Tag Archives | recession

Recession = Fewer Professional Jobs Available

If you haven’t been living under a rock for the past 15 months, you have probably noticed that the decline in oil prices has resulted in many Houston businesses experiencing symptoms of an economic recession. What does a recession mean for you? Historically, recessions equate to reduced availability of professional jobs.

less professional jobsWhile the effects of the freefall in oil prices may have not spilled over to your economic sector yet, it’s important to note that banks are already restructuring the troubled loans of oil and gas companies. This could result in more layoffs in the energy sector and will likely impact other industries as well.

But even greater than the oil and gas industry, we’re seeing international economic upsets in China, Latin America, and in other areas of the American market economy. Some are expecting to see in 2016 a recession greater than that of the 2008 recession.

How Most Companies React to Recessions

Most companies without effective leadership would begin to cut the upper management who complete the 20% of the work. This leaves the lower level employees that complete 80% of the work. Many of our clients lay off the CFO and other “non-essential” leaders within the company. Why pay $50,000-$100,000 more for an employee when they only complete 20% of the work needed? Less professional less professional jobsjobs are thus becoming available because those positions are now deemed obsolete or as overhead.

The experienced professionals are being removed from their positions due to their higher cost. Therefore, we tend to see many “battlefield promotions”. The military coined this term as a promoted soldier due to the death or injury of a senior officer.

Like in the military, employees are often promoted during a recession not  necessarily because of their skills. But because their supervisor left or was laid off. CEOs or hiring managers feel that if these employees can do 80% of what their manager did, then asking them to do the whole job isn’t too much of a stretch.  While they might have the talents to succeed, they may not have the skills needed to complete that last 20%.

One way a business can protect itself from such a situation is by making a practice of hiring star-quality team members. These members can rise to the occasion when faced with rough economic times.

NOTE: Want some guidelines to develop a star-quality team? Download the Guiding Principles for Recruiting a Star-Quality Team to make sure your team can adapt in rough economic times.

Less Professional Jobs Available

As difficult as it is for those receiving battlefield promotions to get up to speed quickly, the fired managers face an even tougher challenge.  Suddenly, there are more qualified candidates in the marketplace than there are positions available. The available jobs have been filled from within through battlefield promotions.

Highly-experienced individuals found that they have to take positions they are overqualified for at reduced pay.  This is where the value of the network you have built (or will wish you had built) really pays off.  Your connections in the marketplace can mean the difference between securing a desirable position, or settling for what you can find.

When looking for a job with limited openings in the marketplace, find an organization where you fit and can provide value.  Even if that means taking a pay cut, the money should come when things turn around.

Hiring & Restructuring Human Capital

Regardless of how this emerging recession is impacting your organization, realize that the #2 reason why businesses fail is employee turnover. Think about it. The costs associated with replacing an employee include: hiring, interviewing, on-boarding, training, mentoring, and waiting approximately 6 months before they find themselves accustomed and productive in your organization. The hiring process is getting longer and thus, more expensive.

As you’re building a new team or assessing your current employees for possible battlefield promotions, consider how you can build a star-quality team. A star-quality team will carry your company through tough times. Assess your current employees as if you were hiring them for the first time. If a battlefield promotion is necessary, who will rise to the occasion and provide the most value to your company?

In tough times, companies generally try to run leaner.  There are ways to do more with less and to measure the productivity of those limited resources. If you’ve exhausted all resources within your organization, then it might be time to look at how to hire the right people to build your team.

Check out the guidelines that The Strategic CFO uses as we advise our Retained Search clients to help find the perfect fit. Click here for your FREE download of those guidelines.

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Fiscal vs Monetary Policy

Fiscal vs Monetary Policy

What is Fiscal Policy?

Fiscal policy is essentially how the government decides to collect and spend money to impact the economy. This is studied in Macroeconomics to better understand the relationship between the economy and governmental influence. The study of fiscal policy is useful in speculating the reaction to changes in the government’s budget. It is also a frequent topic during presidential elections, because fiscal policy affects numerous industries.

For businesses, fiscal policy can be very important. Some businesses are directly impacted by government interaction in the economy. For example, businesses that have government agencies as their clients depend upon a fiscal policy that includes their services. Furthermore, other businesses are impacted by fluctuating taxes. Some industries are more exposed than others to taxes. So it is very important that the leadership of businesses takes these macro-elements into consideration.

