MBS Blog

We are in a recession…so what are we going to do about it? As individuals and organizations we have to improvise, adjust and overcome.  The “capitalist tools” over at www.forbes.com know what businesses need to do.

Many companies are thinking: cut expenses to the bone, particularly advertising and marketing expenses. Well…as I mentioned in last week in Recessionary Marketing (http://www.medblacksea.com/blog/2008/11/recessionary-marketing/ )  the best strategy might be to employ some “contrarian” tactics:

Don’t Skimp On Ad Budgets

Knowledge@Wharton, 12.01.08, 05:30 PM EST

Cutting advertising expenses can yield short-term gains–and long-term trouble.

With corporate managers under enormous pressure to control costs and maintain liquidity in the current credit crisis, advertising budgets often appear to be a dispensable luxury in the struggle to survive. Executives who succumb to that temptation, however, put the long-term future of their companies at risk, according to Wharton faculty and advertising experts.

“The first reaction is to cut, cut, cut, and advertising is one of the first things to go,” says Wharton marketing professor Peter Fader, adding that as companies slash advertising in a downturn, they leave empty space in consumers’ minds for aggressive marketers to make strong inroads. Today’s economy “provides an unusual opportunity to differentiate yourself and stand out from the crowd,” says Fader, “but it takes a lot of courage and convincing to get senior management on board with that.”

According to Wharton marketing professor Leonard Lodish, with demand slack for advertising services, the cost of these services goes down, making advertising expenditures all the more defensible in a bad business climate. “If your company has something to say that is relevant in this environment, it’s going to be more efficient to say it now than to say it in better times,” says Lodish.

Research shows that companies that consistently advertise even during recessions perform better in the long run. A McGraw-Hill Research study looking at 600 companies from 1980 to 1985 found that those businesses that chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 recession had significantly higher sales after the economy recovered. Specifically, companies that advertised aggressively during the recession had sales 256% higher than those that did not continue to advertise.

For companies that do stay the course and continue to advertise into a recession or increase their promotional activities, the key is to craft messages that reflect the times and describe how their product or service benefits the consumer. For example, companies might be tempted to emphasize price in a recession, but that only works for companies like Costco(nasdaq: COST - news - people ) and Wal-Mart (nyse: WMT -news - people ) that are built around a core strategy of providing low prices year after year, says Lodish. He points to the current Wal-Mart campaign, “Save Money. Live Better,” as a successful approach to the recession.

Dean Jarrett, senior vice president of marketing at The Martin Agency in Richmond, Va., which developed the Wal-Mart ads, acknowledges the campaign began in 2007 before it was clear a harsh recession was building. “We can’t claim we knew a recession was coming, but ‘Save Money. Live Better’ is dead on-point with who they are and what they want to be.”

Eileen Campbell, chief executive of the Millward Brown Group advertising firm in New York City, says that while companies should probably not dwell on the recession and scare consumers into hoarding their pennies under a mattress, certain products require a straight-up approach–such as financial services. “If you are in the financial services category, to behave as you did a year ago is silly.” At the same time, however, many consumers are weary of negativity generated by the recession and would be receptive to a more upbeat message, she adds. “If you can put a positive spin on how you can genuinely help without invoking doom and gloom, I think that’s going to be more compelling

Technorati Tags: recession, capitalist tools, doom and gloom, financial services, Dean Jarrett, The Martin Agency, Eileen Campbell, Millward Brown Group, New York City, www.forbes.com, advertising, marketing, www.medblacksea.com, recessionary marketing, marketing expenses, liquidity, credit crisis, advertising budgets, The Wharton School, Peter Fader, Leonard Lodish, McGraw-Hill, Anton Olff, Costco, Wal-Mart,

The unwritten rule regarding the blog here at MBS, Ltd., was that we would focus on macro & micro economic and business issues ONLY. We would not stray into the murky and dangerous waters of politics.

Having stated such, we decided to dive into the political pool (or cesspool?) with this entry. The motivation for this diversion is the topicality and relationship of the subject matter to BUSINESS in emerging markets like Eastern Europe, Russia, Georgia and Ukraine. The subject is NATO.

