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“When Will the Recession End?”, asks the New York Times Company’s CEO as do many sensible managers of enterprises

Posted February 19, 2009

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Janet L. Robinson, president and CEO of the New York Times Company is reported in the February 9, 2009 issue of the New York Times saying that her company’s future rests on three questions no one can answer:

When will the recession end?
When it does, will the decline of print advertising slow to a modest pace?
Will internet ads make a comeback?

CEO Robinson’s first question about when the recession will end is answered at greater length than are her two questions about the future of print and internet ads. Its answer includes a review of research that led to the conclusions stated.

The recession began abruptly when America’s illusion of being wealthy was shattered in November or December of 2007 by the onset of a severe recession with wide ranging effects. With the onset of the recession, there was an unfavorable shift in the balance between assets and income versus debt and spending plans for consumers, businesses and other economic entities.

The end of the recession will not come until consumers, businesses and other economic entities believe that a favorable balance between their assets and income versus their debt and spending plans is restored.

An empirical basis for tracking the career of the recession comes from telephone interviews conducted during the first ten days of each month with 480 consumers sampled from the nation at large.

A total of almost 8,600 consumers provided the data used to track:

Month-to-month change in the financial balances of consumers; and
Investor appraisal of the intrinsic value of stock issued by public companies

Both consumer spending and the pace of economic activity slow when there is a negative shift in the balance between consumer assets and income versus debt and spending.

The Consumer Balance Index (CBI) computed monthly on the basis of consumer survey data indicates change in the financial balances of consumers. The CBI describes what is currently happening in advance of reports by independent authorities and government.

Click here to see graph

START OF RECESSION: The eight-point decline in the CBI from 95 in October to 87 in November 2007 marked the start of the recession.

About a year later, the National Bureau of Economic Research – defining a recession as a slowing of economic activity that persists for some months – announced that the recession began in December rather than November of 2007.

RECESSION’S FIRST BOTTOM: About a year after the recession began, the CBI declined ten points from 83 in September to 73 in October, 2008, marking a low but not necessarily the low in the then year-long recession.

Consistent with the ten-point decline in CBI, there was a record decline in the GDP during the third quarter of 2008.

REBOUND: Between October 2008 and January 2009, the CBI regained seven of the 22 points it had lost between the pre-recession level of 95 in October 2007 and its October 2008 low of 73.

Consonant with the CBI’s rise, the year-over-year decline in Index of Leading Indicators – while still negative – was smaller in November than in December (3.5 versus 3.8). Another sign of an easing in the recession was a 6.5% increase in sales of existing homes.

TIGHTENING: After easing in January 2009, the recession tightened in February, losing two points to bring it to 76 – within three points of its October low of 73.

RECESSION’S EFFECTS: The effect of the recession on consumer financial balances has been greatest for consumers who have the “Strongest” financial balances – i.e., have a personal CBI of 163, which is the highest rating used in compiling the CBI. They include a disproportionately high concentration of prospective buyers of new cars, housing and other major goods.

The sharp decline in sales of new cars and homes since the start of the recession in November 2007 is associated with decline from 28% in October 2007 to just 12% a year later in October 2008 of consumers with the strongest CBI.

The proportion of consumers with the strongest balances remained at its 12% low in November and December and then rose to 16% in January when the recession eased. Then, consistent with the tightening of the recession in February, the proportion of consumers with the strongest financial balance declined two points from 16% in January to 14% in February.

Tracking investor appraisal of the intrinsic value of stock issued by public companies

To gauge change in investor appraisal of the intrinsic value of stock, investors are asked in the monthly survey whether they would buy, sell or do nothing in the event the Dow drops by 10%. About half of households own stock directly or through mutual funds.

In concert with the ten-point decline in the CBI between September and October 2008, the ratio of buyers to sellers declined from 1.56 buyers during the five months preceding September to fewer than one (0.91) buyer per seller during the five months beginning in October. During the five months starting in October 2008, the ratio of buyers to sellers remained low: 1,08 buyers per seller in October, 0.90 buyers to sellers in November, 0.89 in December, 1.08 in January, and 0.61 in February.

GOING FORWARD: In that the current recession has been severe and enduring enough to trigger massive federal government intervention, it more closely resembles the Great Depression of 1929 which lasted ten years than the subsequent one and two year recessions that followed in: 1960, 1963, 1967, 1973, early 1980, 1990, and the early 2000 recession preceded the present “late 2000” recession.

Prudence demands that managers operate on the assumption that the present recession, now in its fifteenth month with no end in sight, is more like the Great Depression, which lasted for ten years, than the eight, one to two-year recessions that followed it.

So long as a manager remains ready to act quickly when it is clear the recession has eased, the risk of operating on the assumption that the current recession will last long is relatively low.

History teaches that a long, severe recession can be transformative. During the ten-year Great Depression, the economy was restructured to accelerate its growth and fight World War II. The economy after the Depression ended was radically different than it was before the Depression began.

Consumers, businesses, and other enterprises, while living in what will feel like a perpetual recession, should be prepared to adapt to a restructured economy when this recession ends, rather than attempt to function in the economy that existed pre-recession.

In an article appearing in the March 2009 issue of The Atlantic, Richard Florida lays out an interesting vision of “How the Crash Will Reshape America.”

When it (the recession) ends, will the decline of print advertising slow to a modest pace?
Will internet ads make a comeback?

The clear, short and unequivocal answer, “No,” can be given to the New York Times’ two questions about whether the decline of print advertising will slow and whether Internet ads will make a comeback after the recession ends.

Advertising of the sort currently practiced is obsolescent. It developed to meet the needs of marketers in the post-World War II boom, when consumer income grew faster than consumer demand for products and services.

J. Walter Thompson, speaking for the advertising industry following the end of World War II, asserted that it was the business of advertising to create demand for products and services that consumers did not know they wanted but could – increasingly – afford to buy.

Advertising spending increased in pace with growth in the ability of mass media to command, control and monopolize the attention of large audiences. At the zenith of mass media’s hold on the public, television audience size could be gauged by what was called the “flush meter” – the drop in water pressure that occurred when the networks ran commercials and consumers took a comfort break.

With their command of public attention, mass media were able to impact captive audiences not empowered to respond. Now, with advancing information technology, consumers are no longer held hostage by mass media.

With interactive access to a rich flow of information, the value of one-way, mass advertising is diminishing and, with it, the willingness of marketers to spend on conventional advertising carried by mass media.

While mass media advertising expenditures are diminishing, spending on interactive marketing communications – made possible by continuing advances in information technology – is increasing.

A giant advance in interactive capability appears to be over the horizon. Artificial intelligence could become robust enough to create a computer that could pass the Turing Test of being indistinguishable from a human when engaged in a conversation.

As artificial intelligence advances, marketers will spend more on interactive communications to answer consumers’ questions one-on-one and will spend less on conventional advertising carried by print, electronic and online mass media.

Marketers are developing their own increasingly sophisticated websites, where consumers answer their questions about product and service offerings interactively. What is not clear is how communication companies can monetize media that are interactive.