. I don’t believe you can spend or borrow your way out of this. Hope this helps clarify.
CASH
In times of financial hardship (and any other time for that matter!) when dealing with the operation of a business unit we all know it is essential to cover these basic bases;
1. Strengthen the balance sheet (more equity & cash; less debt)
2. Focus on reducing inefficiencies (i.e. minimising unit costs)
3. Maximised cash flow by dramatically cutting back on capital spending
4. Action to reduce labour costs – but not just redundancies.
For years I have worked for large organisations; London Brick Company, Butterley Brick, Hanson and now Heidelberg Cement – Building Products UK.
Until recently I have been focused on the above and more but with the exception of CASH.
For years I have been concentrating on the recovery, the ‘bottom line’ of the P&L whilst letting the large organisation that I was a part of worry about cash. I did not have the worries of a small organisation concerned with whether or not they had enough cash to pay their employees at the end of the week.
The site level management culture did not take in to consideration things like the cash cost of stock, the cash cost of repairs inventory or the cash impact of customers and suppliers activity.
This, I am pleased to say, has now changed.
As to which policy is the right one? It seems to me that the UK is currently trying to do what any sensible business wanting to survive this recession is doing (points 1 to 4 above). I consider this to be the right approach, but it is early days with our new government.
Just to throw the cat amongst the pigeons!
The first banknotes were issued in England in 1694.
The first banknotes were issued in America in 1690 (by the British King to pay the army to fight the French in Canada).
Since 1900 the UK has seen 6 recessions or depressions in it’s economy.
In the same time the US has experienced 22.
We must be doing something right!