Think Big And Take Bold Action

The state of the business cycle in 2008 and beyond

By Brian Beaulieu

We are rolling into 2008, and you should be firming up your plans for the forthcoming year. We at the Institute for Trend Research think this should be done within the broader context of what lies beyond 2008, so the following is our extended forecast through 2011.

Keep in mind that the majority of industry moves in concert with the overall economy, as measured either by U.S. Industrial Production or GDP. The outlook for segments with a strong relationship to housing is not going to be as rosy as for others. Folks who tie in with nonresidential construction should fare reasonably well for 2008. Companies associated with industrial activity probably will find business relatively steady, with the volume of activity staying high even though the year-over-year percent increase is small for most, if not all, of 2008.

The decisions we must make about our businesses in preparation for the future are made all the more difficult given ongoing talk about a recession. It seems that talk about a downturn in the economy manages to avoid discussing a timeline for this business cycle event. It is important that you have a working guide, complete with approximate dates for trend reversals, as you make your plans.

2008: Another Good Year
The first piece of the future to consider is 2008. We continue to think the economy at large will be heading higher for the year ahead. What’s exciting is that we have some concrete good news to point to: The U.S. Leading Indicator, Purchasing Managers Index, EcoTrends Leading Indicator, S&P 500, a prior rising trend in Corporate Bond Prices and recent good news coming from Retail Sales data. Retail activity is beginning to modestly heat up as consumer activity remains largely undaunted in the face of adverse nightly news. There are viable signs that the 18-month-long contraction in Housing Starts is beginning to level off. The leading indicator input cited above is great news for 2008 and stands in stark contrast to the concern of others about a recession in 2008 based on credit concerns, consumer debt and a weakening U.S. dollar.

We think the upside activity will stretch to late 2008 or early 2009, as measured by the actual monthly U.S. Industrial Production Index compiled and reported by the Federal Reserve. The rate of rise for a couple of quarters in 2008 will be marginally better than what we have experienced for the last year, based on leading indicator trends in 2007.

2009-10: Prepare for Downturn
We project that the economy will be in recession in 2009, extending through the first two to three quarters of the year. We have been anticipating a downturn in this time frame for a long time, based on increasing imbalances we have seen as troublesome trends within the economy.

It was clear years ago that the housing industry was in a bubble that would one day burst. It has popped big time, and the question that remains is when this source of trouble will finish washing through the economy. The answer is, not until more pain is felt from this sector in 2008 and 2009. The negative trend of declining home prices will likely last until 2009-2010 (prices lag the actual build numbers). Businesses tied to housing can expect the next two years to be rough, with 2009 being the more difficult of the two.

We would likely avoid a recession if housing were the only trouble spot within the economy. Unfortunately, we have major concerns about the post-2008 economy based on future waves of debt that will rock the economic ship, probably occurring at a time when the consumer is increasingly ill-equipped to soldier on. High energy prices combined with higher taxes will add to the consumer strain and likely lead to the business cycle breaking point sometime in late 2008 or early 2009.

Both high energy prices and higher taxes seem inevitable. Energy demand is going to continue to outpace supply until there is a recession that shifts the demand curve backward and provides for a drop in prices. Remember, oil prices in particular are driven by global pressures, not just U.S. domestic issues. Regarding taxes, some combination of the following is sure to occur: (a) The next administration will fail to extend the Bush administration tax cuts, (b) taxes and fees will be raised to cover the increasing cost of existing social services and to cover promised expanded social programs, and/or (c) the U.S. dollar will become so weak that we will not reasonably be able to afford to keep spending more and more.

Inflation could figure into this mix, particularly in 2009 if Congress and the president decide to play hardball with China. This would result in higher retail prices in the U.S. (which can slow the economy) and a slower economy in China, which slows our sales into China despite the cheaper dollar. (The rest of the world slows when the U.S.’s prospects diminish, not just China’s.) Oil and taxes add up to put considerable downward pressure on U.S. discretionary income, which means we will have less money to spend after paying for necessities.

The projected magnitude of the decline puts the coming recession on par with 1980-1983 and 2000-2002. Prepare for a long, nasty decline.

We may now have our first empirical indication of the approaching decline coming from a traditional leading indicator (fortunately, declining home prices is a non-traditional signal): Corporate Bond Prices has tentatively established a cyclical high in some measures of the market. Further decline in this leading indicator for 2009 seems highly probable.

Beat the Business Cycle
We project that 2011 will be the first year of an extended recovery trend that will put the economy back on track for real growth. Please keep in mind that we think 2009-2010 will be a normal business cycle, not the beginning of a depression, and there is a whole playbook of calls you can make to manage your way through the downturn. Plan decisively and without trepidation, and you can beat this business cycle.

Look for counter-cyclical markets or end-users that service non-traditional users. The point is to go where you have never gone before, to a place where you can take market share away from the next guy. Starting off with essentially no market share means there is really only one way to go, as long as you have focused your efforts wisely. The medical, educational and travel/leisure industries are going to fare appreciably better than the automotive, construction equipment and warehouse markets.

If you are going to spend money in the coming year, focus on missionary efforts into new markets. Avoid extrapolating performance of the last two to three years as a guide for what to expect in current markets for 2009-2010. Conserve cash, because you are going to want to take advantage of asset buying opportunities in 2010 and, just as important, you are going to want to leverage those acquisitions. Business conditions will dictate that you have some of your own money if you hope to borrow some at the bottom of the business cycle.

Making these gut-wrenching moves at the bottom of the business cycle is precisely what sets you up to maximize the potential of the next business cycle, and the next business cycle looks worthwhile. So plan on thriving in the years ahead, recognizing that your ability to adapt, think big and take bold action is critical to your success.

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The MHEDA Journal • First Quarter 2008 • Volume 37, No. 1 • Contents are Copyright © Data Key Communications, Inc.
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