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The Perils of Budgeting In Phase B

August 6, 2021

With much of the economy in Phase B, Accelerating Growth, there is a unique set of challenges businesses face when budgeting - how can businesses meet those challenges head-on? Catch our newest TrendsTalk episode with ITR Senior Forecaster Connor Lokar to learn more.

 

 

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Transcript by Rev


Hello, everyone. Connor Lokar, senior forecaster here at ITR Economics checking in for another trends talk. So here we are. It's August, it's late summer. The days are getting shorter, the heat is here and we're closing in on everyone's favorite season, budget season. You didn't think I was going to say football season, did you? Budgeting, it's obviously essential, but a challenging process and one that stresses everyone involved, and in particular can be colored by the phase of the business cycle that a company is currently in, and perhaps, depending on what happens, put businesses out of position for the phase of the business cycle that they will be in for the following year that they're setting the budget for. Now, currently the US economy is in phase B. That is the accelerating phase of the business cycle, accelerating growth, and that's from a US industrial production standpoint.

And I would say most markets that we analyze, and I would say the Oran majority of our client base here at ITR that we consult with and conduct revenue forecasting on behalf of, are also in that phase B trend as we head into the closing months of 2021. And one of our top management objectives that we are hitting on with clients this fall is to avoid the straight line forecasting and budgeting trap. And sure, this seems like a no brainer. In this particular phase of the business cycle though, it can be a challenge, and we are in the best phase. That B is for best phase of the business cycle, after all, and you have spent the last several quarters just increasing your top line, hopefully the bottom line as well, but just generally enjoying an improving business climate.

And this is really typically when everyone's inner optimist starts to take over and we start drinking the Kool-Aid, so to speak, and we naturally assume that 2022 will be a continuation of the conditions we're feeling right now. How can it not? Most likely, we have too much demand right now. You're seeing swelling order boards, growing backlogs, growing weed times, surely, of course, this is going to leave plenty of work still for your business to do in 2022. Right? Bueller? Right?

Well, the challenges that you need to prepare for the next phase of the business cycle that you will be in, not the one that you are in right now. And most businesses, at least per ITRs expectations in our own forecasting and experience with our client base, are going to be spending maybe not in all cases the majority of 2022, but certainly for most of the second half of 2022, in phase C, that slowing growth phase, and quite likely closing the year out with a lower growth rate than they're ultimately to experience in 2021.

And already, nine of our top 12 leading indicators have transitioned to tentative declining trends, offering a growing pile of empirical evidence that things are going to be slowing down next year in line with our forecast expectations. Generally, we look for at least five of our premiere leading indicators to turn in a particular direction up or down and with over [inaudible 00:03:25] we've essentially almost doubled up that statistical threshold that we typically look for.

So to cut through this emotion, companies really need to watch your own rates of change specifically in leverage leading indicators themselves and apply these specifically farmed KPIs against your business to see if a slowing growth trend is going to be a reality for you folks next year. So thanks for checking in. Happy budgeting.

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.