Nick Witney’s article in the Moscow Times (www.moscowtimes.ru) captures, dissects and congeals the truth like few others have recently.  The fact is, NATO in its current form is an obsolete, expensive and largely political club, where military and security matters are of primary importance mainly to its newest members and aspirants.

The subject of NATO is a divisive issue here in Ukraine, as well as further east.  The inclusion or exclusion of Ukraine and Georgia into the current NATO organization, will affect the economic direction of these nations.

Some argue very coherently, that a byproduct of NATO inclusion is the acceleration of political-or what we could call “philosophic integration” between new members and “the West,” as well as increased trade. The hope among the practitioners of “realpolitik” in the West, is that an expanded NATO will act as a check on Russian, as well as Asian influence and ambitions in Europe.

The main problem with this thesis is that it ignores the weakness of NATO and the shifting alliances that have resulted.

The Death of NATO 02 December 2008 By Nick Witney NATO, whose foreign ministers will meet Tuesday and Wednesday, is dying. Death, of course, comes to all living things. And, as NATO approaches its 60th birthday next spring, there seems no immediate urgency about writing its obituary; 60-year-olds may reasonably look forward to another decade — perhaps two or even three — of active and productive life. But perhaps it is now time for some discrete reflection on the fact that “the old man” will not always be with us. Human institutions, like human beings, can collapse with surprising speed once they have outlived their usefulness. The dramatic dissolution of the Soviet Union stands as a reminder of what can happen to organizations when doubts take hold as to whether they still serve any real interests other than those of their own apparatchiks — and how suddenly such doubts can grow when they attempt to convert themselves into something they are not.  NATO has, of course, shown remarkable tenacity. It should have disappeared when the Soviet Union collapsed and the Warsaw Pact evaporated because its job was done. But then came the Balkan crises of the 1990s, culminating in the realization that only U.S. military power could put a stop to Serbian President Slobodan Milosevic’s ethnic cleansing of Kosovo. And then came the terrorist attacks of Sept. 11, 2001, and this kept NATO in business, spreading its activities to Afghanistan.  But NATO’s repeated demonstrations of resilience should not blind us to the fact that it no longer provides a healthy basis for the transatlantic security relationship. As long as NATO’s raison d’etre was to keep the Russians out and the United States in, NATO’s internal dynamic of U.S. leadership and European obeisance was both inevitable and appropriate.  This unbalanced relationship still has advantages for both parties. Americans may find their European allies less pliable than before, but they can at least count on the absence of any serious alternatives for what NATO should become or what it should do. Europeans can continue to avoid responsibility for their own security and to invoke the catechism of “NATO — the cornerstone of our security” as a substitute for serious strategic thought.  But each now resents the behavior of the other. Americans find their patience tried by Europeans who are free with their advice and criticism, yet reluctant to shoulder risks. Moreover, the United States learned from the Kosovo experience of “war by committee” to distrust NATO as a place to run operations, and now Afghanistan highlights the organization’s limitations as a mechanism for generating force contributions.  As for Europeans, they are unhappy about pressure to participate in a U.S.-led “global war on terror” that they regard as dangerous and misconceived. They are also averse to policies seemingly designed to antagonize their more difficult neighbors like Russia and the Islamic world.  So what is to be done? None of the ideas for another dose of NATO rejuvenation looks like the answer. All the talk of an improved NATO-European Union partnership is mainly wasted breath. “Intensified strategic dialogue in Brussels,” in practice, boils down to the chilling specter of interminable joint committee meetings at which one nation’s ambassador to NATO explains his government’s position to a compatriot diplomat who is accredited to the EU and vice-versa.  The problem is not institutional relationships between the two organizations — except in the important but narrow case of Turkey and Cyprus, which remain bent on pursuing their bilateral feud without regard to the real risks to the personnel of their allies and partners deployed in Afghanistan and Kosovo. The real problem is relations between the United States and European countries, 21 of which belong to both organizations.  Nor does the answer lie in developing an EU “caucus” within NATO. The 1990s concept of a “European Defense Identity” within NATO proved to be unviable. Since then, expansion of the alliance and proliferation of NATO “partners” has made the idea of a special collective role for EU members all the more improbable. A double layer of decision-making would only cause an already ponderous organization to seize up.  There is nothing more dramatic to be done than to focus on upgrading the EU-U.S. strategic dialogue. The annual summits need to be made more substantial, and their focus needs to shift from transatlantic, bilateral issues to aligning EU and U.S. global policies and actions. President-elect Barack Obama should keep an eye on the calendar of the European Council, which brings the EU presidents and prime ministers together four times a year, and solicit an occasional invitation. The U.S. mission to the EU should be scaled up, and the EU representation in Washington needs to become a proper embassy. The more seriously the Americans show that they are willing to take the EU collectively, the more seriously the Europeans will take themselves.  Winston Churchill once remarked that you could always count on the Americans to do the right thing — after having tried all the alternatives. In the same way, the Europeans will eventually find themselves having to speak with one voice and act as one body in the wider world, if only because a globalized world will not allow them the luxury of doing anything else. As Charles de Gaulle forecasted: “It is not any European statesman who will unite Europe. Europe will be united by the Chinese.” Only collectively can Europeans be effective contributors to global security or achieve a robust transatlantic security partnership.  As NATO enters its twilight years, the United States should encourage the EU to grow into its global responsibilities. Despite all their differences and mutual dissatisfactions, Europe and the United States know that their relationship is as close to being best friends as they are likely to see for the foreseeable future.  Nick Witney, former chief executive of the European Defense Agency, is a senior policy fellow with the European Council on Foreign Relations. © Project Syndicate

