Different Influences Will Work Together to Moderate Prices, But They aren’t Enough to Induce Deflation.

There is a term causing many economists and government officials to get
nervous – Deflation. As bad as run away inflation is, deflation is even
more sinister. Deflation is the continual lowering of prices across all
goods and services. It is mainly in the minds of consumers though. It
is the belief that you, the consumer, can get a better deal by waiting.
This perpetuates poor demand and supply must keep trying to catch up by
lowering prices and on and on it goes.

But as noted in two good overviews on Deflation (Finding Good News in Falling Prices in the NY Times and Deflation is an empty threat (so far) on CNNMoney.com) the dramatic price drops, as reported by a metric called CPI, are coming mostly from commodities. I’ll bet you’ve noticed the price of gas is lower than you probably ever thought it would get? That is because the price of oil has dropped from $145 for a barrel to about $43 a barrel. Other items like copper are dropping in price as well. It makes you wonder why the price of commodities were so high to begin with (much of it was the building of emerging markets like China and India, but some of it was pure speculation). $145 isn’t the true value of a barrel of oil and neither is $43, these are extremes. But the price decline is now leveling off. So items associated with commodities will not drop in price at the same rate as they did from the end of August, 2008 until early December, 2008.

But this argument mostly sides with sellers tolerance for lowering their prices because their margins were still healthy enough. That will not be the case if demand continues to shrink as is expected. Why? Rising unemployment. As more people are out of work, they will only spend on necessities like peanut butter and milk. But it is only true while the unemployment rate is rising. Once it begins to level off and and stabilize, consumers will increase their spending again. The beauty of layoffs is that it ensures those that still have jobs will maintain their compensation level. It is rare to see wage cuts. This drags out the problems much longer, for both the company and the economy. Here is a good excerpt from the NY Times piece:







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Traditional economic theory doesn’t do a good job of
explaining this. During a recession, the price of hamburgers, shirts, cars and
airline tickets falls. But the price of labor does not. It’s sticky. (excerpt
this. So succinct)

In the 1990s, a Yale economist named Truman Bewley set out
to solve this riddle by interviewing hundreds of executives, union officials
and consultants. He emerged believing there was only one good explanation.

“Reducing the pay of
existing employees was nearly unthinkable because of the impact of worker
attitudes,” he wrote in his
“Why Wages Don’t Fall During a Recession,” summarizing the view of a
typical executive he interviewed. “The advantage of layoffs over pay reduction
was that they ‘get the misery out the door.’ ”

The average employee, who didn’t get any real wage increases for six years (data shows that wages didn’t recover from the recession of 2001 until 2006, when adjusted for inflation) is certainly not going to get one this year. But the good news is they will actually see an improvement in their buying power due to these lower costs. Although I’m skeptical about the survival of the social contract corporate America has with its employees i.e. benefits like inexpensive healthcare.

What remains to be seen is whether the spending habits are tempory or permanent. Paying off debt is now a priority and I expect that value to persist – to a point. There are so many intelligent consumers that can quickly calculate the cost of financing against the benefits of the investment.

These different influences will work together to moderate prices, but they aren’t enough to induce deflation.

Trying Times for the Profession of Recruiting

This is one of the most trying times for the profession of recruiting. There is the obvious reason – income is tight so hiring is tight. But there is also the cultural ramifications of the current situation. For instance, a writer that reflects the Generation Y opinion, Nadira A. Hira, is stating in a piece called Yers won’t settle that Gen Yers are observing the shortcomings of the baby boomer and Gen X careers and reflecting on what they want in life. Her opinion sounds a little self righteous and speculative, but she has a point. Why would a well skilled 23 year old join the ranks of corporate life? Here is a good excerpt:

As a high-profile Los Angeles businesswoman told me last week, what
said schadenfreuders don’t realize is that the outcome of the financial
crisis may not be a defeated Gen Y, but a more determined one —
determined, that is, to follow fulfilling work. “There won’t be any
trust in companies,” she said. And the fact of the matter is, without
that trust, corporate America becomes even less attractive to standout
young employees than it was before the recession hit. The security that
a Lehman Brothers or Merrill Lynch business card used to mean — never
mind the cachet that they carried — began to evaporate as even those
peers who chose the “stable” path of, say, financial services found
themselves jobless. And as the list of the white-collar unemployed grows longer every day, it’s beginning to look like they’re gone for good.

