Leading Indicators

Leading Indicators

Cut through the noise and get a grip on a rocky economy with one of the country’s top economists.

September 9, 2011
Chuck Bowen
Industry News
Alan Beaulieu

Financial markets are making huge gains and losses seemingly at the same time, rocking investor and consumer confidence. The Fed has pledged to keep interest rates at historic levels for the next two years. Congress has solved the debt ceiling crisis – for now.

What does this mean for small business owners? How can you sort it out?

Well, it helps if you can call an economist. Alan Beaulieu is half of the twin-brother team that runs ITR, an independent economics firm in Boscawen, N.H. He works with the Outdoor Power Equipment Institute, giving advice to the folks who make a lot of the iron in your shop.

The Impact of Business Cycles

Editor’s Note: This is an excerpt from the first chapter of “Make Your Move: Change the way you look at your business and increase your bottom line” by Alan & Brian Beaulieu. Email lleditors@gie.net with your own leading indicators for a chance to win a copy.

The Impact
Cycles are important because the economy goes through ups that are favorable for growing business and downs in which business disappears. If business operators understand where they are in the business cycle, they can make the most of the conditions that lie ahead. How well they prepare depends on knowing where they are in a cycle, the type of cycle involved, and reading the road signs to the future.

We have identified four phases within each business cycle: Phase A, B, C and D. Since each phase of the cycle has its own strengths and traps, businesses must use management tactics that are specific to each phase to ensure their prosperity. The four business cycle phases are:

Phase A – Advancing. The economy is on the upswing; advancing toward better days.

Phase B – Best. Business conditions are booming.

Phase C – Caution. The economy is still growing, but at a slower pace. Phase C is the most profitable phase of the business cycle, but it is also time to become more conservative in your planning.

Phase D – Danger. The downgrade stage. People are depressed. It is time to keep the powder dry and be ready for action!

When the business cycle is just beginning to turn up, companies that are not convinced that the demand for their items will rise usually are reluctant to increase the factors of production needed to make the most of the rising trend. And, when increased demand comes, they won't be able to satisfy it or they will have to run out and buy what they need at a time when it will cost more for overtime, etc. If you can't see the coming rising trend, you won't be in position to fully capitalize on this golden opportunity – in fact, you may even lose out to more far-seeing competitors.

When the business cycle is down, it becomes even harder for business because everyone hopes the downturn will be brief. Many organizations suffer by not acting quickly enough in:

  • Laying off employees.
  • Shifting to strong cash positions.
  • Decreasing inventory levels.
  • Watching their receivables, credit, and debt.
  • Looking hard to be sure return on investment will justify all capital expenditures.

Business leaders who don't pay attention to business cycles are likely to be swept along with the herd. They'll lose control of their direction, be forced to move with the pack and could be consumed in the frenzied stampede. Many will be trampled. As they're left broken and bleeding, they still won't have a clue as to what happened. They'll claim that no one could have foreseen it; that their downfall came completely out of the blue – which simply isn't true. Since business cycles are telegraphed at least a year in advance, they should have paid attention and should have known what changes were at hand.

"It's not just the economy. It's what do you do with this information. There must be some purpose to it," Beaulieu says. "A lot of people can talk about what they think The Street's gonna do, but if it happens, what does that mean you should do with that information?"

Lawn & Landscape caught up with Beaulieu this summer at OPEI's annual meeting to see if he'd share his insight on the future of the U.S. economy, and what factors the average contractor can watch to accurately predict what will happen next for his own business.

Do you have any broad predictions for what the economy's going to do in the next year?
Next year's gonna be another year of economic expansion. It'll be scary.

Both political parties are gonna make it scary. And I'm not doing this to push people one direction or the other. And in the process we're going to forget that there are a lot of things going right. And there are still opportunities and businesses can move forward, and the world's not ending in November 2012.

And the people that can remember the things that are going on right, the people that can remember that customers will be buying, the housing market will be soft, yes, but it'll be better than '11. More people have jobs in '11 than had them in '10. People who keep all that in mind will find that they will be growing their businesses in 2012.

It's basically a function of tuning out the noise and tuning into the realities of the world around us. The thing we can do is turn off our TVs and radios. [Laughs.]

Can you give our readers a longer-term outlook on things?
Well, let's keep it to the five year. We always tell people to stay tuned. And we continue to watch the road signs and continue to watch what's going on, so they gotta stay focused. But right now, it looks like '13, the first half of the year, the economy basically plateaus. By the middle of the year, it tips over into recession the second half of '13.

And the recession will last for a good part of '14 if not all of '14.

It won't be a steep recession. That's probably the thing I'd emphasize if I were you is that people will think recession, they will think the last one we just went through. But that was the Great Recession. It's not the same thing. There are still things you can do. You still can remain profitable.

You have to know when it's gonna happen so that you can prepare for it, and there are different things to do to prepare.

Right now, it's gotta be about competitive advantages. It's gotta be making sure you have trained people, customer service has gotta be better than anybody else's. That takes money. It takes effort. It takes CEO involvement.

One of the three big things for 2012 is that you have competitive advantages, customer service, which is a function of marketing and advertising after that. And then you have very well trained employees.

So if a business owner has any lingering fear or concern about a recession coming around the corner again, what can he do to prepare? Is there anything he can keep in mind to ward it off?
Yes. Learn what to look for, and then keep looking at them. I have a list of seven things: money supply, corporate bonds rate-of-change, U.S. leading indicator, purchasing managers index, retail sales, employment and non-defense capital goods new orders.

Because they won't lie to you. And so you don't ever need to be surprised again.

But we get those leading indicators, and we let thousands of people know what's goin' on so they don't ever have to have that. It's like an MRI, you know? You don't have to wonder if there's anything growing, because you've just been tested.

You don't have to wonder if there's a recession coming, because it's always been tested. No worries.

What else should a landscaper keep an eye on?
Well, that list of seven would work for them as well. More specifically, the non-residential landscape contractors are gonna watch local or regional vacancy rates and office buildings, commercial buildings, as they see those vacancy rates creeping up, obviously that's an easy tell that there's gonna be an impact on their business.

And the non-financial side, they're just gonna be looking at personal wealth. They're gonna be looking at – it's not gonna be so much housing occupancy, because a lot of the homes that are empty weren't hiring them to begin with. It's just gonna be a functional of household net worth.

It's gonna be a function of if the stock market's doing well, people will spend money on a landscaper. Those would be the two things I'd start with those guys. Use those barometers. And those are easy to find.

Previously you mentioned consumer confidence is not a good leading indicator.
It's useless. [Laughs.] It used to be incredibly important. If you look at the data over the last 10 years or actually 20 years at this point, it does not help you see the future.

It just tells you how people are feeling today. But there's no predictive ability to it. People wanna think there is, because it seems pervasive.

I look at it in terms of housing, they look at it in terms of retail sales. And you look at it in terms of what people are actually doing. There's no connection.


The author is editor and associate publisher of Lawn & Landscape. Email him at cbowen@gie.net.


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