Double Dip Recession – CEO Alert

by Victor Cheng

I am putting out this urgent message to all of my readers to warn them to prepare for a Double Dip Recession (See: What Caused the Great Recession?).

Yes, there are early indicators that a Double Dip recession is on the horizon.

While no official definition exists, generally speaking, a double dip recession is basically two back-to-back recessions separated by a brief period of economic growth (typically 6 – 18 months).

According to a wide range of economists, there’s a 25% – 50% chance that the recovery we think we’re currently experiencing is the brief “recession vacation” in the middle of a double dip recession.

There are two primary factors driving
a potential Double Dip Recession.

First, of the nearly $800 billion in stimulus money, half has already been spent. (See the home page of recovery.gov for an on-going tally)

The rest will likely be spent over the next year, with a disproportionate share of that spent before November 2010.

Why November?

Mid-term elections.

Numerous studies of voters show that putting money (in all its forms – benefits, jobs, tax refunds) into voters hands substantially increases the likelihood of voters re-electing whoever happens to be in office at the time of the financial windfall.

So the big question is when all the stimulus money money is gone (most likely sometime in next year), what happens then?

Who will be the big spender at that time?

Second, a substantial reason for the recent growth in business and consumer spending is back log. In 2009, most business severely cut back on everything — including raw materials, housing extra inventory, etc..

Early this year, these businesses were “too lean” and they had to replenish supplies once again. And since it looked like the worse was over, replenishment spending occurred in the first half of this year.

With most businesses done with their “catch up” spending, they will not shift into more of a maintenance spending in the second half of this year.

So why the urgent warning?

I urge you to not over commit your resources anticipating a recovery that can turn south very quickly.

 

FLEXIBILITY and ADAPTABILITY
remain two important mantras to live by.

A flexible cost structure, than can scale up to meet sudden surges in demand, and scale down to adjust to less demand is essential.

As a CEO coach, I have been urging all my clients to move the mix of fixed vs. variable costs to be towards variable cost.

Of the companies who have been hurt the most, a high fixed cost is one major commonality.

The second mantra is adaptability. For those of you who have heard me speak, you will remember my motto “Adapt or Die”.

Many people assume that the worst of our economic woes are behind us. This is not necessarily a good assumption to make!

In speaking with owners and CEOs of hundreds of companies across the US this year, the consistent anecdotal feedback I’m getting is that sales are up a little from their worst periods last year.

In short, 2010 stinks less than 2009.

The temptation is to breath a big sigh of relief, assume no more bad news can come (the worst is over… or is it?), and get sloppy.

Or

You can use this “breathing room” to ask yourself the hard questions.

  • What did I learn about my market from the past 2 years?
  • What mistakes did I make?
  • Do I have a solid and strong business? 
  • Where are my weaknesses? Where am I exposed?

The next 12 months is an ideal time to do some re-tooling in your company. If you need to make some substantial changes to weather (or heck even prosper in) future economic storms, now is the time to do them.

The urgency of the immediate crisis has waned. Sales, margins, and profits for many are up (though not always by a ton).

In short, a window of opportunity exists to re-position a business, shore up glaring weaknesses, move away from poor market opportunities and towards new ones.

Now is the ideal time to make major moves.

Yet, I see complacency setting in.

All those tough decisions can be avoided — replacing mediocre team members no longer seems urgent, getting new revenue streams from “market experiments” suddenly seems unimportant, driving business from new distribution channels can take a back seat to sticking with the status quo.

If you don’t force yourself to make the difficult choices now pro-actively, you will be forced into making those choice reactively.

One of the trademarks of my commentary and advice to others is I practice what I preach.

In the first 7 months of 2010, my own company’s sales and EBITDA have exceeded comparable metrics for all 12 months of 2009. (If you’d like to understand the process I used to accomplish this, get a FREE copy of my book The Recession Proof Business)

In short, 2010 has been a good year by every measure — yet you wouldn’t be able to tell based on my operating plans for the next 12 months.

These plans include:

  • Overhauling my marketing with objectives of generating new business in 2011 from sources that generate none today
  • Introducing new service offerings that over time will drive the vast majority of sales
  • Adding staff in 3 countries
  • Re-organizing team roles (including my own)
  • Shifting of vendor agreements and selection to more variable based cost
  • Re-evaluating and re-negotiating supplier contracts
  • Delivering more than promised to clients
  • Upgrading technology tools
  • And more….

In short, I have maintained a “crisis mode” pace, a willingness to innovate / take risks, and a healthy sense of paranoia that perhaps I missed something…. all this despite having my best financial year ever.

I take nothing for granted, nor should you.

As my high school football coach used to say, you win championships by being mentally tough and exerting extra effort when everyone is tired, exhausted, and overwhelmed — it’s precisely when everyone else slows down that you gut it out and speed up.

An awful lot of people have eased up including your competitors. Now is the time to leapfrog ahead. If you don’t, someone will leap frog you.

Grow or Shrink because in this economy there isn’t much in the middle.

The choice is yours.

 

Comments

{ 1 comment… read it below or add one }

Jacob Markley August 18, 2013 at 11:14 PM

Very interesting and noteworthy article. I’m curious though, how bad do you think the second part of the recession will be and how long do you think it will last? Rough estimates will be okay if that’s all you have. Will it be worse, better, or the same as the recent recession?

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