 

 

 

Anton Olff

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Doing business in an emerging market like Ukraine is challenging. One of the biggest challenges is the lack of predictabilty. Sometimes, you just don’t know what to expect. People dissappear without reason, rules and regulations change without notice, and even things like running water and electrical power can never be counted on. 

At least some are determined to inform and prepare people so they can manage their expectations. Below is a menu insert from one of the better restaurants here in Odessa. The last line says it all. 

 

Anton Olff

Technorati Tags: Ukraine, emerging markets, Odessa, restaurants, rules and regulations, running water, electrical power

The “dismal scientists” are at it again.  The National Bureau of Economic Research (NBER) recently released a statement saying that the United States is in the midst of a recession that begun one year ago.

Now, it doesn’t take a rocket scientist or even an economist reading tea leaves to tell us what is obvious to most people-the World, not just the USA, is in deep economic trouble. The question remains: how do we…the collective we…define economic conditions?

For most of us, recessions and depressions are measured from a personal perspective. Recession is when someone you know loses their job or your business has slowed down. Depression is when YOU lose YOUR job or your business has gone bankrupt. This is a very simple, transparent and easily definable standard for economic cycles.

Of course, anecdotal  forms for measuring national or global economic cycles would never be considered “scientific,” accurate or informative beyond the personal. They do however point to something the article from www.americanthinker.com illustrates:

·         What are the standards for measuring economic cycles?

·         What specific data and formulas are used?

·         Are there personal or political factors that affect the determination?

·         Are the standards applied equally?

 

As economist Randall Hoven indicates, the NBER may not have adhered to a strict scientific analysis. So…whom do we trust? Perhaps the personal definition of economic cycles is the one we should utilize after all…….

 

December 03, 2008

NBER’s Anomalous Recession Calls

By Randall Hoven

The National Bureau of Economic Research, the official caller of recessions, recently said we are now in a recession that started one year ago, in December 2007 .

The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

 

This struck me as odd.  Not that I don’t believe we are in a recession now, but the starting date of December 2007 just seemed too early to me.  To see if this made sense, I looked at some underlying economic data and the NBER’s explanation, such as it is.  Why this might be important, I’ll explain later.

