Some of the most valuable work an economist does in business has little to do with the future, just the current and the past. And these insights don’t require a professional economist, just a dashboard that senior management reviews regularly.
A company was emerging from the recession quite well, but one division was lagging. The division head was under suspicion. The CEO was clearly displeased. Nobody wanted to sit next to that division head at the executive committee meeting for fear of collateral damage. Then the economist spoke up. Division A serves a sector that tends to turn up as soon as the overall economy improves. Division B serves customers who spend more starting a few months before the recession ends. But Division C, the economist explained, serves a sector that is sluggish for as much as a year after the recession ends, then takes off. A few charts of past results drove the point home. The CEO, though somewhat doubtful, decided to wait on changing the division’s leadership.
Six months later Division C was booming. The economist’s value had nothing to do with a forecast. He had simply determined which parts of the economy drove each division, then applied well known historical relationships.
In this type of analysis, corporate economists and consultants provide great value without making predictions. Another example involved the question of why a bank’s deposits were down. Marketing wanted a larger advertising budget. The retail manager wanted to raise interest rates on deposits. The CFO wanted to cut spending because business was weak. The economist explained that Federal Reserve policy was depressing deposits across the country. Although competitor data were not yet available, it was almost certain that they were in the same position. Advertising wouldn’t help and raising deposit rates would like trigger a price war. The CEO decided to ride out the dry spell, and that decision worked.
Costs are also important. If total costs are going up, is a key price rising? Or perhaps waste is increasing in a factory, or administrative staff is growing too fast. Knowing inflation trends for the goods and services used by a company helps to explain why total costs are rising or falling, which indicates how business efficiency is trending. A trucking company, for example, has to pay market prices for diesel fuel and competitive wages for labor. But if total costs are rising faster than these inflation rates and the volume of work, someone needs to dig into the data to learn why.
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Business sales and costs can also vary geographically. One branch manager may look great while another looks lousy. But business growth is easier in a fast-growing city. Labor turnover is higher in some areas than others, and a wide variety of costs can vary with location. Some of this information can be handled easily, though more detailed analysis may require a specialized employee.
Only the largest corporations have economists who can offer these insights, but every business can track how the economy impacts the company. Look for a staff member with an economics degree, or at least an interest.
To construct an economics dashboard, understand that the economy is often divided into some major sectors: consumer spending, residential construction, non-residential construction, business capital spending, exports and government. Each of these can be subdivided into constituent parts. Data from government agencies cover the basics of spending. Some private sector information is readily available to help in some areas.
With historical data downloaded and sources of updates identified, an analyst can set up a dashboard for management review. The first value of the dashboard is that management will look at information that applies to the company’s sales and costs. All too often business managers see headlines about GDP or consumer confidence and fail to drill down to the particular economic indicators that are vital to their own enterprise.
The second value of the dashboard is consistency. It’s easy for any human being to focus on data that confirm the person’s prior beliefs. So the optimist will see all of the positive data, while the pessimist notices the negative news reports. A dashboard, on the other hand, has the same data every month or quarter. The executive cannot help but to look at the data elements, even when they disagree with the leader’s preconceptions.
Finally, a dashboard produced on a regular schedule is a discipline to review the financials with an eye to economic data. This activity can easily be forgotten, especially when the financial data is good. The organization will benefit from understanding how the economy is affecting it, even in a good business environment.
Every business of significant size should maintain an economic dashboard of the indicators most important to the profitability of the company.