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08 November 2001

There Is No Recession! When Will Things Get Better?

by Ed Ross

I've been asked lately, "Is the motion control business slow for everybody or just for me?"

The answer is both "yes" and "no." If you're in the vast majority of motion control businesses, you're not alone. Your sales have fallen off.

Asked when sales will improve, I don't have a ready answer. The economists don't agree.

This is so even though, in the long term, the motion control business will have to grow because it's vital in flexible control of automation.

In the short term, however, manufacturing is slumping. This usually leads the downturn in a recession.

When manufacturing output declines, capital equipment is always hard hit because you buy less production equipment when sales are declining than you do when they're increasing.

Some economists say, "There's no sign of a recession, but we think the economy may recover next year."

What's a recession?

It's often said that in general, the economy is in recession when real growth (the actual growth in total output measured by the gross national economy adjusted for inflation) is negative for two consecutive quarters. No standard has been agreed on, however, so each economist can select his own criteria for what constitutes growth and how to adjust for inflation. I used to assume the consumer price index would always be used, but wholesale price inflation, wage inflation, and hunches seem equally popular.

I see economics at about where astronomy was in 280 B.C.: a mass of ignorance. Folks believed the earth to be the immovable center of the universe, with the sun and planets rotating around it. Yet one man, Aristarchus of Greece, described the solar system just about right. He calculated the motion of the earth and the planets about as accurately as possible given the primitive, inexact instruments of the time.

Similarly, some contemporary economists seem to be in tune with reality. Michael Mandel, Economics Editor for BusinessWeek, may be one. The predictions in his book, The Coming Internet Depression (October 2000) were uncannily accurate.

From Mandel's columns in BusinessWeek and a live Internet discussion, I've inferred that he thinks we probably won't have a really deep depression this year, thanks to the emergency tax rebate. He doesn't, however, seem optimistic about a near-term recovery. He said a great deal depends on how much of that rebate is spent rather than saved.

The idea is that if most of the rebate is spent, it cycles through the economy, multiplying its effect as it goes. For instance, if you spend your rebate on piano lessons, and the piano teacher then spends her added income on theater tickets, etc., the money goes through the economy a number of times, until somebody in the chain says, "Why should I spend this? I don't need anything," and puts it in the bank.

You might think there'd be data from economic research that predicted the ratio of spending to saving with some accuracy, but none of the many economic think tanks have ever done something of such practical value.

Economics professor Lester Thurow of the Massachusetts Institute of Technology wrote in the 4 September 2001 Boston Globe that we have "a very small short-term tax cut," and the stimulus effects will be "small to nonexistent."

In view of his success in predicting the Internet recession, I'm inclined to side with Mandel, although I respect Thurow as an uncharacteristically realistic economist. But the Globe's headlines on 31 August continued to trumpet, "Schwab to cut up to 2,400 more . . . Japan tech firms to fire 12,200 . . . Swissair will trim 1,250 jobs."

When one or a few companies lay off employees, there's little effect on the giant servo system that is the economy. The employees find other jobs, so total sales aren't affected. If sales continue to be sluggish, however, profits decline and more layoffs occur, setting up a loop until the entire economy reaches a new low point.

I believe the same dichotomy exists between astronomy and astrology as between physics and economics. No matter how much knowledge an astrologer has, his ideas must be basically wrong because there's no way the planets' positions at any given moment and an individual's future are linked.

Similarly, the ideas expressed by many economists violate the laws of physics. For instance, it's clearly impossible to produce less and have more. Should we really be grateful to Alan Greenspan because he let prosperity go on for so long before he decided we were too "irrationally exuberant" and slowed down production?

Should we worry about other people losing their jobs? After all, they don't buy motion control equipment-not directly. However, they form part of the end user group that consumes manufactured products. That demand drives the capital equipment industries on which the motion control business depends.

If you lose business to your competitor, he gains. An economic downturn is different. You both lose.

Perhaps we'd see things straighter if our headlines said, "278 consumers laid off" instead of employees.

I'll be watching these headlines. When I see hiring instead of firing, I'll be optimistic about the motion control sales picture. MC

Author Information

Edward A. Ross is president of Ross Associates in Needham, Mass., and author of The Ross Guide to the Motion Control Industry. Contact Ed at (781) 449-5123; fax: (781) 449-2942; edross@mediaone.net.