While not robust, the recovery is finally underway in Delaware. Personal income is growing, jobs are being added and the unemployment rate is falling. The leading indicator for Delaware maintained by the Philadelphia Federal Reserve shows no signs of a recession on the horizon. What does this mean for Delaware businesses?
When consulting with Delaware businesses the first question explored by DECON First is how sensitive the business and its industry are to swings in the business cycle. Businesses in industry that are volatile over the business cycle, with sales dropping faster and rising more rapidly than the total economy, must integrate this into their decision making.
Businesses in cyclically sensitive industries should pay closer attention to macro economic conditions and be prepared to act more quickly. If slow to respond to a downturn, such businesses will have excess inventory rapidly piling up. Staffing will exceed sales requirements. Capital improvements or expansion of facilities should be postponed. Discounting, coupons and special lower price deals should be considered.
Cyclically sensitive business should also be prepared to move quickly during an economic upturn. They need to have the inventory necessary to satisfy a double-digit upswing in sales. A pool of experienced part-time employees should be available to work increased hours. More discrimination can be used in pricing and capital projects to enhance sales can move forward.
The first step in determining the cyclical sensitivity of a Delaware business is to examine the percentage swings in employment, sales and number of establishments that occur over two or three business cycles. Employment at furniture stores in Delaware, for example, rose 56% in the recovery following the 1991-92 recession and 25% following the 2001-02 recession. On the heels of the “Great” recession of 2007-08, Delaware furniture store employment has plunged an astounding 64%.
While new car sales are sensitive to the business cycle, an increase in the sales of used cars helps to cushion the cyclical swings. Sales at auto part stores, on the other hand, are mildly counter cyclical as vehicle owners’ shift to repairs rather than replacement.
The second step in determining the cyclical sensitivity of a Delaware business is to identify a statistically meaningful indicator of the business cycle.
Employment in Delaware architectural services may double during a recovery and drop in half during a recession. Analysis shows that change in Delaware architectural employment lags the moving average of Delaware residential permits by approximate 20 months.
More importantly, although Delaware architectural firms tend to delay downsizing or expanding for more than a year and a half, they would be safe to start making changes 6 to 7 months after the turning point in residential permits.
The third and final step in determining the cyclical sensitivity of a Delaware business is to separate secular trends from business cycle trends. Employment at book stores in Delaware, for example, has plunged over 70% yet this drop started in 2004. Certainly the “Great” recession had an impact, but the coming of Kindle and other Internet book sales has caused a major structural drop in book store sales as well.
Careful observation of economic data and trends can be more than an academic exercise. As with the example of cyclical sensitivity it can help a business stave off major losses of net revenue and even closure. DECON First is dedicated to linking economic data to better decision making for Delaware’s businesses.
DECON First uses economics to strengthen Delaware business. This is accomplished by providing accurate, objective, and relevant analysis of the economy, coupled with best practice recommendations that deliver new customers. The detailed analysis for the Indicators above is found in the DECON First monthly Delaware Economic Review (www.deconfirst.com).
Direct questions to info@deconfirst.com
