I am talking about the recession and recovery from it. Are we recovering yet? How much? Judging by the stubbornly high unemployment rates you might say no, not yet, or certainly not all the way. But those statistics are lagging indicators to a degree and what’s not showing up, because it’s anecdotal, is the number of companies that are hitting the red line on their tachymeters. They’re running lean and trying to maximize every economic input to their businesses, as they should.
Friends and acquaintances that I have known for many years all tell the same story. The pace of business is torrid; they’re running so fast they barely have time to catch their breath. From what I can see and given the inputs, it looks like companies need to hire people.
It’s always scary in an early or sluggish recovery to be the first one to put out a hiring sign but the reality is that it’s time. Soon, if not already, companies will start to lose business because they don’t have enough competent people pulling on the oars.
I’ve seen this first hand recently. Companies want to engage in projects because the desperately need the output but they are so short staffed that they don’t have time for a framing discussion.
This is what they call a nice problem to have but it’s still a problem and it won’t get better by watching the economic indicators. At some point the fear of doing something will diminish and be replaced by the fear of not doing enough and when that happens we should see an uptick in new jobs. Unfortunately, with the herd all doing the same thing, it will be hard to find competent qualified people to hire and then we’ll have a discussion about that problem but it won’t be a nice to have thing.
Better to start early.
It was only a matter of time before slack demand in the rest of the world backed up into China, the world’s biggest manufacturer. According to an article in the New York Times finished goods have been piling up in Chinese warehouses, car dealers’ lots and in the spaces between other things in factories.
China is in the early phase of an inventory recession, a situation that happens when production gets ahead — or in this case, way ahead — of demand. It’s a textbook case of too many goods chasing too few dollars, Euros, Pounds — you get the idea.
We see much less of this kind of downturn in the west for some good reasons. First, we have really good supply chain technologies and practices so we know early on that things will back up and manufacturers slow down production to avoid having the kind of glut that now affects the Chinese. Second, and more important, we take the signals from the market seriously and have transparency in government. We report the actual truth instead of what we think we want to see. The Chinese? Not so much, especially in the latter case.
Classically, the remedy in this situation is to curtail production, which leads to fire sale pricing. Economists call this working off the excess inventory, real people call it unemployment. The Chinese government can’t afford unemployment especially now because they are in a once in a decade leadership swap-out and because employment is the national unemployment plan.
They don’t have much of a social safety net and the government doesn’t want to throw a number of people out of work that might rival the entire population of a European country or large American state. So the finished goods pile up.
Short term, WalMart has more to sell at lower prices. But soon the reverse will have to happen. Goods will get scarce and prices might actually rise. Maybe.
The recession mania around the world is unfolding like a textbook demonstration of all possible types. Here in the west for instance, we are having — or had depending on where you live and your political persuasion — a credit based recession. That’s where there are too few dollars chasing goods and services but not leading to inflation because demand has dug a hole in the floor.
It’s not like there is no actual demand, but for some reason, banks have had to rebuild their balance sheets after the wild party they threw themselves five or so years ago and they aren’t lending. So in this case, lack of credit is stifling demand.
Whatever happened to supply side economics? You know, the idea that if you build it they will come? The Chinese have done their jobs in the supply side scheme but the rest of us seem to be letting them down.
Actually, the part of supply side no one likes to talk about goes like this: all markets clear — at a price. This means that products match up with buyers until all the product is all gone, but there’s no guarantee what the price will be for the marginal goods, i.e. those that were made in excess of reasonable demand. That’s where the firesale comes in.
Oh sure, things are beginning to get better in selected places but in most cases the economy is still pushing on a string. What to do? Too many goods in the Far East, too little credit in the rest of the buying world and suddenly, too little employment all over the place. The prevailing wisdom tells us to tighten our belts and show confidence but we’ve been doing that for many years already and the “Confidence Fairy” as Paul Krugman would say, has failed to materialize to sprinkle pixie dust on the economy.
We could always try some proven macroeconomic ideas. Nah.
The contrast of stories on today’s New York Times front page cannot be more stark.
This story discusses the unemployment situation in the Euro Zone, which can not be more serious. One set of facts will represent the whole — unemployment in Spain is 24 percent, in Germany 5.7 percent. The second story discusses Obama’s attack on the G.O.P. budget, which he calls radical. What’s going on?
The two stories are closely related because they each reference macroeconomics. The Europeans decided to attack the recession and deficits with austerity despite the fact that economists from many corners of the world (ok, Paul Krugman and some others) called it a non-starter. What they got was shrinking economies and rising unemployment, no surprise to the Nobel winning Dr. Krugman.