There are many careers where the work itself gets you out of bed in the morning. It could be running a local charity, working for a Non Government Organization in a foreign nation, or doing some low stress work like sowing. Often the pay is adequate because the goal isn’t to get rich. Its an experience.

But another avenue is entrepreneurship. Suppose you were 23, you live with your parents, you have a used car, a high speed internet connection, a network of sharp friends, and time. Would you sign up for a corporate life where:

  • a boss doesn’t understand your lifestyle
  • your pay increase is 5% (and it is communicated to you like you blew the doors off the allowance for that year because everyone else was getting 3%)
  • the speed at which you achieve anything is about a quarter you would expect because you have to get sign offs, agreement from teammates, and teach those that haven’t been paying attention
  • And there is nothing to believe in because your commitment to a project lasts only as long as your funding

Or would you maybe start a graphic design company just for kicks? Or create a website where small businesses can share components of how they do things that are innovative? There are all kinds of low risk entrepreneurial experiences.

Back to my initial statement. Recruiters have something a couple of weeks ago I called a Hiring Brand. How are they known from a human capital perspective. GE has a great hiring brand. So does McKinsey. The Investment Banks used to be on this list, but now they aren’t. Some companies will use this as a means to join the GEs and McKinseys as great places to work, but many businesses will take the short sighted approach and undermine their pool of talent for years. Its high stakes.

Quick Advice for the Newly Unemployed

Many people are losing their jobs. This isn’t an easy thing to deal with emotionally. Sites like this one and careerbuilder.com offer several viewpoints for someone to feed off of when ready. I try to point people to a diverse set of options, whether it is in regards to entrepreneurial opportunities, self reflection, or job resources (blogs, pay websites, job posting websites, and job statistics).

Rachel Zupek over at Careerbuilder.com wrote up a good overview for someone newly unemployed. Her piece is called Make the Most of Being Jobless. Here is an extended excerpt I pulled:

So desolate job seekers, the good news is that even with these
tough times, things will get better and you will survive. Here’s how
you can make the most of your unemployment:

Step No. 1: Take care of logistics.
When you’re laid off, there are several unpleasant — albeit necessary
— issues to tackle. Before anything else, apply for unemployment
benefits, resolve severance concerns, figure out your health-care
coverage and assess your financial situation.

Step No. 2: Mourn.
Job loss is devastating. In fact, after the death of someone close to
you and divorce, it’s one of the biggest losses you suffer. Not only
have you lost your job; you’ve lost routine, money, pride and perhaps
most importantly, a sense of purpose.

Understandably, a little
moping is allowed, says Jodi R. R. Smith, president of Mannersmith, an
etiquette consulting firm. A week of bad daytime TV and junk food is
about right; then it’s time to dust off and find some balance, she says.

Step No. 3: Make good use of your time.
With eight extra hours in your day and not much coming up in your job
search, there are countless things you can do to improve yourself,
personally and professionally. Here are some ideas:

• Create your own jobs.
Suddenly being jobless throws a lot of people into a schedule-free day,
says Lynette Radio. As consultants who are sometimes between
assignments, she and her husband tackle projects around the house like
painting or putting in new floors.

“It keeps us busy and on a
schedule,” she says. “Structure is what you need most at this point to
not only feel professional, but not fall into a cycle of self-pity.”

• Don’t limit yourself.
If you can’t get a job in the industry you want, find a creative way to
be a provider — not just a worker — in the industry you’re interested
in, says Vicki Kunkel, author of “Instant Appeal: The 8 Primal Factors
That Create Blockbuster Success.”

“Don’t limit yourself to
finding a job in the industry you’ve worked in for the past 15 or 20
years. A layoff is a good time to look at what really matters to you,
what you love to do or what you’ve always wanted to try.”

• Reassess your life. Joblessness allows you to reconsider your work situation, as well as other aspects of your life.

• Learn a new language.
Spend 30 minutes every day learning a foreign language, suggests Jill
Keto, author of “Don’t Get Caught with Your Skirt Down: A Practical
Girl’s Recession Guide.”

• Look for an internship. If you’re interested in a career transition, an internship allows you to learn from a company in a different industry.

“Make yourself available for a learning opportunity, at a cut rate to
the employer,” says Lauren Milligan, founder of consulting firm
ResuMAYDAY.com. “Seeking out this nontraditional type of situation will
show initiative and confidence.” And, if you do a great job, you’ll be
on the short list for a full-time position.

