Monday, February 22, 2010

Read the Fine Print of Indicators

As we emerge from the worst economic climate in generations and we enter a changed world in which, amongst other things, banks are more cautious in their approach to lending, businesses are understanding that material decisions that they make now need to be evaluated comprehensively. In this new context, it has become more critical than ever to base business decisions on a full understanding of the external environment in which a business operates. The days of crap shooting and hoping for the best are, for the moment, behind us.

However, as we enter a world in which accurate, insightful information is more critical than ever, it has also become increasingly difficult to obtain such information as hindsight is no longer a defining factor in forecasting. This is highlighted through two recent articles commenting on consumer behaviour in the US and the UK that show interesting trends that are counter intuitive to what one may expect post-recession.

Hindsight suggests that in a world in which recession-hit consumers are faced with the prospect of a jobless recovery, cheap brands should do better than luxury goods. However, while consumer spending is expected to remain sluggish, and consumers will still be making trade-offs that they did not need to make in the past, there are examples abound of luxury brands performing better than expected - many consumers still opt for premium coffee and super market brands, for example. How can the reality of a jobless recovery be reconciled with the sustainability of the luxury sector? The answer may lie in the fact that the headline unemployment figures don’t tell the full story - overall unemployment in the US, for example, is hovering at around 10%, but unemployment within high earners (luxury brand purchasers) has not changed significantly over the past 18 months, in contrast to America’s lowest earning population, which stands at around 30%, three times the national average. It is not a stretch to conclude that the vast differences in unemployment rates, depending, on income levels, directly translate into vastly different consumer habits.

Understanding the often ignored subtleties of key economic indicators can go a long way towards ensuring that business decisions are made in an informed manner. Rather than basing decisions on the headline assumptions

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