World Trade Magazine recently ran a great article by Dan North on Policy Perspectives: Reading the Economic Tea Leaves: Confessions of a Successful Forecast. It was short, sweet, to the point, and dead-on – even though it used one of the words that is obviously not in George W. Bush’s vocabulary.
The article points out how many brave economists strayed from the consensus opinion last year because they saw a set of circumstances so compelling that it led them to forecast – very much counter to the consensus at that time – that the economy was likely headed for recession. They were right, and this is the best article that I found that explains why. In short, there were three major forces at work against the economy (and we all know that 3 is enough to cause chaos):
- inflationary pressures started to bubble
When the Federal Reserve warned that the economy was growing too fast back in May of 2004, it was right. They raised rates to curtail the effect, but there is normally a lag of at least 3-5 quarters, and more if the market is especially exuberant.
- crude oil reach a record high in May of 2004 – and then started to skyrocket
every time crude oil spiked in the last thirty years, a recession followed
- in August of 2006, the median sale price for an existing home fell on a year-over-year basis for the first time in 11 years
and this was at a time where the camel could barely stand as the Federal Reserve corrections and crude oil spikes were starting to pile on
Thus, by the summer of 2007, there were three strong negative forces battering the economy. Each on their own had consistently caused recessions in the past. And then:
- the sub-prime crisis hit
battering the real estate market with the force of a tsunami
- other debt crises surfaced
the storm just couldn’t get any more perfect
A recession was inevitable. But it’s nothing to worry about.
- First of all, it’s the nature of the market, it surges, it drops, it corrects, and then it emerges stronger than ever!
- Secondly, these same brilliant economists have noted that the necessary conditions for a quick exit are falling into place and the recession is not likely to last very long, with the recovery curve predicted to start by year end – meaning that we’ll be back to a growth cycle in mid 2009 or early 2010.
- Thirdly, this is the perfect market for supply and spend management to really take off! Now that savings are on top of everybody’s mind, sourcing and procurement is going to start to get the respect it deserves in all the laggards out there. They’re going to need good solutions. It’s a good time to be a provider of stable sourcing software solutions. Time to kick the development and marketing cycle into full gear. (And don’t make me tell you again where you should be putting those dollars!)