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Corporate Strategy: Tracking the Recession

by Cesar Bacani, 17 September 2009

tags:
analysis double dip recession forecasts recession recovery

On Sept. 1, the Institute for Supply Management announced that activity among U.S. manufacturers expanded for the first time in 19 months. It said the ISM index, which is based on a survey of purchasing managers in manufacturing firms, rose to 52.9% in August from 48.9% in July. Earlier that day, China announced that its own Purchasing Managers Index increased to 54% in August from 53.3% in July, the sixth consecutive month the PMI has come in above 50%, which indicates business expansion.

So the good times are back and CFOs should plug the rosier scenario into their planning, budgeting and strategy-setting? Not so fast. “Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Fed chairman Ben Bernanke has said. The National Bureau of Economic Research in the U.S. has yet to call an end to the recession there. And Harvard University economist Kenneth Rogoff, who correctly predicted the Great Recession, warns that economic crises are protracted affairs and the fallout could linger long after a recession has technically ended.

Nouriel Roubini, the New York University economics professor who also foresaw the crisis, even warns of a double-dip recession, along with William White, chairman of the Economic and Development Review Committee at the Organisation for Economic Cooperation and Development in Paris. This is echoed by former Morgan Stanley star analyst Andy Xie, who is now an independent economist. Writing in Hong Kong’s South China Morning Post newspaper on August 24, he boldly predicts a relapse in the U.S. in the first quarter of 2010. “By the middle of the second quarter next year, most of the world will have entered the second dip,” Xie adds.

Understanding the Basics

What’s a CFO to do? It’s a maddeningly complicated business, this constant tracking of the recession and possible recovery, but the CFO has to do it. Listening only to one side of the debate and discounting all others is not an option, and neither is plugging your ears and tuning out the cacophony altogether. Finance must know and understand what is going on in the wider national, regional and global economy in order to make plausible cost-cutting, spending and investment plans for the company.

It’s useful to first gain a basic understanding of what makes a crisis a crisis, and a good place to start is The Anatomy of Financial Crises: Understanding Their Causes and Consequences. Written in fairly accessible language in 2007 by Franklin Allen, who teaches finance at the Wharton School, and Douglas Gale, a professor of economics at New York University, this paperback edition was published earlier this year. Click here to read the first chapter.

For those who do not have the time or inclination to plough through 180 pages or so, The Global Financial Crisis of 2007–20?? by Charles Jones explains in 45 pages the migration of the crisis from Wall Street to Main Street, what U.S. policymakers are doing, and where the U.S. economy may be headed. Check out the list of suggested reading on the last page. They include the Economic Report of the President, 2009 by the U.S. Council of Economic Advisers and blogs that keep readers up to date on current events, such as The Wall Street Journal’ts Real Time Economics.

A more iconoclastic and opinionated analysis is provided by a series of e-mail exchanges in Salon.com between Goldman Sachs banker John Talbott and former IMF chief economist Simon Johnson (click here for Part 1, Part 2 and Part 3). Their conclusion: the U.S. government is mishandling the economic crisis and the people who caused it, primarily those in big finance, are getting off scot-free.

Here’s a sample passage: “The way in which the Obama administration is attempting to extricate us from the crisis -- with unconditional support for big banks, regardless of costs -- is not addressing the fundamental imbalance of power that favors the financial sector. If anything, the big banks that survive in this sector have now become more powerful -- the political market share of JP Morgan Chase or Goldman Sachs has increased because Lehman and Bear Stearns are out of business.”

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