 

The rule of thumb for defining a recession is two consecutive quarters of negative real growth in GDP.  This is now the second recession called by the NBER in the two terms of President George W. Bush, yet in neither case were there two such consecutive quarters.  In fact, at no time in Bush’s Presidency were there two such quarters.

 

Of all 11 NBER-called recessions since 1947, only one other involved no two consecutive quarters of negative real growth.  That was the recession of April 1960 to February 1961.  However, that recession involved one quarter with significant negative growth, -5.1% annualized, and a cumulative -1.0% growth for a whole year

 

Compare that to Bush’s two “recessions.”  In 2001

 

• No two consecutive quarters of negative growth.
• Worst single quarter: -1.4% annualized.
• Year-to-year: +0.2% (positive real growth, 4Q2000 to 4Q2001).

 

In 2007

 

• No two consecutive quarters of negative growth.
• Last four quarters: -0.2%, +0.9%, +2.8%, -0.5%.
• Year-to-year: +0.7% (positive real growth, 3Q2007 to 3Q2008).

 

In all the other nine recessions since 1947, the NBER-called recession involved at least one quarter of year-over-year negative real growth.

 

President Bush deserves some sort of prize for getting two recessions assigned to him, yet never presiding over either (1) two consecutive quarters of negative real growth, or (2) year-over-year negative real growth.  I think that’s a first.  It certainly is in the last 60 years.

 

But the NBER does not use the “rule of thumb.”  Here is how the NBER explains its method.

 

The committee’s procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP, but use a range of indicators. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in activity.”  Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates.  The differences between these two sets of estimates were particularly evident in 2007 and 2008.

 

Get it?  I don’t.  I mean I sort of understand it, but I could never duplicate the NBER’s results with that explanation.  No one could.  It lacks transparency.  If the NBER explains its method elsewhere, I could not find it and no such link was provided in its FAQ on the matter.

 

For example, in the 2001 “recession”, why does the NBER say it started in March, under Bush, and not in 2000, under Clinton?  The first quarter of negative real growth was actually the third quarter of 2000, under President Clinton.  It showed -0.5% growth contraction, annualized.  But the NBER said no recession.  When it again showed -0.5% growth six months later, under Bush, the NBER said recession.

 

In 2007, the final revision of the estimate of fourth quarter growth was slightly negative: -0.2%.  The NBER now says that was a recession.  One quarter of -0.5% under Clinton, not a recession.  One quarter of -0.2% under Bush, a recession.

 

Maybe unemployment was more of a factor in the NBER’s analysis.

 

When the NBER said the recession of 2001 started, the unemployment rate was 4.3%.  That’s pretty low.  In fact, the unemployment rate was 4.3% or higher in every single month of President Clinton’s first term, and every single month of his second term until March of 1999.  No recession that whole time.

 

What about in December 2007, the beginning of our current “recession”?  The unemployment rate was 5.0%.  Then it dropped below that for the next two months and still stood at 5.0% in April of 2008.  Again, the unemployment rate was at or above 5.0% in every single month of Clinton’s recession-free first term.  It did not go below 5.0% until May of 1997.

 

Well, neither real GDP nor the unemployment rate quite explains the NBER’s method.  The NBER said it looks at the “income side.”  So let’s try Disposable Personal Income in real dollars.

 

In three of the last four months of 2000, all under President Clinton, real DPI declined.  NBER said no recession.  In the next three months, or the first three months of 2001 and mostly under President Bush, real DPI increased in each month.  NBER said recession.  Decline in three of four months, no recession.  Increase in three of three months, recession.

 

Just for fun, I looked at quarterly GDP numbers since 1947 and all 11 NBER recessions called since that year.  Here are a couple of interesting observations.

 

(1) Every time there was at least one quarter of year-to-year negative real GDP growth, there was a recession associated with it.  There were no recessions without such negative year-to-year growth, with two exceptions.

