Business And The Economy: A Dashboard More Important Than A Forecast

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Some of the most valuable work an economist does in business has little to do with the future, just the current and the past. And these insights don’t require a professional economist, just a dashboard that senior management reviews regularly.

A company was emerging from the recession quite well, but one division was lagging. The division head was under suspicion. The CEO was clearly displeased. Nobody wanted to sit next to that division head at the executive committee meeting for fear of collateral damage. Then the economist spoke up. Division A serves a sector that tends to turn up as soon as the overall economy improves. Division B serves customers who spend more starting a few months before the recession ends. But Division C, the economist explained, serves a sector that is sluggish for as much as a year after the recession ends, then takes off. A few charts of past results drove the point home. The CEO, though somewhat doubtful, decided to wait on changing the division’s leadership.

Six months later Division C was booming. The economist’s value had nothing to do with a forecast. He had simply determined which parts of the economy drove each division, then applied well-known historical relationships.

In this type of analysis, corporate economists and consultants provide great value without making predictions. Another example involved the question of why a bank’s deposits were down. Marketing wanted a larger advertising budget. The retail manager wanted to raise interest rates on deposits. The CFO wanted to cut spending because business was weak. The economist explained that Federal Reserve policy was depressing deposits across the country. Although competitor data were not yet available, it was almost certain that they were in the same position. Advertising wouldn’t help and raising deposit rates would likely trigger a price war. The CEO decided to ride out the dry spell, and that decision worked.

Costs are also important. If total costs are going up, is a key price rising? Or perhaps waste is increasing in a factory, or administrative staff is growing too fast. Knowing inflation trends for the goods and services used by a company helps to explain why total costs are rising or falling, which indicates how business efficiency is trending. A trucking company, for example, has to pay market prices for diesel fuel and competitive wages for labor. But if total costs are rising faster than these inflation rates and the volume of work, someone needs to dig into the data to learn why.

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