Gauging economic climate change, Pt. 4: Non-consumer factors

In my previous posts in this series, I’ve examined recent recessions, jobs and income, and consumer spending and debt to make the case that small businesses must adapt to long-term economic climate change even once the credit crisis eases.

I haven’t mentioned Wall Street, monetary and fiscal policy, or globalization. So here’s where I stand aside and give the economists the floor. If you haven’t already discovered the Baseline Scenario, I am pleased to introduce you! It’s published by really smart economists dedicated to educating the rest of the human race about the precarious state of the U.S. and global economy and the prospects for improvement.

There’s an old saying: “To the blind, all things are sudden.” Normally, the owners and managers of small businesses and non-profits can craft strategy without studying macroeconomics. Not now. I urge you to take the time to read Baseline Scenario’s summary on the U.S. and global economic crisis. It really could be the most important half-hour investment you make.
A critical excerpt from the 12/15/08 edition of Baseline Scenario:

6) The global situation is analogous to the problem of Japan in the 1990s, in which corporates tried to repair their balance sheets while consumers continued to save as before. The difference, of course, is that the external sector was able to grow and Japan could run a current account surplus; this does not work at a global level. Global growth prospects are therefore no better than for Japan in the 1990s.

7) A rapid return to growth requires more expansionary monetary policy, and in all likelihood this needs to be led by the United States. But the Federal Reserve is still some distance from fully recognizing deflation and, by the time it takes that view and can implement appropriate actions, declining wages and prices will be built into expectations, thus making it much harder to stabilize the housing market and restart growth.

8) The push to re-regulate, which is the focus of the G20 intergovernmental process process (with the next summit set for April 2), could lead to a potentially dangerous procyclical set of policies that can exacerbate the downturn and prolong the recovery. There is currently nothing on the G20 agenda that will help slow the global decline and start a recovery.

9) The most likely outcome is not a V-shaped recovery (which is the current official consensus) or a U-shaped recovery (which is closer to the private sector consensus), but rather an L, in which there is a steep fall and then a struggle to recover.

Very sobering stuff. I’ve framed this crisis as economic climate change that is challenging the very viability of organizations large and small. In industry after industry, there is no longer the demand to support the current players. We won’t just slog through. Adapt or Perish.

The final post in the Economic Climate Change series, Adaptation and Opportunities, will focus on how to begin addressing these new realities.

Topics: Economy