Don't Get Too Excited by Green Shoots, They Might Turn Brown

Last week, the Dow broke through the psychological barrier of 10,000 and many breathed a sigh of relief. The call went out that the economy was about to emerge from what can be characterized as the darkest financial period in recent history.

There certainly are green shoots indicating that the worst of the recession is behind us. When reporting relatively strong third quarter results for Google, CEO Eric Schmidt said, "While there is a lot of uncertainty about the pace of economic recovery, we believe the worst of the recession is behind us and now feel confident about investing heavily in our future."
Similarly, Steven Bird of Safeway described his Coffee Index, a measure of consumer confidence (The Los Angeles Times, October 16). When the recession first hit, consumers switched from lattes to coffee and now Bird can see a swing back to lattes again. Likewise, consumers are starting to shift back to premium wines. All signs are that some consumers feel the economy has reached the bottom and we can start to return to some simple pleasures of life.

As we frantically look for evidence of economic recovery, we need to take care not to mistake all measures as signals that consumer spending is on the rise again. Take computers as an example. I read in BusinessWeek (October 26) that many consumers have put off buying new computers because they didn't want to end up with Microsoft Vista. Now that Microsoft has launched Windows 7, a lot of people will be in the market trading in eight-year old machines. The point of this example is not to mistake an increase in the purchase of computers as a signs of economic growth.

The National Bureau of Economic Research (NBER) defines a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months". Gross domestic production (GDP) and employment are seen by NBER as the primary measures of economic activity. When I talk to senior managers, many feel that sales are now flat and no longer declining. This is certainly encouraging news. Add to that encouraging quarterly results with supporting comments by CEOs saying that the bottom of the economic downturn might in fact have been reached.

But, predicting economic recovery is quite another story. In the State of California, for example, almost 1 in 5 people are said to be affected by the recession through job loss, or a reduction in hours and/or pay. Those who work for the State of California, fear that more bad news is on the way with State revenues likely to be about $1b less than what was forecast for the current year. Add to that the "Lost Generation" (BusinessWeek October 19), a generation of college graduates who have not been able to get work and who might consume differently as a result of the impact (both financially and psychologically) the recession has had on them.

The point of all of this is that while signs that the recession is drawing to a close might excite us, turbulent times will continue as we find innovative ways to generate growth. As James E. Skinner, the CEO of Neiman Marcus said, the recession "is forcing us to experiment".

Jenny Darroch is on the faculty at the Drucker School of Management. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com

 

 

Follow Jenny Darroch on Twitter: www.twitter.com/Jenny Darroch

Comments

[azphoenixwolf]

Waiting in the wing are the oil vultures. If there was a recovery, the demand would go up and higher prices would quash any recovery and they would swoop down to feed on the carcass of a wrecked economy to join the bankers, health care industry, and military industrial complex. Remember Democrats and Republicans are just fancy names for vultures who feed on different sides of the carcass.

[azphoenixwolf]

The commercial real estate and the FHA bubbles that are collapsing. I have two friends who are losing their houses and are having to do short sales. The one was a mortgage broker (business dried up and he let his license go) whose downtown condo went from $400K to $150K and the other had his ARM house loan reset $400/mo. higher and is short selling from $260K to $129K, sadly, after putting his $60K inheritance in as a down payment which he will lose. There are waves of these ARM reset mortgages coming soon like a tsunami. Three friends have had their hours cut from 5 to 4 days/week. No one is talking of restoring their hours. Two friends now have to work from home as their bosses are trying to save money. One boss/owner lost a 40K client and can save $30K by not having a central office. My other friend who is a commercial loan officer is now working from home and says that this is a major trend as a way for companies to save money. These rentals are never coming back for the commercial real estate sector. These sectors are in a permanent depression, not a recession.

[azphoenixwolf]

Has anyone heard the expression: guns or butter? We are in TWO wars and there is expansion in Afganistan (The Pres. just oked 13,000 more troops). We now have Viet Nam II and Viet Nam III. Don't forget, when the Russians invaded Afganistan, the economic strain helped lead to the collapse of their empire. History is repeating itself. Those who do not remember the past are doomed to repeat it. How is the economy going to "recover" and people go back to work if the jobs are GONE. Think of all the thousands of snailmail postal jobs and media print jobs, and overseas transfer jobs that are gone and never coming back. USA Today circulation is down 17%. A lot of their papers were bought by business travelers who are no longer traveling. I got a foreign national the other day when I tried to get information from my cell phone company. These sectors are in a permanent depression.

[azphoenixwolf]

Lots of black roots, not green shoots.
Many TARP borrowers aren't repaying their billions in loans and the FDIC reserve recently went billions in the red because of bank failures & bankruptcies (they are the people insuring your bank deposits - lol - sleep well tonight). Some of the banks weren't even on their watchlist, but had dramatically fast collapses because of the worsening economy. There have been a lot of articles lately about endowments and pension funds that have lost major portions of their investments in the recession (some 30-40%: some of it due to speculation in derivatives that had the meltdown) just like many of us. Many may be unable to meet their obligations to their retirees which will be a long term problem. Tax revenue is down 17%, so expect more government job layoffs. Just like the alcoholic that has another binge to postpone a hangover, we have just delayed the day of reckoning by adding all this stimulus money, bailout money, & borrowing from China to our national debt

[marinara]

I wish to correct: Readers will be put on the defensive as cash heavy corporations gobble away at your market.