 

(2) With simple rules based on real GDP numbers alone, a recession as well as its beginning and ending quarters could be called.  Every recession called by these rules was also called by the NBER.  Every recession called by the NBER was also called by these rules, with two exceptions.  For every recession these rules called that matched the NBER recessions (9 of the 11), the starting and ending quarters matched within one quarter, at worst.  What were these simple rules?

 

• A recession starts in a given quarter when that quarter-to-next-quarter’s growth is negative and the total growth over the two quarters combined is also negative.  (A somewhat weaker version of the “two quarters” rule.)
• A recession ends as many quarters after that beginning quarter as there remains cumulative negative growth.

 

That is, without trying really hard, using real GDP data easily available from the St. Louis Fed only, and programming simple rules in a spreadsheet, I was able to match 9 of the 11 NBER-called recessions, with no false alarms and with, at most, one quarter mis-match in timing.  The only two exceptions in any of this?  The two recessions under George W. Bush.

 

My simple rules said no recession in either case (yet called all other recessions, with no false alarms).

 

The year-to-year negative growth rule said no recession in either case (yet called all other recessions, with no false alarms).

 

The “two quarters” in a row rule said no recession in either case (yet called all but one other recession, with no false alarms).

 

(It’s still possible, by any of these rules, that we are in a recession now, but one that started in the third quarter of 2008, meaning July at the earliest.  But for any of these rules to kick into effect, we need the fourth quarter’s data.)

 

I’m sure the NBER has good reasons for calling and timing the two Bush recessions. But even it would have to admit that those two recessions are anomalous — oddballs among the 11 recessions in the last 60 years.

 

Why would this matter?  Why would it matter whether the US recession started in December of 2007 or July of 2008, for example?  After all, President Bush presided in either case.

 

Here is why.  Europe is now in recession, and it started in the second quarter measured the old-fashioned way: two consecutive quarters of negative real growth in 2008.  The US did not have its first quarter of negative growth until the third quarter of 2008.  The question is whether the recession spread from Europe to the US or vice versa.

 

If the US recession started in 2007, as the NBER states, Europe caught our cold.  If we go by the simple rule of two negative quarters in a row, we are catching Europe’s cold.  It’s all about who gets the blame, at least plausibly so.

 

In 2001, President Bush got the blame instead of President Clinton, per the NBER.

 

In both cases, blame Bush.  In this second case, blame Bush not only for a US recession, but a global recession.  If Iceland is bankrupt, it must be Bush’s fault.

 

Yet in both cases, we don’t know exactly how the NBER did it.

 

Here is what the NBER says about itself:

 

Committee members are: Robert Hall, Stanford University (chair); Martin Feldstein, Harvard University and NBER President Emeritus; Jeffrey Frankel, Harvard University; Robert Gordon, Northwestern University; James Poterba, MIT and NBER President; David Romer, University of California, Berkeley; and Victor Zarnowitz, the Conference Board. Christina Romer of the University of California, Berkeley, resigned from the committee on November 25, 2008, and did not participate in its deliberations of November 28.

 

Christina Romer (formerly on the committee) was just designated as the chair of Barack Obama’s economic advisors.  She is married to David Romer (on the committee).

 

Here’s how the NBER might help: tell us exactly the formula for calling and timing a recession and give us the input data so that we can reproduce its results.  If it can’t, or won’t, it should not be considered the “official” caller of recessions in my opinion.

 

In my opinion, there should be both transparency and clear objectivity in calling and timing recessions.  The method should be repeatable and based on publicly available data.  It should be more than simply the considered, consensus opinion of a panel of seven experts.  Otherwise we invite public doubt — public doubt in the area of cause and effect of economic downturns.  This is important stuff — or should be, in a democracy.

 

Data sources:

 

• St. Louis Federal Reserve Economic Data (http://research.stlouisfed.org/fred2/) for real GDP (GDPC96), real Disposable Personal Income (DSPIC96) and Civilian Unemployment Rate (UNRATE).
• NBER (http://wwwdev.nber.org/cycles/dec2008.html) for latest recession announcement, FAQs on recession definition, and official recession dates (http://www.nber.org/cycles.html).

Anton Olff

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