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The Psychology of the Business Cycle

January 29, 2021

ITR Economics is advising businesses to prepare for growth in 2021 - but how do you adopt a growth mindset after a year like 2020? Catch our newest TrendsTalk episode with ITR Senior Forecaster Connor Lokar for guidance on moving forward.

 

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Transcript by Rev


Hello, everyone. Connor Lokar, senior forecaster at ITR Economics, checking back in on this latest TrendsTalk. Thanks for taking some of your time out of your day to join me on this one. I think today we're going to do something a little different. We're stepping into the psychologist's office. We're going to lay down on the couch and we're going to unpack the psychology of the business cycle, particularly what we call phase A, the recovery phase of the business cycle, which is precisely where we see many portions of the economy right now, and it's where a lot of your businesses very likely are right now or at least will be through the early portions of 2021.

So if you're listening, I would say it's highly probable that you follow ITR Economics in a number of capacities. Some of you might be frequent flyers on our blog and TrendsTalk posts, or you may engage with our subscriptions, or some of you are even our consulting clients that we create custom revenue and market forecasts for. So most of you probably have noticed that ITR is quite optimistic about 2021 and its growth prospects. In fact, I don't think it's inaccurate to say that ITR is probably more bullish than maybe some of your other favorite three letter networks or newspapers. I won't name names. And we've been advising our clients and readers on this platform, listeners, to start taking aggressive action to prepare their businesses for more activity in the coming quarters.

As a team of economists, it may seem like we say this matter of factly, as if it's easy to flip that switch, but today I want you all to know that we know that it's hard. This is not easy. We deeply empathize with how difficult 2020 was for many of you, your businesses, and really just what a challenging year it was for many people's professional and personal lives as well, which is why, in my opinion, phase A really can be one of the most psychologically challenging portions of the business cycle. Preparing for what's next for coming growth, whether it's hiring, training, purchasing new capital, equipment assets, raw materials, square footage, software investments, expanding a fleet of trucks or vans and on and on, whatever it is, consumes resources, consumes cash. It consumes capital. It consumes bandwidth within the company from a personnel standpoint. That's a hard decision to make before the demand in orders and corresponding cashflow actually shows up.

A client of mine recently remarked to me how beaten and battered they felt. Beaten and battered they feel after just a bruising and punishing 2020. I could hear, I could feel the emotion in his comments. This is a hallmark of phase A, the spillover of that negative emotion, that risk aversion that comes after surviving multiple quarters and battling through multiple quarters of declining revenue. The challenge, which is perfectly normal, is that this mentality spills into phase A and it arrests that necessary and aggressive decision-making as that bottom in the business cycle is forming.

There's a reluctance to mentally buy in on the current and nascent improvement and that expected future demand. Waiting until the domain and cashflow is actually there before pulling the triggers on hires, CapEx, capacity building, that's the natural tendency. That's the default. That's what most businesses do, and it fits with the positive emotion of the moment. It's easier to get company-wide buy-in from the board, leadership, whatever it is, on this aggressive decision-making when the grass is already green and the sky is a perfect blue. But now is when the true opportunity exists. When the storm clouds are still lingering, the rest of the herd cannot tell if they are here to stay, or if they are receding on the horizon.

Labor and equipment can still be acquired at a relative discount compared to what you'll experience later this year. Raw material pricing, while rising as of late, is still relatively favorable. You have time to get equipment ordered, installed, troubleshoot it, and have it in place for when you actually need it to pay dividends through higher efficiencies, throughput, shorter lead times, later on in the cycle when the growth ultimately shows up. You have time now to onboard, to train, to have a full personnel arsenal at your disposable to profitably attack the upcoming top-line growth later on this year.

Acting early, it's hard. ITR knows it. There's great risk in acting early in phase A. You put yourself, your business out there, and precisely when risk appetite individually or collectively within the company is at its lowest. But there's also great opportunity. Attracting the most from the picture, that's easy for a team of economists, for us here at ITR. It's often a personality trait that leads you into the field, but that's not everyone. We know that. We help our clients overcome this with reliable forecasting, transparent leading indicator, and market evidence and signaling, and it's allowing our clients to trust and leverage instruments and data points that are specific to their business because that's really the only way to consistently and appropriately act early throughout the business cycle and override those psychological norms. So if you've been considering and probably laboring, overacting early and being aggressive, know that that's normal. This isn't easy. It's hard. Thank you for taking a few minutes to join me on the couch today. I'll see you on the next one.

About

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.