President's Message - Licking the Double Dip

by Benjamin Rand

Business is improving. The stock market is up. The Purchasing Managers Index for Manufacturing was 59.6 in March, its highest level since mid-2004. Unemployment fell to 8.6% in WNY last month, still too high, but improving. Orders are up, backlogs are growing, so company owners and presidents should be happy, right? Not quite. Their worries and fears are now focused on the dreaded "double dip."

No, this double dip is not the two scoop variety that normally comes to mind this time of year. This double dip, better known to economists as a W-shaped recession, refers to the possibility that a short period of growth after a recession will be followed quickly (in less than a year) by another recession. The pundits would have us believe that the threat of a double dip hangs over our heads like the sword of Damocles and you can hear that concern behind the cautious optimism of many WNY business owners and presidents.

In reality, double dip recessions are relatively rare events. Of 33 American recessions since the mid-1800s, only three were double dips in 1913, 1920 and 1981 according to Deutsche Bank economists. The last double dip was actually self-induced when Paul Volker raised rates to staunch inflation after the 1980 recession. So there is only a 3%-6% chance of a double dip based on historical precedent according to my calculations. Of course, I'm no economist, as my macro professor used to constantly remind me. Yet even highly trained and experienced economists rarely agree. As George Bernard Shaw famously observed, "if all economists were laid end to end, they would not reach a conclusion." That is certainly the case these days as economic sentiment seems to gyrate from one extreme to another with every new government statistic.

So the bigger question is: why should you care? After all, recessions are a fact of economic life. They show up quite regularly every six or seven years. The wonder is that we are not better prepared for them when they do come. This past recession left many businesses scrambling to improve their efficiency, jettison under-performing assets and diversify the markets they serve. In reality, many of these actions could have and should have been taken before the recession hit. Running your business well should always be your mantra, in good times as well as bad.

As a business owner or president, you cannot allow fear or anxiety to paralyze your decision making and leave your business in limbo. This clearly occurred during this past recession. Perhaps the one thing all economists DO agree on is that psychology plays an important role in economics. At the start of last year, business owners and presidents were so unsure of where the economy was headed that many of them stopped everything they were doing other than day-to-day business, including many otherwise healthy WNY companies. That inaction clearly made the situation worse for the economy as a whole and for many of those businesses in particular. If we spend all our time wringing our hands about a double dip, there is a real possibility that we will create a self-fulfilling prophesy.

So, instead of living in fear of a double dip, or any recession, learn from our recent experience. First, get your business in shape now, whether you are making money, breaking even or losing money. Second, do not allow fear and uncertainty to shut down your decision making. Follow these rules and you will be ready, if and when a double dip does strike. In the meantime, ignore the pundits and run your business. Life is too short and, to quote John Maynard Keynes, "in the long run we are all dead."