Republicans in Congress recently passed a draft budget ladled with draconian cuts that would accomplish the same things that the Europeans have. The U.S. recovery, such as it is, owes its existence to the stimulus program put in place in 2009. At the time there were calls for more not less stimulus from Democrats and at the same time less from the Republicans. What we got was almost enough to give us a glimmer of hope in the election year. Will it last?
It hardly makes a difference that the Americans and Europeans have now run a controlled social experiment — which is very hard to do — and that the evidence clearly favors stimulus. In this election year, I don’t expect much to change but if I was Obama I’d make sure the country knows about that little experiment.
This does give me an idea though. Stimulus means spending money you borrow at the bottom of an economic cycle in order to rev the economy. But for many, probably most, people, deficit spending is counter-intuitive. It doesn’t make sense.
This may be because we are thinking about economics with the automatic part of our brains. In a piece I will publish tomorrow, I discuss Nobel Prize winner, Daniel Kahneman’s book “Thinking Fast and Slow” which analyzes what he called System 1 (fast) and System 2 (slow) thought processes.
It turns out that System 1 is what we operate with most of the time. It’s the autopilot that lets us drive while on the phone and almost never have an accident. System 2 is the process you use to do algebra and, well, understand Economics. The irony is that System 1 doesn’t know anything about Economics or math in general, but people never seem to be troubled when they use System 1 thinking on tough subjects. Just look at the Euros and the G.O.P.
We need more System 2 thinking in this world but politicians are increasingly trying to satisfy their fringe elements, a long tail to be sure, rather than the big middle. How can we get everyone back to the center? Take a look at Thomas Friedman’s recent piece from down under.
Bye for now.
Happy New Year! Let’s be counter intuitive for a moment, shall we?
We’re in a recession and we all know it. Traditionally (and sadly) in an economic downturn when companies seek to lower their expenses they cut their marketing budgets, and why not? Marketing costs money and if you believe your marketing messages will fall on deaf ears in a slowdown, then you certainly won’t want to spend money on marketing programs so cutting marketing makes sense.
Before you run out and fire everyone or slash the budget to the point that stamps are rationed by the CEO, consider something else. Marketing is essential to promoting your ideas and even in a recession, promoting your ideas is a powerful tool for doing business now and down the road.
Slashing the marketing budget might have been a reasonable idea back in the last big recession—the one that happened before the fax machine was big news—but in today’s world, with fabulous communications and dirt-cheap ways of reaching people, it makes sense to think twice about marketing cuts.
There are three things that marketing—alone or in conjunction with sales—can do to help you make the downturn as shallow as possible for your bottom line. In no particular order, they are: spreading your thought leadership, showing your customers that you are involved in their success a.k.a. doing the right thing and building communities that will drive your inevitable upturn.
So your customers aren’t buying more of what you provide. They bought from you once because they think you are the best at what they need you for and you want them to keep thinking that way for two reasons. First, if you manage to provide them with ideas for maximizing their business with and without the use of your products and services you’ll at least get to the point where they place a replenishment order. Also, keeping the customer’s mind occupied with thoughts of you will keep them from looking around for brand X because it’s cheaper.
Do the right thing
More importantly, though, sticking with your customer by showing you understand and are involved with their success is a great way to build bonds and to show them concretely that you are the real deal. Historically, sales people were almost exclusively relied on to provide the thought leadership and show involvement but two problems come with that approach. Sales people sell, which is tactical, they aren’t great at the thought leadership and doing the right thing because these are strategic activities. Stopping by with donuts might be the closest a sales representative can come to being strategic, but how many times can that work before the customer gets fat or annoyed or both? No body likes to have to say ‘no’ as in “No we aren’t buying that today” so don’t make them say now when it’s just as easy to get them to say ‘yes’ to becoming involved in a community.
Now is a great time for marketing and sales to work together to build customer communities. A good community takes a bit of time and effort for the organizer and for the attendees and while no one would like to admit it, in a slack period, time is something we all have in a bit more abundance.
What does a community do? It brings together customers on a periodic basis—once or twice a month—to trade ideas about current use and future need. Smart sales and marketing people will look at a community as a laboratory where they can test ideas for products and messages, and to just listen.
Communities are gold in a slump because they enable customers to share the Kool-Aid, which is a natural thought leadership conduit. Communities also give the customer better insight into you and your products and, if you are doing your thought leadership job properly, they set the stage for your recovery by identifying needs for existing products and services as well as needs for new ones.
Marketing departments are the natural and rightful places for much of this activity and married with effective sales representation they can do a lot to keep the valley of a slump from turning into a crater. So while you might be thinking about cutting your marketing budget, also consider how you can redeploy some of those resources to prepare for the upturn.