My intention was to write an article about how to predict the direction of the economy in order to then plan your business activities. I will mention some of the various forecasting tools in this article and make a follow-up piece on a specific index, later.
But in the process of writing the article I had a "eureka moment" after I had watched a video (A Matter of Choice) and read an article (The Power of Cause and Effect PDF) by Dr. Eliyahu M. Goldratt.
According to Eliyahu Goldratt, it is time to really understand the law of cause and effect, and then use common sense on how to conduct your business. His point is that all too easily, people jump to conclusions and it becomes a self-fulfilling prediction on whether the economy is going to hell and the world is going under in the near future. This is a quotation from Jack Vinson's post, Goldratt on forecasting, regarding the above mentioned article and speech:
Anyone who has spent time studying Theory of Constraints knows that the idea of forecasting and extrapolation is an anathema to being smart about making decisions. . . Suffice to say, a little research showed that the standard news media weren't a good source of accurate information. Goldratt goes through the process of digging up useful information from which this company could make sensible decisions.(Knowledge Jolt with Jack, February 17, 2009.)
The example in the article describes a large Japanese electronic subsystems manufacturer which had a reduction of incoming orders by 50% in December 2008. The company's management arrived quickly at certain conclusions and related it to the financial crisis on the housing market and the problems with the automobile industry, but they didn't reflect further if the loss could be attributed to any other reasons.
As a result, they were looking at dismissing a lot of people. They extrapolated from these data from other industries and reached certain conclusions. Instead, they should have gone to the root of the problem and looked at their whole supply chain. They then got data from the Nikkei index (similar to Dow Jones index in America) and there they saw that one of the major retailers of electronic goods had increased its sales in December over 100% compared to last year!
The problem is that other parties of the supply chain are also following the same news media reports of dire warnings, and it became a snowball effect due the situation. The various parties involved in the chain cut back on their stock because others are doing it too, due to the fact that severe economic hardships were predicted. The companies that may have the most difficult time, are the small sub-contractors that have material in stock and thereby have obvious problems to survive the transition period. You could see examples of the panic syndrome in today's auto industry in Sweden.
I will describe an index that could be worth looking into in my next post. It is called Purchasing Managers' Index and was established by the National Association of Purchasing Managers in 1931. Perhaps business people just need to follow the right data, in order to forecast where business is headed. By looking at the right data, the business outlook may look very very different.
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About the Author: Martin Lindeskog is a trader in matter spirit and a small business entrepreneur in Gothenburg, Sweden. He is a board member of the Swedish National Association of Purchasing and Logistics (Silf, Western Region). Martin also writes a long-standing blog called Ego and will soon start a new series of interviews for his podcasting show on the Solid Vox network.
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