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Marchand--Perils Ahead - Recession, Deflation. . .

November 1998
Soon after this column appears, many printing companies may find themselves struggling on the unfamiliar terrain of a deflationary contraction. Even companies that have done well during the long period of uninterrupted growth—now perhaps about to end—may be faced with new and severe challenges. Before winter is over, slower demand may begin to reduce the number of cylinders in the market. Or not.

I'm reluctant to predict an imminent downturn. I'm just not sure the hard times are really waiting for us around the next turn in the road.

Moreover, I know little about deflation, too little to be confident of my advice about how to market in a deflationary setting. No one has much practical knowledge of the subject. The U.S. economy has not experienced a sustained period of deflation within the memory of any economist or business leader.

Human Nature
It's human nature to ignore bad news that we understand poorly. We feel we can't do much about the circumstances. So we become passive—often at our own peril.

There are other reasons that also explain why business leaders may be inclined to ignore forecasts. Here's an example from the last month.

Just when financial markets seemed headed for a long journey south, the markets recaptured lost ground as the Fed made two adjustments in interest rates—the second a mere 16 days after the first. Federal Reserve officials are concerned about a credit crunch, yet at least one senior Treasury staffer warns about the risk of loose lending practices in commercial banks.

Or how shall I interpret the following? A number of third-quarter corporate profit reports exceeded expectations, while production rates for the same quarter are reported to have slipped to levels not seen since early '91. And year-to-date inflation is running at an annual rate of 1.4 percent, a 12-year low.

Explanations are not hard to find for what seem at first glance to be contradictory reports. But the prognosis remains unclear: slower growth (remember the famous soft landing?), a significant recession or something worse, something created by the spread of a mishandled international financial crisis?

Add to this questions about whether historically low and dropping rates of inflation are signs of economic health or harbingers of deflation.

I am well aware that messengers who bring unwelcome news are seldom received warmly, so it's risky for a columnist to pursue the subject. Nevertheless, the matter is worth thinking about because there are strategies printers can adopt to lessen the impact of a slowdown, perhaps even to thrive, while preparing for the expansion sure to follow.

 

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