16 October 2008

Industry view: This is no great depression

"There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know."

Dr. Jeff Dietrich started his talk on the economics of the automation industry with this quote to a slide by former U.S. Secretary of Defense Donald Rumsfeld.

“We’ve learned a whole bunch of new words lately,” referring to this quote and the myriad words and phrases we are now familiar with from the banking industry and financial meltdown.

Words like CDOs and NINALs that refer to a pile of mortgages sold as a single security and “no-income no-asset loans” that many see at the heart of the so-called sub prime mortgage mess.

“We can make up words that describe anything and not know what anyone is talking about.”

Dietrich is a senior analyst at the Institute for Trend Research, and he looked at the economic and business trends facing Measurement, Control, and Automation Association’s (MCAA) key customer industries.

The MCAA annual industry breakfast that coincides with the yearly ISA Expo was Wednesday morning at the Reliant Center in Houston.

His firm produces semi-annual reports for the Association on the business cycles of key customer industries. He looked more closely at that the most recent information and talked about the best strategic decisions for companies that occupy the automation space.

Recognizing the confusion that reigns in the public mindset, Dietrich recalled a blurb from Joseph Heller’s Catch 22, “Nothing makes sense anymore, and neither does anything else.”

On the contrary, said Dietrich. His firm has predicted the recession we are entering for over two years. It uses well-known metrics and resources in their analyses. In spring 2006 and 2007, the organization said the price of oil and energy would trickle down into the commercial economy by the end of 2008 and continue on a recessionary road through 2009.

An important update now is they expect the recession to continue into the first quarter of 2010 and to be pretty chewy in that quarter as well.

Dietrich uses data that clearly point out the recessions of the past 30 years and the figures for the looming recession are obvious. Though the U.S. gross domestic product (GDP) is still 2.8%, the industrial production (IP) is in negative territory now at -0.6%.

“The GDP, as you can see, follows IP into the negative area. When GDP has two consecutive quarters of negative growth, that is officially a ‘recession.’ We’re not even there … yet.”

Dietrich said recessions are not necessarily bad. He looks on a recession as a wellness program. It is time to get in shape. During good times, we get fat, stupid, and lazy. “We need to go back to the gym and get in better shape. Slimfast isn’t going to do it. It’s going to take a long time,” declared Dietrich.

The “fat, stupid, and lazy” part refers to the recent years of poor regulation, inattentiveness by the government, and greed by the population as whole.

He does not see the present bailouts and government takeovers as sure solutions to any of the fiscal and budgetary indiscretions we presently endure. The fact that the $700 billion bailout—The Economic Stabilization Act of 2008—was part and parcel of legislation related to the Mental Health and Addiction Bill in Congress is telling.

“Mental health and addiction are certainly a part of the problems from which we suffer,” joked the economist.

ITR is now predicting a longer recession than they did last year. The analyst sees this one going for 16-17 months rather than a year with the first quarter of 2010 but harsher even than the previous year, 2009.

The unemployment rate tells you what happened six months ago. It is what they call a lagging indicator of which there are many. “So if our unemployment rate is 6% now, you can imagine that it’s going to be a bigger number in six months.” That what makes recessions go.

However, this is not the Great Depression Dietrich assured the 150 business executives at the forum. In fact, many business and industry verticals are doing well. He pointed to non-residential construction, hi-technology production, exports, some service sectors, and a host of others as doing well now and likely to continue doing well.

His advice is to look at how your company tracks industrial production and plan accordingly. If your business tracks a certain trend or industry, you do not have to accept those fluctuations always. You can change your markets, give yourself a broader base of operations, and outperform general indexes.

You have to figure out ways to sell to markets during a recession. That is what we are seeing in retail sales now. And it is everybody. Neiman Marcus and upscale places are trying to figure out how to do this. It is everybody’s problem. Even if you are wealthy, when you lose 30% of your wealth, you jump up and pay attention.

“An enormous phenomenon today is that we all have jobs, but we don’t have the value in our homes and portfolios that we did.”

Dietrich’s organization uses common sense predictors in its assessment of economic outlooks for industries and individual companies.

Here is a simple and revelatory case study. Though sales are increasing year after year, the rates of those increases change over time; one’s business is going through business cycles, hitting highs and lows.

Knowing ahead of time when highs and lows will occur can help one plan and maximize profits. ITR strategy is to compare company revenues to economic indicators to determine when a company’s future sales highs and lows may occur.

—Nicholas Sheble