This recession is different from the previous ones:
- Most immediately significant, employment is plunging more steeply than in a long time - by more than two million jobs last year, more than during the previous two recessions, and this one is far from over.
- At the same time, U.S. consumer spending is falling sharply. In the third quarter it sank at a 3.1% annual rate, the steepest decline since 1980 - meaning that managers who have made it through the past four recessions have never confronted anything like it. The drop is worrisome because consumer spending is more than 70% of America's economy, and while it may rise quickly or slowly, it almost always rises. During the whole of the last recession (2001), consumer spending never declined at all; its growth only slowed.
- Compounding the problem, consumers are more deeply in debt than ever, an immediate concern for companies that lend to consumers. Longer term, consumers' balance sheets are so ugly that many executives believe this recession may linger as people slowly rebuild their finances. "It could be a couple of years before consumer spending goes up again."
- Consumers aren't the only ones deleveraging. Companies are too, and on a more massive scale than ever seen before. That means business-to-business firms are also suffering.De-leveraging is typical in a recession, but because boom-time leverage had reached unprecedented levels, the reverse process may become particularly violent.
- Yet another important difference - the credit crunch - affects even those companies that are reducing debt, but especially those that aren't. Virtually all firms depend on a constant flow of credit to carry them smoothly through the ups and downs of business fluctuations. While it's entirely typical for lenders to get more cautious in a downturn, the near freezing of credit is something else again. Even companies able to pay higher interest rates may find that credit isn't available from the usual sources at any price.
The U.S. housing bubble bursts, pushing U.S. consumer spending down, leading to less demand for imports from China, causing slower growth of the Chinese economy, thus decreasing demand for copper, pushing copper prices down to their lowest levels in almost three years, causing big problems for you and your warehouse full of copper.
You can conduct pretty fancy scenario planning and still not be ready for that - and it's safe to say we've barely begun to see the rippling effects of a recession in an information-based, truly international economy.
The most effective moves you can make for prospering through a recession are ones you established a long time ago. In times like these the strong get stronger and the weak get eaten. --> while Washington Mutual and IndyMac Bank were failing, Bank of America (BAC, Fortune 500) - which got out of subprime mortgages in 2001 - attracted $21 billion of new consumer deposits as consumers ran to safety. --> When the Wickes furniture retailing chain filed for bankruptcy earlier this year, more than 100 truckloads of furniture were on their way to its stores; a Milwaukee retailer that had remained financially solid, Steinhafels, bought the contents of several at bargain prices.
10 recommendations.
- Reset priorities to face the new reality.
- Keep investing in the core.
- Communicate like crazy, balancing realism and optimism.
- Your customers face new problems, so give them new solutions.
- Don't rush to cut prices.
- Focus on capital - how you're getting it and where you're using it.
- Reevaluate people - and steal some good ones.
- Reexamine compensation - what is it offering incentives for?
- Think twice about offshoring.
- Be smart about mergers and acquisitions.