• Network, network, network.
Always look for new ways to expand your network and utilize the one you
already have. You can do so by getting involved with relevant
professional associations, says Colette Ellis, a career and stress
management coach for InStep Consulting.

“Find opportunities to
take on leadership roles to increase your visibility within the
industry,” she says. You can also join committees that are working on
strategic projects for the association.

• Re-invent yourself.
Reinvention is simply re-examining yourself, taking what you’ve learned
over time and evaluating what makes you tick, says Sean Simpson,
communications director for Express Employment Professionals.

“Reconnect with what gets you excited,” he says. “Once you have figured
out what your passions are, match them to your skills and experience
you have gained over the years. This will help you determine what jobs
best utilize your strengths and which choices are most suitable for

• Set up a buddy system.

• Take a class.

• Volunteer. Eighty-one percent of employers
view volunteering as relevant work experience, according to a recent
CareerBuilder.com survey. Roxanne Ravenel, a job-search coach, says
volunteering gives people a sense of purpose and empowerment, which is
critical to the self-esteem of job hunters who feel powerless after
weeks or months of a fruitless job search.

Vacation Time is Great for Self Reflection

The headlines are impossible to miss: so and so company is laying off 25,000 or this and that company is downsizing by 10,000 employees. It makes everyone anxious about the status of their job. Most of the time it isn’t the work part that people are anxious about, but rather the steady check. Many companies, either by choice or for survival, do this to streamline their delivery of products or services. To get in line with the demand for their offering.

But timing is funny right now. The holiday season, particularly the days between Christmas Eve and New Years are a bust when in comes to productivity. Everyone is either on vacation or the people they need to do a deal is on vacation. Several companies, tech companies for example, shut down for the last week of the year. They do this to save on costs (don’t turn on the lights). Often times the employees are given the choice of having the time off non paid or taking vacation.

In other years, this time of year is a celebration of family and religion. This year it still is, but with a serving of concern. Concern for your job, concern for your debts, and concern for a future that is not close to the one you planned for.

But thankfully, the US system of democracy and capitalism offers so many options and alternatives that even the worst situations usually reveal opportunities. It is just a matter of getting out of your comfort zone to take advantage of them. Write your own headline.

Three Leader’s Strategies in a Down Economy

The beauty of a down economy is nothing is sacred. It allows government and corporations to make truly visionary decisions. I’ve said it before, but I think the downfall of the US is the Cost/Benefit Analysis. The example I like to use is the case of the cellular phone. The technology was there way before it gained major adoption? Why? Because it had to play ball with the install land line base. Getting it aligned to a similar but technologically different communication device slowed it tremendously. Now look at India. It has a cell phone penetration that is both faster and deeper than the US. Why? Because it didn’t have to deal with a legacy system. But no Cost/Benefit Analysis is going to come back with a suggestion that is visionary. It is a safe tool.

OK, that is the long way to get to my three summaries.

Jim Collins of Good to Great: Why Some Companies Make the Leap… and Others Don’t is taking the current situation to remind people of the importance of talent. A Postcard piece by Patricia Sellers called How to thrive in turbulenttimes describes Collins as emphasizing that before you can get the bus moving in the right direction, you have to have the right people on the bus. This isn’t really about downsizing or becoming lean. This is more about getting like minded individuals all moving in the same direction. Often in corporate life, there are motivations that are not aligned. This causes leadership issues and slows effective change. If the leadership team is unified in the goal, which is often the case in distressed companies, then driving results gets easier since there is nothing but support from peers and executives.

IBM, often a forerunner for identifying markets, is investing heavily in data and information capabilities. Sam Palmisano, the CEO, realizes that problems for humanity – wasted energy, insufficient health care, poor distribution of food and water, and snarled traffic for example – aren’t going away just because the economy is poor. If anything, he believes people will pay more attention to them. IBM has expanded mightily into the worlds of metadata and business intelligence, knowing the margins, if done right, are huge.

