In five earlier posts, I reviewed the evidence of economic climate change:

This recession is structurally and dramatically different than the other five recessions of the past 35 years.

Even before this recession began, job creation and real median household income had already flat-lined.

To compensate, Americans worked longer hours and took on massive amounts of debt, fueled by low interest rates, soaring housing prices, and easy (often negligent) credit.

The implosion of this housing bubble, combined with the global credit crisis, suggests “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. (Baseline Scenario)

In the final post of the series, I discuss adaptation and opportunity by connecting the large-scale economic impacts we’re going through to the five basic recession strategies available to your enterprise.

In this final post of the series, I want to build the connection between the large-scale economic impacts we’re going through and the five basic recession strategies available to your enterprise. It is easiest for me to think of the implications of this crisis in ecological terms. A mild recession is like a short drought: it temporarily stresses plants and animals but most bounce back when rain returns. On the other hand, a sustained drought throws the ecosystem into disequilibrium, lowers the carrying capacity for supporting life, and disrupts the interdependency of species with dramatic adapt-or-perish consequences.

Sadly, it seems clear that our economy is rapidly downshifting to a smaller, slower-growing state that may last for many years. Just as global warming is disrupting natural habitats, the economic downturn is altering the economic habitats of businesses and non-profits far and wide. As consumer spending and business investment shrink, many enterprises are no longer in equilibrium with their environment. They are in a race against insolvency.

Faced with shrinking revenues, there is a natural survival response to cut costs and redouble past efforts to drive sales. In highly contested markets with excess capacity everywhere, this strategy yields diminishing returns. It is certainly no guarantee of remaining cash positive.

Instead of doing more of the same for less and less return, the path back to fitness requires doing less of the same – and doing more to create new demand and reduce competition. Design your short-term strategies to become both cash positive AND uncommon.

The next post will explore the five basic recession strategies.

With the gift of hindsight, I can report that it is possible to adapt and transform in severe economic conditions. It’s painful, but possible to come out stronger. Twenty years ago, the Boston area experienced a deep recession that decimated the design and construction industry. A highly-contested marketplace became downright dangerous as companies slashed costs and took huge risks to win work. It did not take long for me and my Beacon Construction colleagues to recognize that hyper-competing in this environment would eventually end in failure. Through trial and error, we discovered strategies for finding and winning work outside the hotly contested mainstream. In the process, we evolved into a far leaner and smarter organization that became an attractive acquisition for Skanska USA.

Since leaving Beacon in 1994, I’ve spent many years as part of a national research-based initiative to identify and disseminate patterns of entrepreneurial success. This knowledge, and in particular the systematic way that top entrepreneurs harness adaptation to changing circumstances, are the foundations for this blog.

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.

They also borrowed at an accelerating rate as low interest rates fueled housing prices and expanding home equity loans.

Here’s financial blogger Hale Stewart again:

Let’s look a bit deeper into the expansion.  Consumer spending makes up 70% of US GDP.  So for the economy to expand, people need to keep spending.  At the beginning of this expansion, the US was saving about 2% of their paychecks.  That means the US consumer was pretty much spending everything they made.  Although the US consumer kept spending for the duration of the expansion he didn’t see any increase in real income.  So – where did this extra money come from?

Massive amounts of consumer debt.  Notice the mammoth increase in consumer debt over the last 8 years.

According to Credit Slips, the fantastic blog on consumer credit and bankruptcy:

The debt service ratio estimates the proportion of after-tax income that families spend on mortgages and consumer debt.  That ratio rocked around 10-11% for the early 1980s, then it began to climb. Since the second half of 2005, despite record low interest rates, the ratio has remained above 14%.  That’s about a 30% increase in the amount of income consumed by debt payments alone.

The reason debt service has grown isn’t hard to figure out.  From 1990 to 2004 alone, Americans shifted from owing about 86.2% of a year’s disposable income to owing 105.1% of their disposable income.  We don’t have the numbers yet, but no one thinks the debt load shrank from 2004 to 2007.

