The rocky road to recovery

Aug. 26, 2009
"Like any recession, this one will play out in stages and will vary by industry. Regardless of which stage your company fits, or the speed of change, you must move beyond tactical, reactionary moves and make structural changes needed to support growth. ...

"Like any recession, this one will play out in stages and will vary by industry. Regardless of which stage your company fits, or the speed of change, you must move beyond tactical, reactionary moves and make structural changes needed to support growth. To make this shift, companies need to be proactive and prepare now for the new growth environment, whatever it may look like." –David Brainer, principal, Deloitte Consulting LLP

It seems fitting on this day when an icon of U.S. political history, Sen. Edward “Ted” Kennedy, passes on, that we take stock in where we’re all headed in this country, especially economically.

Whether you loved or loathed Ted Kennedy, one must at the very least admire his doggedness – a truly American trait if there ever was one. For 40 years he fought for universal health coverage for every U.S. citizen – and he never wavered in his attempt to gain it. Right up until his death early this morning at age 77 from brain cancer, he fought for it – and as yet the final chapter in this ongoing political battle over health care is still yet to be written.

That same unshakeable sense of purpose is going to be needed by all of us as this nation continues its long, slow climb back to economic good health, for there are many unpleasant challenges ahead – with the cost of health care just one of them.

Of late, though, it seems that confidence among consumers is brightening – and more robust spirit is one of the key ingredients we’ll need in the days ahead. The Conference Board said its Consumer Confidence Index, which had retreated in July, rebounded in August, with the Index now standing at 54.1, up from 47.4 in July. The group’s “Present Situation Index” increased slightly to 24.9 from 23.3 last month, while its “Expectations Index” improved to 73.5 from 63.4 in July.

Now, these consumer confidence survey’s are based on a representative sample of 5,000 U.S. households – and considering there are over 300 million U.S. citizens out there, this “sample” seems awful small to me when making such huge broad claims about “consumer confidence.” And course such human emotions like “confidence” are always fickle, apt to change at the slightest bit of bad news (such as, say, the appearance of Godzilla on a city street). Then again, though, we’ve had a lot of bad news of late, so for “confidence” to rise in the face of things is somewhat heartening.

"Because the speed and intensity of the recovery will largely be determined by consumer psychology and a willingness to spend, I envision true economic stability won't take root until the first quarter of 2010," noted Greg Maloney, CEO and president of Jones Lang LaSalle Retail. "And consumer confidence will play the biggest part in our return-to-normalcy.”

"Consumer confidence, which had posted back-to-back monthly declines, appears to be back on the mend,” noted Lynn Franco, director of The Conference Board’s consumer research center. ”Consumers were more upbeat in their short-term outlook for both the economy and the job market in August, but only slightly more upbeat in their income expectations. As long as earnings continue to weigh heavily on consumers' minds, spending is likely to remain constrained.”

But one of the things weighing heavily on American minds right now is the continuing climb in health care costs – even as we desperately seek some way to do the exact opposite. According to Aon Consulting, health care costs are expected to increase on average 10.5 percent in the next 12 months. After surveying over 60 leading health care insurers, representing more than 100 million insured individuals, Aon found that health care costs are projected to increase by 10.4 percent for HMOs, 10.4 percent for POS plans, 10.7 percent for PPOs and 10.5 percent for CDH plans.

Aon also found that prescription drug costs are expected to increase 9.3 percent, with the specialty pharmacy trend rate is 13.2 percent. In addition, health care rate increases for retirees over the age of 65 are projected to be 6.6 percent for Medicare Supplement plans and 7.3 percent for Medicare Advantage plans.

Then there are the deficits being racked up at a frightening rate by the federal government. We’re on track to post $1.56 trillion worth of red ink this year ALONE, easily topping last year’s record of $455 billion, with a projected $9 TRILLION hole being dug by current spending outlays over the next decade. That’s on top of the $11 TRILLION in debt already on the U.S. books.

While the U.S. economy is actually projected to start growing again by the White House’s budget office, albeit just 1.6% in the second half of this year, unemployment is going to stay relatively high; it averaged 9.4% in July and should peak at 10.2% next year before falling to 9.1% in 2011.

Needless to say, none of this paints a very rosy picture for the future. Yet it’s how we deal with these challenges that will be critical.

Deloitte Consulting LLP recently released new research that found while most major companies surveyed believe that the U.S. economy will start improving in early 2010, many of those same companies will lag behind the general economy when the rebound occurs. The reason: Too much focus on short-term, tactical actions and little attention to structural changes and strategic investments that are needed to support growth in the new business environment.

Approximately 55 percent of the companies surveyed by Deloitte feel the U.S. economy will start showing signs of recovery in the first or second quarter of 2010; though 25 percent think relief won't come until the third quarter or beyond. But, when the upturn does commence, Deloitte believes many companies will struggle to deal with the new economy, which will likely be a completely different playing field from what companies have seen in previous recoveries.

"After implementing initial cost cutting measures when the economy first began to tumble, such as reducing salaries, layoffs and plant shutdowns, many companies are now are confused about their next steps," said Kelly Marchese, a principal at Deloitte. "We believe these businesses should stop focusing on short-term concerns and look at their business in this new reality. Businesses need to focus on areas such as talent, growth and structural change so that their business doesn't just survive – it thrives."

Deloitte said its survey – Here Today, Where Tomorrow? Taking Action in Uncertain Times – is the result of hundreds of hours of in-depth meetings and discussions with nearly 100 companies across a wide swath of American businesses, including the healthcare, manufacturing, retail, life sciences, financial services and energy industries.

Deloitte believes there are three key economic phases to this downturn that businesses need to recognize so businesses can better focus their revitalization efforts:

• Phase 1: Over the Edge: companies were focused on shuttering their business, generating cash, and looking at tactical cost reduction. Survival was priority number one.

• Phase 2: Lumpy and Bumpy: the current phase of the economic downturn where companies need to place the focus on structural changes, strategic investments and a resetting the profit model.

• Phase 3: Growing into a New Reality: this is what companies need to prepare for; where the new economics, market realities and competitors emerge.

“Every organization grows at its own pace, determined by factors as large as the global economy and as personal as its current balance sheet. But, every business must grow – the only question is how,” noted David Brainer, a principal with Deloitte. “[Yet] that's just the beginning. It's not just about strategy; it's also about practical execution.”

It’ll require a lot of gumption and faith in ourselves to successfully cross all these hurdles ahead, no doubt. But if we can stick to our guns like Ted Kennedy did over his life – despite personal successes and grievous failings, political mistakes and triumphs alike – then there’s no economic challenge we cannot overcome.

About the Author

Sean Kilcarr 1 | Senior Editor

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