What will an economic turnaround look like?

November 5, 2010

Are we on the bottom, have we turned the corner, will there be a double-dip? Who knows exactly? We only ever know the truths to these questions in retrospect. But there will be some rather obvious signals that the upturn is happening. Here are some personal observations about the indicators to look out for when the upswing happens.

Firstly, an economic or, more correctly, a business cycle upturn will be a process that is likely to follow along these lines:
1. Businesses will see a slight improvement year-on-year, quarter-on-quarter in their trading sales. The result will be a reduction in pessimism not an outburst of optimism. They will respond by putting all their current resources to work to the maximum. They will initially not take on new staff or extra resources being not fully convinced that this is an upturn rather than a business cycle blip. However, as the improvements carry on through to a second or third quarter, the current resources will be fully utilised and businesses will have to take some steps to ramp up
2. The next thing that will become noticeable will be that the existing full-time workers will start to see an increase in the overtime work available. A welcome relief to many workers and an ability to make up some of the money that they had lost out on in the previous 2-3 years
3. The next sign will be the reverse of the ‘short-time lay offs’ or ‘short-time working’. During the recession many people will have been put on reduced hours and 3-day weeks. These people will now be brought back into the full-time employment and fully utilised. A note of worth is that this will be the first sign of improvement in the live register of unemployment figures. Those on short-time work are counted on the live register and the removal of these ‘short-time workers’ will probably be the first real move downward on the unemployment statistics
4. As the current resources are now close to fully utilised, employers will try to use as many external contractors as possible to fill gaps in their resources. Employers will be reluctant to hire new people until they are sure that there will be sufficient work for them. So contractors will see an upturn before unemployment falls
5. Only then, when all the existing resources have been maximised, current workers are using up available overtime and short-time workers are fully re-employed will employers seek to hire new workers.

Many may have heard economists talking about unemployment as a lagging indicator. What they mean is that when the business cycle upturns employers will use existing resources first and will only hire new people when they have fully utilised the existing resources fully. Thus, it can take many months from the beginning of the economic upturn to the unemployment statistics falling. The first real indicator to watch out for will be the numbers of short-time workers falling on the unemployment statistics. This is the first real sign that business is on the up.

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