Just a little over a year ago businesses and economies around the world shut down in efforts to control the spread of COVID-19. Governments started emergency fiscal stimulus programs to support businesses and individuals. Truly staggering amounts, trillions of dollars, were pumped into economies at a time when most discretionary spending was curtailed. For a large part of the global economy, financial distress was extreme, and for the lucky ones, savings grew as spending declined while income remained steady.
A substantial portion of the workforce shifted from office work to remote work, which effectively increased disposable income for those who continued to work. One result, referred to as “forced savings” is that savings rates jumped. In the US, personal savings rates went from 7.2% of income in December 2019 to 13.7% in December 2020. Similar jumps were found in the EU nations (source: Dossche, Zlatanos). In the U.S., cumulative personal savings increased by $1.3 trillion over expected trends. (source: Klein).
Early in the pandemic, demand for all goods and services crashed, which fortunately coincided with production shutdowns. However, as work from home and the pandemic stretched on, there was a decided shift in consumer demand away from consumables towards durables. Early on, shortages were common as manufacturers slowly ramped up production to meet new demand. In many cases, pricing also surged as spending, and demand, increased in a wide range of areas. U.S. Spending on home remodeling grew by over 3%, pushing up demand for building supplies, appliances, and fixtures. (source; CBS Boston). Buyers pushed up home sales prices by close to 12%. These are all signs that demand outstripped a restricted supply. (source: Trading Economics). Sales of autos, fitness equipment, home appliances, and work from home support products also increased.
As we enter the second quarter of 2021, it is reasonable to ask: how long will the spending boom last? History suggests that many companies are caught by surprise at both ends of boom-and-bust cycles. Those that miss the start of a boom miss on the gains, while those that miss the end are hit with the losses. CI can’t predict when the boom will end, but it can identify the indicators that suggest it is ending.
From a CI perspective, the issue is what indicators will foretell the timing and abruptness of the boom’s end. Knowing if the boom is heading for a sharp drop off or a soft-landing gives leadership options in how to respond. Two key tools, scenario planning, and indicator tree development, come to the forefront to help identify the boom’s end.
When addressing the end of a boom, scenario planning follows the traditional structure, but with a consistent assumption that the boom will indeed end. Scenarios should explore a hard and rapid collapse, fast but steady decline, and a slow decline. For a wild card, try a flattening to a new normal.
Once the scenarios are developed, build out an indicator tree by working backward to identify the specific events and changes that are likely to precede the scenario. As a quick example, consider inventory changes. A sudden increase in inventories can be a sign of declining demand, or it could be that retailers are stocking up in advance of seasonal fluctuation, such as holiday shopping. Either way, the indicator itself should be monitored. The more pronounced the change, the more effective it is to determine when the next step in the boom’s end is about to happen.
Indicator trees are a powerful tool when building out environmental monitoring programs. To learn more about how Fletcher/CSI can help you build an effective indicator tree as part of your environmental monitoring program, contact us at [email protected]
Author: Erik Glitman, CEO Fletcher/CSI