Expansionary Fiscal Policy

There are three phases of fiscal policy that the government switches between depending on the outlook of the economy. Use the term expansionary fiscal policy when the government is spending more than it is receiving. Generally, this stimulates the economy during a recession or downturn. At the onset of a recession, high government spending with no rise in taxes is common. Then increased taxes and decreased spending follows. If this phase of fiscal policy does not work, it can leave the government in a greater deficit without a recovered economy.

Contractionary Fiscal Policy

Contractionary fiscal policy is the opposite of expansionary. It involves spending less than the government collects in taxes. Rather than attempting to stimulate the economy, this phase restrains the economy. This includes controlling inflation and paying down debt. Another tool of contractionary fiscal policy is raising taxes. When the government raises taxes, households have less disposable income while the government has more to spend.

Neutral fiscal policy is the phase between expansionary and contractionary fiscal policies. This is a period of time when the government’s spending is approximately the same as its collections. This phase is often a transition period between expansionary and contractionary policies, so it is a time of speculation and uncertain governmental policies.

What is Monetary Policy?

Use monetary policy to describe the decisions over a nation’s money supply. In the United States, the Federal Reserve has this duty. The key decisions affecting monetary policy are setting interest rates, setting bank reserve requirements, and buying/selling government securities. Thus, the same agency as fiscal policy does not control the monetary policy.

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Fiscal vs Monetary Policy

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Fiscal vs Monetary Policy

See Also:
Generally Accepted Accounting Principles (GAAP)
Economic Drivers to Watch

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Stagflation

See Also:
Economic Indicators
Balance of Payments
Supply and Demand Elasticity
The Feds Beige Book
What are the Twin Deficits?

Stagflation Definition

In economics, stagflation refers to the combination of stagnation and inflation. Stagnation refers to slowing economic growth or recession. It is a period of low gross domestic product and high unemployment. Inflation refers to rising consumer prices. The combination of these two conditions makes for a troubled economy.

The term stagflation was first used by economists in the 1970s when both the U.S. and the U.K. were experiencing simultaneous stagnation and inflation. At that time much of the economic trouble was due to rising oil prices which can contribute to both inflation and stagnation.

Central Banks and Stagflation

Central banks have certain tools for counteracting unfavorable economic conditions. They can implement monetary policy tools to try to influence the conditions of the economy. Central banks can raise or lower interest rates, raise or lower reserve requirements, and buy or sell currency to influence money supply.

For example, if inflation is rising, a central bank can raise interest rates, raise reserve requirements, or purchase currency to reduce the money supply in an attempt to curb inflation.

And during a period of stagnation, if the economy is slowing down, the central bank can lower interest rates in an attempt to increase the money supply and stimulate business and economic activity.

Stagflation Dilemma

However, when inflation and stagnation occur simultaneously, the tools of the central bank are not so simple to implement. For example, during a period of stagflation, a central bank could raise interest rates to fight inflation. But this would hurt the struggling economy. And the central bank could lower interest rates to stimulate the economy, but this would exacerbate inflation.

So one of the main reasons stagflation is such a problem is that central bank monetary policy is essentially unable to ameliorate the unfavorable economic conditions. Trying to fix one half of the problem only makes the other half of the problem worse. Additionally, it doesn’t matter which side of the problem they attempt to correct or influence.

stagflation

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Recession Definition

Recession Definition

A recession definition is a period of slowed economic activity. The term describes a contracting economy. It is typically defined as two consecutive quarters of declining gross domestic product. Characterize a recession by high unemployment, low productivity, and lower levels of investment. A recession is also a part of the business cycle. Furthermore, a typical recession lasts from six to eighteen months. In the U.S.,a non-profit organization called the National Bureau for Economic Research (NBER) officially declares a recession.

Describe a recession as either short or long, and shallow or deep. Short or long refers to the duration of the recession. Whereas shallow or deep refers to the severity of the recession. But, refer to more severe recessions as deep.

US Recessions

If you want to learn more about the historic dates of expansions and contractions of the business cycle in the US, then go to: www.nber.org. Also, learn how you can be the best wingman with our free How to be a Wingman guide!

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See Also:

Economic Indicators
Stagflation
What are the ‘Twin Deficits’?
Supply and Demand Elasticity
London Interbank Offered Rate (Libor) Controversy

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What is Deflation?

What is Deflation?

What is deflation? Deflation is the decline in the price for goods and services. It can also be referred to as the increase in the value of real money. In other words, it’s the value that the current currency will go up per unit of goods or services.

Deflation Explained

Deflation often occurs when the demand for goods or services drops. As this happens, the price of the current supply will often drop in order to meet demand. Deflation economics often happen during large recessions or depression times. Furthermore, deflation should also not be confused with the term disinflation which refers to a slowing effect of inflation or a slow increase in the price of goods and services.

