Transcript by Rev
Hello everyone. Connor Lokar here, Senior Forecaster at ITR Economics, checking in for another Trends Talk. Today, we’re talking about beating the business cycle, specifically as we’re looking at the second half of 2022 and 2023 when the business cycle is set to transition to C, the slowing growth phase of the business cycle. Now you may be asking yourself, Connor why are we talking about this in mid 2021? I mean, the grass is green, the skies are blue, demand for my business is way up. You know, it is phase B after all. It’s the best phase of the business cycle when the economic tailwinds are strong in your sails. You have all those good problems to have, too many orders, not too few, inventories are too low, not too high, lead times are too long, and so on and so forth.
So, you know when I think about it, at ITR we always preach thinking ahead of the business cycle, typically a half business cycle ahead, and a year from now, many businesses and markets are going to be transitioning into phase C, slowing growth. You know, the last several weeks we’ve actually seen a couple interesting data points, a couple of tentative rate of change peaks in a couple of our leading indicators, notably the SP5 month-over-month rate of change and the PMI month-over-month rate of change, which both tentatively peaked and our internal analysis indicates that it’s highly probable that both of those rate of change peaks are likely to hold, making these two of the earliest data points that are beginning to corroborate that expected slowdown in 2022.
So that brings me to one of our favorite phase B management objectives, which is using improved cashflow now to strategically position the business to beat the business cycle. Now again, you’re probably thinking why is this a phase B management objective? Shouldn’t this be something that I think about in phase C? Well, yes and no, because it’s something you implement in phase C, but the planning and rollout phase takes much longer. You don’t just start phase C, that first month of slowing growth and suddenly decide, “Okay my business is going to enter a new market or launch a new product or service offering,” or some other strategy to pick up, share to beat slowing business cycle conditions. I mean, the groundwork for these things takes months, if not a year or more, consuming both time and resources, often cash, as far as trying to develop and nurture these new initiatives, which is why we need to start thinking about it now.
You have to identify and understand the viability of a new market or product opportunity. The product development phase obviously takes time. You have to have a sales and marketing strategy to ensure the new offering or market entry is successful. I have to understand any adoption friction that you may run into and qualified potential clients and then the sales process in this new market could be totally different from your historical core markets. You know, maybe a new hire is required that has some institutional market knowledge or connections in the market that you’re trying to enter. I mean, we have to get those folks in the organization now, onboard them, to nurture and develop these plans.
So that’s why this makes phase B the time to start laying the groundwork for making your move to beat the business cycle next year and in 2023. The robust economic tailwinds, they’re pushing your business forward right now, your cashflow is improving, you’re accumulating resources that you can leverage to beat the next phase in the business cycle. Now, most businesses are going to ride the current economic wave late this year and you know, either in the summer or early fall, they’re going to apply a linear forecast for 2022 based on what they did this year and then be surprised when they find themselves slowing and missing their targets as the external environment all of a sudden isn’t helping them quite as much as it has been and will continue to here in 2021.
But not ITR listeners. We want you thinking a half business cycle ahead, not reacting a half business cycle too late. So the time is now for you to start thinking about what comes next, make a plan, and then execute next year and in 2023 to beat that slowing business cycle trend. So hopefully a little food for thought there. Something for you to think about as we head into the summer months. Thanks for stopping by.