Are We In A Balloon Boy Economy?

Just a few weeks ago, millions of people watched in horror as a saucer shaped silver balloon soared for 50 miles across the Colorado landscape. What made this a nail-biting spectacle was the belief that there was a six year old boy in the gondola of that homemade balloon. At one point it was reported that he may have even fallen out. Then, in a climactic moment, the balloon touched down and a quick inspection showed it was nothing at all - just a big inflated gas bag causing a lot of excitement.

This past Friday, the Dow Jones Industrial Average rose above 10,000 again. The same day it was announced that nationwide unemployment hit 10 percent. The market has been climbing steadily for months. We’re getting regular pronouncements that the ugly recession of the past couple of years is over. Even government officials like Federal Reserve chairman Ben Bernanke and Treasury Secretary Tim Geithner are cheerleading the return of happy days and economic growth. All that is seemingly needed now is a little mopping up action related to that pesky unemployment number and the economy will be chugging along nicely once again.

Something hasn’t seemed right about all this hoopla, but I wasn’t able to put my finger on it until Rick Santelli showed a chart titled “scary situation?” on his report for CNBC’s Fast Money program on Friday evening. This chart overlays line graphs for the DJIA and Unemployment as a function of time over this year. As Rick pointed out, there is an eerie correlation between the two rising numbers. A rousing discussion followed, related to government policy, corporate earnings forecasts and whether the unemployment figure is or is no longer a lagging indicator of economic activity. But I think they missed the really astounding implication of this chart. Have a look and see if you catch it:



What I’m thinking is that this chart is no anomaly. It’s an accurate representation of what’s playing out in the world of public corporations. It almost begs us to look a little deeper into the tightly coupled relationship between a rising market and rising unemployment. Let’s do that and see what we find.

Have you been watching the earnings reports that have been coming in over the last week or two? There seems to a theme in the reports for this earnings season and last quarter’s. Many companies meet or exceed Wall Street’s estimates for their earnings. They beat expectations and their stock pops. The composite of all these good reports has been causing the DOW and S&P averages to go up. So everybody’s happy and things are great, right?

Not so fast. The same reports that gleefully announce that a company’s earnings meet or beat expectations also tend to report that sales are flat or down for the quarter. The favorable earnings results have come from what is politely referred to as “efficiency improvements.” Sometimes they come right out and say it’s actually cost cutting or even layoffs.

So we have the beaming CEO who delights Wall Street with an excellent earnings report that ensures he lives to fight for another quarter and likely garners a nice performance bonus as well. But lurking behind that rosy facade is the human tragedy of yet more lower level employees stowing their personal belongings in cardboard boxes and heading to Personnel to be processed out of the company.

Is this the mechanism that keeps the stock averages and the employment numbers rising in lock-step? Could the seemingly robust earnings that justify higher stock prices be coming from emptying the desks and factory workstations, driving more and more people into the ranks of the unemployed?

All this seems to suggest that many companies are going beyond mere hunkering down for recessionary times. They’re actually making their performance look good by hollowing out the organization, what used to be called “eating the seed corn.” An easy way to do this is to throw everything overboard that isn’t directly related to achieving the next quarter’s earnings results. Easy targets are research and development, advertising, human resources, education & training, and manufacturing beyond orders for immediate delivery.

Doesn’t this eventually catch up with you? It can, especially when new competitors enter the market. Companies with robust new product development can find market niches wide open. The entrenched dominant company that normally crushes new entrants like bugs is so weakened that upstarts can gain a foothold. Many incumbents are presently gambling that this won’t happen to them. They’re playing a big game of “chicken” with their competitors, betting that everybody will continue to cut staff and other expenses to maximize short term earnings and keep the Wall Street analysts happy.

As business owners and managers, can we gain any insights from this that will help us improve our relative positions? If we really are in a “balloon boy” economy where expectations have become inflated way beyond what is actually going on, then we need to carefully manage our operations so that we can continue to stay in business. But we can also keep an eye open for opportunities to move into areas that may be opening up. One strategy is to test the waters by offering a wider range of products and services to your existing customers, especially when you can do this without incurring additional capital expense. Those once formidable opponents may not be so formidable anymore if they’ve squandered their ability to dominate markets just to look good in the short term.