Deflation Examples

Some common examples of when deflation has occurred are times like the Panic of 1837, the Civil War, as well as the Great Depression.

The Panic of 1837 was the first major time that deflation occurred as people rushed to banks there was an overall drop in the money supply as well a major decrease in the price of goods and services.

During the Civil War, there was another era of deflation as the United States set the dollar on a gold standard and reduced the amount of money printed during the war. This caused an overall drop in the money supply and therefore an overall drop in the prices.

Finally, the Great Depression was a time in which many banks failed and the ability to gain money became difficult thus causing deflation to occur and the price of goods to fall dramatically. This period of deflation is probably the most dramatic because of the time in which it took to climb back to normal levels of inflation.

what is deflation?

See Also:
What is Inflation?
Treasury Inflation Protected Securities (TIPS)
Consumer Price Index (CPI)
Supply and Demand Elasticity
Economic Indicators

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Economic Indicators

See Also:
Consumer Price Index
Stagflation
Balance of Payments
What are the Twin Deficits?
The Feds Beige Book

Economic Indicator Definition

Economic indicators are macroeconomic data that describe the condition of an economy. So, use them to determine whether an economy is prosperous and expanding or troubled and contracting.

For example, a high unemployment rate and a contracting GDP are considered signs of a troubled economy, such as a recession. In comparison, high levels of consumer confidence and rising stock market indexes are signs of a prospering economy.

Economists, investors, and policy makers use economic indicators to discern the health of the economy. Then they try to forecast changes in the business cycle.

Types of Economic Indicators

There are three types of economic indicators: leading indicators, lagging indicators, and coincident indicators.

Leading indicators considered predictors of economic trends. Analysts use these data to try to forecast changes in the business cycle. Examples of leading indicators include the following:

  • Stock prices
  • Building permits
  • Average weekly initial claims for unemployment insurance
  • An index of consumer expectations

Coincident indicators fluctuate simultaneously with the business cycle and reflect the current condition of the economy. Examples of coincident indicators include the following:

Lagging indicators appear after the completion of economic trends and changes in the business cycle. Use them to analyze the economy in retrospect or to confirm other economic data. Examples of lagging indicators include the following:

Economic Indicator Sources

The most reliable and closely-watched economic indicators are published by government or non-profit organizations, such as the Conference Board, the Federal Reserve System, the Bureau of Labor Statistics, and other organizations. These organizations issue economic data periodically.

If you want to track your economic indicators, then download your KPI Discovery Cheatsheet today.

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Economic Data Online

Economic indicator data can be found at the following websites:

Conference Board Index: conference-board.org/economics

Federal Reserve System: federalreserve.gov

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Adjusted Present Value Example

See Also:
Adjusted Present Value (APV)

Adjusted Present Value Example

Joey owns a small chemical plant called Chemco. Chemco, despite the effects of the recent recession, is doing fine. They are doing so well, in fact, that they have excess cash. Chemco decides to look for a suitable investment for the free cash flow of the company.

The next day Joey attends his trade organization meeting. At this meeting he meets the CEO of Chemicalventures, his main competitor to Chemco. They resolve to set aside their differences and meet for lunch. At this lunch meeting, Joey finds out that Billy has decided to sell Chemicalvenutres and wonders if Chemco would be interested in purchasing Chemicalventures. Billy assures Joey that the investment will be worth his time and effort.

Joey, the next day, contacts his board of directors. The board of directors of Chemco is interested in the idea as long as it is financed with debt. First, however, they require the financials of the company as well as the adjusted present value of the deal.

Joey talks to Billy, who sends the company financials over to Joey. Joey begins his preliminary research by Googling “adjusted present value calculator”. Unsatisfied with what he sees, Joey sends the Chemicalventures financials over to his top financial analyst.

Adjusted Present Value Calculation

The analyst performs this calculation based on the Chemicalventures financials:

If…

Investment = $500,000

Cash flow from equity = $25,000

Cost of equity = 20%

Cost of Debt = 7%

Interest on debt = 7%

Tax = 35%

And the deal is financed half with equity and half with debt.

Then…

NPV = -$500,000 + ($25,000 / 20%) = -$375,000 PV = (35% x $250,000 x 7%) / 7% = $87,500

-$375,000 + $87,500 = -$287,500 –> Bad Deal

Joey is pleased to find these results because they have saved him from making a poor business decision. He contacts Billy to tell him that, unfortunately, Chemco can not purchase Chemicalventures.

adjusted present value example

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