Remember the summer when you were 10 years old? For many people it meant being part of three different sports leagues. One was probably baseball or softball, another was soccer, and the third was perhaps basketball. You knew each person on each team and some overlapped. When the school year started you had all these different networks of people you knew through the leagues. Some people counted on you because you were one of the better players at baseball, while some knew you just because you were on the 15th man on the soccer team. This same paradigm is happening at Cisco Systems. During the last recession (2001), Cisco realized it took entirely too long for it to change and accomodate new economic environments. Cisco responded to the self evaluation by installing team oriented programs. If you are familiar with how internet traffic is routed then you know it is a big web. That way if one node goes down, the whole system can handle its absence. It is the same concept for their organization – a web of boards, councils, and subgroups. Each populated with different personnel to ensure diversity of thought. To reinforce the idea, compensation is now tied to these teams productivity. And it is paying off. Silos are broken down and decision making is improved and faster.

Team Dynamics with Innovating – Two Methods

I often get sucked into Janet Rae-Dupree’s writings and this week is no exception. She published a story called For Innovators, There Is Brainpower in Numbers that is mainly an advice piece about team dynamics with innovating. But before I get to that, I must copy a proverb she included:

“None of us is as smart as all of us.”

Japanese proverb

Back to my entry. An effective means to improve the efficiency of generating ideas is something called TIPS or Theory of Inventive Problem Solving. It is based on ideas of Genrich Altshuller, a Russian engineer/ scientist who led a related association in the second half of of the 1900s. How it works is to take successful products or processes and componentize them for what is innovative or reusable. Then take those parts and assemble what is applicable into the next problem. This benefits from a broad range of diversity in thought. Avenues that don’t seem similar are exposed for potential. And ultimately time is saved and relationships are formed.

Janet Rae-Dupree also talks about Brainstorming. She describes it as not the pancea it is often thought to be. I agree to a point. I think some brainstorming is good, especially when the participants feed off each other. But too often it is not a good use of time. Some of the reasons for this are (as excerpted):

throwing in an idea for public consideration generates fear of failure,
and workers looking to advance their own interests often keep their
best ideas to themselves until a more opportune time.

But researchers have shown repeatedly that individuals working alone generate more ideas than groups acting in concert.

As an aside, it seems group or team dynamics have the potential to accomplish more and quicker, but the US doesn’t reinforce this in its education system. Collaborative learning is often ignored for Anaylsis and Procedure learning (tests).

“Innovation today isn’t a sudden break with the past, a brilliant
insight that one lone outsider pushes through to save the company,” he
says. “Just the opposite: innovation today is a continuous process of
small and constant change, and it’s built into the culture of
successful companies.”

US Employment and Prediction

Here is a quick chart of how things have progressed over the last two years in regards to unemployment – the blue line that is. I included the red line to emphasize my viewpoint on the next few quarters. First, I’ll say I’m actually not as optimistic as the chart indicates. But I have a good feeling about the unemployment shape.

Here is my rational for a deep unemployment situation, but not a drawn out one:

1) Transformation Efficiency. The method for transformation is much more efficient than it once was. Business within the US is in constant fear. Because of that most companies have both hiring and layoff systems in wait. So when a company needs to activate one or the other the time to get the machine moving is very small. Plus people can acquire skills faster than ever before.

2) Impatience! No one seems to be talking about the most valued resource in the US = TIME! The greed that caused many investors to abandon long term investing strategies (why wait 10 years for 9% return when I can leverage everything for 20% now) will very soon pull the US out of the situation. Its as simple as there are just to many deals to be had out there right now.

3) The Cash Bubble. Today the three month Treasury bill traded at a negative yield. That means people who bought them are acknowledging a loss on it. How strange is that? People want to put their money somewhere to the point of taking a loss because the  return will still be more than many other investing options. If that doesn’t scream for alternatives, I don’t know what would.

4) Globalization. Businesses are realizing it isn’t a cure all. Good ideas still have to come from somewhere. And lessons learned from the last 15 years or so will show the US is still the leader in driving new business. Which in the long run, flips globalization back to the US. For instance, suppose you are a successful company in Asia in the call center business. Your growth rate levels off and expansion is necessary to improve income. The US has the talent to assistant in this type of work.

5) Content is still King. Many news agencies are in dire situations (Tribune, Time Warner, and the NY Times) but it isn’t because people read less, listen to music less, or visit museums less. It is because advertising needs a refocus. In the meantime, this situation will spawn a new dynamic of content creation and perhaps distribution. There are simply too many talented people flooding the vacuum of free time.

So because of these five forces, the US will hit a deep unemployment chasm (in it right now 12-8-08) and then rebound out fairly quickly. I feel like the tipping point is when the jobs report levels off. That will be the signal that it is safe to go back into the water.