An increase of three percentage points in the debt service ratio may not sound like much, but that’s an additional $3 taken out of every $100 of after-tax income just to make interest payments.  It has the same effect as taking a 3% pay cut.

Fast forward to January 2009. The housing bubble that floated all that home mortgage debt has burst; nearly one in six homeowners owe more on a mortgage than the home is worth. Credit card companies are tightening credit and raising rates.

Implications for business strategy:

1. Federal economic stimulus will hopefully help the economy, but will not meaningfully improve stagnant household incomes.
2. With household income flat, health care expenses rising at a double-digit rate, and severe new restraints on consumer borrowing, there will be powerful, downward pressure on consumer spending for a long, long time.
3. Big ticket items including housing, education, health care, and transportation are likely to see dramatic changes in consumer behavior over time.
4. Discretionary consumer spending will decrease, but will remain an outlet for meeting psychological needs.

In the fourth post in this series, I’ll discuss some of the non-consumer issues that should inform recession and post-recession strategies.

We’re still in the storm, but we can already see some of the likely contours of the future business environment. Jobs and household income were increasing at glacial rates long before the crisis and ongoing downward pressure is anticipated. To the extent that the fitness of our individual enterprises is tied to a general “rising tide,” said tide is lifting fewer boats and not as high.

Like global warming, we frequently have a vague recognition of the trends in job and income growth but without scale or detail. Let’s take a look.

Job creation was a crisis before the recession
Last April, financial blogger Hale Stewart assembled a fact-filled critique of the recent economic expansion (2002-2007).  He included a version of this graph showing that expansions in the 1960s and 1970s grew jobs at about 3% per year. In the 1990s expansion, job growth dropped to 2% per year. Then, in the 2000s, job growth flat lined for 29 months before eking out an average 1% annual growth – not even enough to absorb the 1.25% annual growth in the labor force.

Most people lost ground in the last economic expansion
Throughout the recent presidential campaign, we heard a growing angst about the plight of the middle class. The bottom line is that median household income, adjusted for inflation, has stopped rising. Stewart offers this Census graph with the comment: “Real median household income is now at the same level it was in 2001.”

In early 2008, before the housing and credit collapse, New York Times correspondent Steve Greenhouse examined this trend in The Big Squeeze: Tough Times for the American Worker:

One of the least examined but most important trends taking place in the United States today is the broad decline in the status and treatment of American workers — white-collar and blue-collar workers, middle-class and low-end workers — that began nearly three decades ago, gradually gathered momentum, and hit with full force soon after the turn of this century. A profound shift has left a broad swath of the American workforce on a lower plane than in decades past, with health coverage, pension benefits, job security, workloads, stress levels, and often wages growing worse for millions of workers.

That the American worker faces this squeeze in the early years of this century is particularly troubling because the squeeze has occurred while the economy, corporate profits, and worker productivity have all been growing robustly. In recent years, a disconcerting disconnect has emerged, with corporate profits soaring while workers’ wages stagnated.

…this may be the first time in American history that the typical working household goes through an economic expansion without any increase in income whatsoever.

This, unfortunately, is the continuation of a long-term squeeze. Since 1979, hourly earnings for 80 percent of American workers (those in private-sector, nonsupervisory jobs) have risen by just 1 percent, after inflation. The average wage was $17.71 at the end of 2007. For male workers, the average hourly wage actually slid by 5 percent since 1979. Worker productivity, meanwhile, climbed 60 percent. If wages had kept pace with productivity, the average full-time worker would be earning $58,000 a year; $36,000 was the average in 2007. The nation’s economic pie is growing, but corporations by and large have not given their workers a bigger piece.

The squeeze on the American worker has meant more poverty, more income inequality, more family tensions, more hours at work, more time away from the kids, more families without health insurance, more retirees with inadequate pensions, and more demands on government and taxpayers to provide housing assistance and health coverage. Twenty percent of families with children under six live below the poverty line, and 22 million full-time workers do not have health insurance. Largely as a result of the squeeze, the number of housing foreclosures and personal bankruptcies more than tripled in the quarter century after 1979. Economic studies show that income inequality in the United States is so great that it more closely resembles the inequality of a third world country than that of an advanced industrial nation.

