Leaner Times Ahead?

The economy works in cycles : what goes up must eventually come down. We have been in a boom for the last eight years. Are we now moving into leaner times ahead?

The two telling indicators of leaner times ahead are: falling consumer confidence and increasing news of corporate layoffs. On the former, the latest University of Michigan survey showed consumer confidence crumbling further in February to the lowest levels in more than seven years. Since consumer spending is 70% of the U.S. economy, this is bad news for the economy. People hold back their spending when they fear for their jobs. And new corporate layoffs are being announced almost everyday. The recent ones include not just the crashed dot-coms, but major (and mostly profitable) companies such as:

General Electric (estimated to cut 75,000 jobs), DaimierChrysler (26,000), Lucent Technologies (16,000),Verizon (10,000),WorldCom (7,700-11,550), Motorola (9,400), Sara Lee (7,000), Whirlpool (6,000), J.C. Penny (5,300), Nortel (4,000), Xerox (4,000), Gateway (3,000), Sears (2,400), , AOL-Time Warner (2,000), DellComputers (1,700), Helwlett Packard (1,700)…..

The list keeps growing!

No matter what companies call layoffs these days(“right sizing”, “periodic rebalancing of the skill sets of our work force”…. ), it is never a pleasant process for the employers or the employees. (It was the single most painful part of my job when I was running my bank during the last recession.) But what sets the current rounds of layoffs apart from the previous ones is the fact that they come early in the down cycle. In the past, companies used layoffs as the last resort when things are really bad. Now successful companies want to do it “pre-emptively” and “proactively” long before they must do it. Nowadays it is almost fashionable that when companies announce their results (good or bad) they give out details of their planned reductions in work force. It seems companies are more eager to please investors (who generally welcome the news)  than to worry about the morale among its workers!

Last year, when only the dot-coms are handing out pink slips, layoffs are happy events: Dot-com employees knew the market was still hot and jobs are plentiful. They treated layoff severance pay like bonuses, since most found new and perhaps higher paying jobs at other dot-coms right away. Then things got a bit tougher, so some of the displaced workers decided to go back to their former non dot-coms jobs. Now it seems we are entering into a new phase as traditional companies are laying off people. Even though the job market isn’t tanking and there is no general panic in the air yet, everyone can sense that pressure is mounting.

Although I am not predicting a full recession ahead, the good times appear to be coming to a close. Magazines and newspapers are suddenly full of articles advising what to do to prepare for the worst. Americans have had so many years of good times that many are unprepared for the lean times ahead.

Are you prepared?

I think proper preparations need to be in two areas: in the head and in the pocket book. Years of prosperity have caused many families to confuse their needs with wants, and have gradually moved into a lifestyle that requires two jobs and two incomes! This is a good time to re-evaluate your lifestyle and your spending habits, and there is no more effective tool to this than the old-fashioned Family Budget. I am dismayed to know that few families have developed a habit to control spending with a budget and an effective expense tracking system. In the bible, it exhorts us to watch how little ants save up during good times to provide for lean times (Proverbs 30:25,6:7-8). Proverbs 21:20 says: “In the house of the wise are stores of choice food and oil, but a foolish man devours all he has”. Families are well-advised to have at least 3-6 months’ reserve in their bank accounts in case their income is temporarily interrupted.  Debt reduction is another important area – families should strive to have no debt other than their home mortgage loans. And even the amount of home mortgage loans needs to be in check. “The borrower is servant to the lender”, the bible warns (Proverbs 22:7). The bumper sticker which cutely says “I owe, I owe, so off to work I go” will not work when one loses one’s job!