As I was coaching my daughter, Kristina, on the finer points of a good head fake in basketball recently, I couldn't help but think all the so-called experts were naively serving up a misdirection on our economy. One economist after another is racing to be the first to call the end to our recession when, in reality, no one really knows. I have my doubts.
Our country's economy was slowing before Sept. 11th. The manufacturing sector, with no pricing power and intense competitive pressure, saw margins tighten to unacceptable levels and began paring back on overhead-including record numbers of announced layoffs. Out of sheer patriotism and unbridled momentum, the consumer kept spending through the holidays. All-time lows on consumer financing rates and deeply discounted retail pricing made for what could be considered a strong finish to the economic expansion that started way back in 1991. The consumer will decide when the recession begins and when it ends. We will only be able to look back and be accurate.
Smart About How Dumb We Are
Most of us are smart enough to know that we're not smart enough to know. The rest are called economists. Successful enterprises focus on the controllables and drive their organizations to increase market share. Many CUs have embraced that philosophy in the past decade as we've seen the consumer drive margins tighter by insisting on lower loan rates and higher share rates. To be sure, the consumer is in fact quite spoiled. And that is part of the problem.
Over the long haul, our system here in the U.S. will remain the standard for the global economy. Our Treasury bonds are still the safest haven, our manufacturing is still the envy of most nations, our innovation and willingness to take calculated risk is unmatched anywhere. We're strong as a country and individually.
In the short term, perhaps the next couple of years, we may need a good measure of our internal fortitude as we deal with the fallout of the last (and all-time record) economic expansion.
Let me explain. I'm smart enough to know that I'm not smart enough to call the beginning or the end of the expansion or recession. But I know good business from bad business, and in the 90s, there was some bad business to go with all the good business. Record levels of debt were piled up by many corporations and households during this expansion. Only now, may we be seeing the affects.
In most households, both spouses work to service a debt load that is roughly equal to disposable income. The consumer is spoiled and still has a ways to go before he/she is better at handling "wealth." Savings accounts are at record lows and debt levels are at record highs while stock values are down significantly for many households. Simply put, the average household is highly leveraged and now the layoffs have begun.
On the corporate side, there was plenty of leveraging going on in the 90s and by a lot of companies that weren't even generating a profit. Is it fair to ask if Enron, Global Crossing, and K Mart are only the beginning?
Along with layoffs, what will be the affect on the consumer's confidence if a few more stories like Enron and Global Crossing surface? How will the average investor/consumer feel if he/she sees any more stories about the senior management of a company making a bag full of money, while the investment banker made a bag full of money floating their debt and issuing their stock, while the auditor turned a cheek to seemingly questionable business models and accounting practices? Watch out for more stories about companies lending their executives large sums of money without shareholder approval.
A potential loss of confidence in the system could be in the cards-and that won't make for a quick turnaround in the economy. Remember this is the same investor/consumer who owes a lot of money and has seen their portfolios evaporate with the "dot com" industry.
Which brings us to President Bush's State of the Union speech and his solution to the recession. Remember? "Jobs, jobs, jobs."
That's what is really bugging me about calling the beginning or end to the recession. We might ask, "where, where, where?" As we evolved from the last recession, the "dot com" and tech sector added thousands of jobs. Many people were re-employed in good paying jobs after being "downsized" in the late 80s and early 90s. What job-adding cottage industry is about to explode this time around?
Focus On The Controllables
Perhaps like no other time, credit unions should stay focused on building market share on loans and shares while operating efficiently and economically. Market share and financial competitiveness. We should recognize the potential for a prolonged slump and be prepared for an increase in shares. Something tells me the average investor might be a little more appreciative of "NCUSIF (or FDIC) INSURED" right about now. Yes, I'm aware of the increase in shares in 2001. At this point, it's too early to say if that's over or just beginning.
Some ideas to be considered, nothing real elaborate and some things you may already be doing. The successful CU will stick to the blocking and tackling of building market share and financial competitiveness:
* Expand your FOM and increase your focus on growth. Don't let the regulations on growth discourage you from growing. There's plenty of capital in most CUs to accommodate growth.
* Expect more from each other and your trade associations on pressing for relief from regulatory burden on growth.
* Forget about what the bankers are saying and focus on your own business model for growth through member satisfaction. All that other stuff takes your eye off the ball.
* Increase financial competitiveness by im-proving investment portfolio performance and making better use of capital through growth.
* Continue efforts to increase sales focus. A good salesperson is better for your business than a good service person. A good salesperson builds the business and gives good service because he/she knows good service leads to more sales.
Time For Directors To Learn
* Send your directors to the conferences where they actually learn something useful about the business. Invite knowledgeable people in the business to speak regularly at your board meetings, even if you don't agree with everything they might have to say. Your directors need and deserve more enrichment.
* Be leery of vendors who try to get your business by appealing to your "conservative" nature. They may be pandering to your conservative nature because they don't want to go to the extra effort of showing you a better way. There's as big a risk in being too conservative as there is being too risky-It's called gradual obsolescence.
Earlier this month we here in New York hosted the World Economic Forum. As we weaved our way around the extra traffic (and protesters) on our way to our favorite Italian grocer, my 11- year-old daughter wanted to know what the W.E.F. was all about. Having watched the State of the Union with me, Kathleen had her own concerns about the war on terrorism and what the solution to the economy could be. I found myself more of a believer in our country than ever before but more aware of the need to continually tweak for improvement. We have the best system, but it still needs fine-tuning.
It was interesting to me to find myself relying (as I discussed the economy and war with Kathleen) on some old hand-me-downs such as "Don't put all your eggs in one basket (Enron and FOMs)"; "Don't look back because someone might be gaining on you (focus on market share not the noise)"; "A penny saved is a penny earned (NCUA INSURED vs. the NASDAQ)", and "There is such a thing as too much of a good thing (consumption and debt)."
Before it's all over we could be in for a real shakedown cruise in this country. Either way, I like credit unions' chances. CUs have the marketing opportunity of lifetime right now because their culture puts the member first. I like our chances as a country a lot, too. Like General Patton said, "America loves a winner and will not tolerate a loser." Let the tweaking begin.
Peter Duffy is with First Empire Securities, Hauppauge, NY. Mr. Duffy can be reached at (800) 645-5424.