Greenhouse goes on to report that the average middle-class husband and wife combined are working three months more per year than 25 years ago! They have also turned to debt: the topic of my next post.

Their technical durations were 6, 2, 5, 3, and 3 quarters, although if you examine the unemployment rate, you’ll see that the pain continues for much longer. We’re already 4 quarters into the current crisis and not close to the bottom yet.

Unemployment rose 4%, 2%, 3.5%, 2%, and 2.5% respectively. By comparison, the rate has risen almost 2.5% since late 2007 and may go much higher.

As I list the key causes of the past five recessions, note the absence of the kind of system-wide implosion we’re currently experiencing.

The 1973 recession was triggered by the quadrupling of oil prices by OPEC and the cost of the Vietnam War. Lockable gas caps were a sign of the times.

In 1979, oil prices spiked again. A few years later, the Fed imposed tight monetary policy to control inflation, leading to another recession.

A recession begun in 1990 was precipitated by declining business investment, the savings and loan crisis, and the Gulf War and Mideast uncertainty.

The most recent recession in 2001 followed the dot-com bubble and September 11.

These recessions were tough enough on individual businesses. In Boston from 1989 to 1992, conditions were particularly severe. I’ll talk about that in later posts.

Here is a last comment about the unemployment rate. Notice that jobs come back much more slowly than they are lost. Once economists tell us a recession has ended and the economy is growing again, it takes years for jobs to rebound and the economy to feel healthy again.

In the next few posts, I’ll be looking at factors in the current crisis that are changing our economic climate long-term: jobs and income, consumer spending and debt, and the banking mess and global risks.

I’ll be discussing the what, when, and how of each one in future posts. But first, I’d like to get this blog launched by discussing recessions in general and some of the long-term economic changes that organizations should consider in crafting their strategy. To do that, look for a series of posts entitled “Gauging economic climate change.”

***Update 2/22/2009: I’ve refined one of the strategies in the graphic (Substitute) and will be exploring these five strategies in some of my next posts. A shout out to my friend Dan Lasman whose insightful critique led to this change!

***Update 3/8/2009: With the Economic Climate Change completed, I will begin writing more about these recession strategies this week. Sign up for email updates and you’ll receive them as they come off the presses!

I picked the name “Recessioneering” to signal my conviction that there are effective practices that can be applied whenever an enterprise – business or non-profit – strives to adapt and grow even when markets are distressed and resources are modest. These practices have been the focus of my practice for over ten years and I’ll be discussing them in future posts.Here then are my goals for this blog:

• To provide an accessible and valuable resource for processing this crisis and repairing, renewing, or reinventing your enterprise.
• To share successful strategies and techniques collected from practitioners, experts, and news sources.
• To shine a light on new business opportunities, whether they are recession-induced or otherwise.
• To focus strictly on information and methods relevant to the smaller enterprises that make up half our economy but are largely ignored by traditional media.

I have been in and around business strategy for over 30 years (bio) and I’ve experienced my share of recessions: Entered the workforce in 1974 during the throes of a recession triggered by the OPEC oil embargo. Worked with businesses and developers during the Carter/Reagan recessions. Scrambled through the aftermath of Black Monday (1987), the largest one-day percentage decline (22.6%) in stock market history, while leading a high-rise office development as the market imploded. In 1989, I became the Marketing VP at Boston’s Beacon Construction (now part of Skanska) and learned a ton about recession strategy while playing a key role in stabilizing and growing one of Boston’s leading construction management firms.

To learn about programs and services to help your organization navigate the road ahead, please visit Dave Lash & Company and contact us via email or at 978-468-6633.

Thanks for visiting Recessioneering and I wish you every success in meeting the challenges of 2009.