Economics Professor Says Businesses Should Remain Cautious until Recession is Over
Monday, November 23, 2009
December 2007 brought the beginning of what has become the longest recession in this country since the Great Depression. How will we know the recession is over? Butler University Economics Professor Bill Rieber says we’re already seeing positive indications.
- The stock market is up. Investors think about the future when they’re investing, and they’re optimistic.
- The housing market has stabilized. Housing prices are projected to rise up to 2 percent in 2010, but that’s not expected to put a serious dent in home sales.
- Interest rates are very low, a key factor in driving spending decisions. In addition, we’re seeing government stimulus money trickling through the economy.
- Anecdotal evidence is strong. For example, a higher demand for freight transportation indicates companies are shipping more orders or need materials for increased production.
“However, many uncertainties still loom,” explained Rieber.
Unemployment reached 10.2 percent of the labor force in October; the highest rate since April 1983.Also, the private sector is still weak, even with the low interest rates. And, worries over health care are making people timid — and rightly so. Healthcare represents 15 to 20 percent of our economy.
Rieber says because of these uncertainties, businesses should continue to proceed with caution until we’re sure the recession is over. He suggests businesses focus on the following:
- Be careful about new hires. The upside to the high unemployment rate is that you have a much bigger pool of candidates to choose from. You can have your pick — it’s a nice opportunity.
But you need to have full confidence that the recession is over and the recovery and expansion is underway before you make the investment of time, money and training that a new employee requires. You don’t hire someone lightly; commitment and trust is involved on both sides. Until you’re sure the recession is over, it’s difficult to take that leap of faith and build that relationship.
- Keep prices low.
- Consider the strength or weakness of the dollar when planning business strategy. The dollar is getting weaker in foreign markets. This makes imports more expensive, and so for those firms that import inputs — goods or materials — that can raise their costs.
On the other hand, the weak dollar makes our goods cheaper overseas. Some firms may want to boost their international trade exposure to take advantage of this. We’re never sure how long these foreign exchange opportunities will last, but you may have more interest in exporting at the moment.
- Control inventory carefully. Management likes to forecast sales and have the correct amount of goods in place. If you have the right inventory, you won’t have any stock shortages and lose sales. You also won’t tie up so much of your capital in unnecessary stock. Service firms don’t have stock, of course; instead, they need to have the right amount of people for their business.
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