Retail
The seasons of our economy
Business and investment strategies in the 80-year new economy cycle
By Harry S. Dent Jr.
Smart Business Detroit | November 2006
New generations drive economic booms and busts with their spending and productivity patterns from highly measurable demographic trends.
But every other generation, something more critical happens. Individualistic generations bring radical new technologies, lifestyles and business models that create a new economy, new technologies such as steamships, railroads and the telegraph; then electricity, telephones, automobiles and radios; then personal computers, wireless phones, the Internet and broadband.
There are always new innovations, but in every other generation in modern times, there have been clusters of radical technologies that change the infrastructures of communication, transportation and energy. These innovations, over time, have changed our business models and created surges in worker productivity and our standard of living.
The first businesses to to take advantage of new technologies reap the largest rewards, and their competitors often have a hard time catching up. Ask yourself, “Who has a secretary these days?” The answer is, almost no one, because with computers, simple word processing, e-mail, voicemail, and the host of other productivity-enhancing technologies that we use every day, secretarial work has been absorbed by professionals and administrative personnel. The elimination of an entire level of employment boosted the productivity of almost every company in America.
The most important impact of these cycles is that our economy goes through four seasons about every 80 years, as the chart above shows. The first stage is the Innovation Season, during which the radical new innovations, such as cars in the early 1900s and computers in the early 1980s, move in to niche markets.
This stage exhibits rising inflation and low productivity from the young-but-rising new generation. The last such season occurred from 1969 into 1982.
The second stage is the Growth Boom Season. The new, individualistic generation creates a boom with its rising spending and productivity that sees inflation rates fall. Technologies developed in the last economic season then move into the mainstream economy and begin to penetrate the market in an S-curve fashion (exponential growth rate), especially in the second half of the boom.
We are still in the last growth boom that began in 1983 and will peak around 2010.
That brings us to the most difficult stage: The Shakeout Season, when the final burst of the technology bubble creates an extreme economic correction that is accompanied by a stock market crash like that of late 1929 to mid-1932. The excess capacity from the massive business expansion of the previous economic season, along with falling consumer spending, creates a deflationary spiral, high unemployment rates and a high rate of business failures.
Companies that grew stronger during the Growth Season have the potential to solidify their market position and even enhance it by taking market share from weak competitors during the Shakeout Season. Although we’ve had many recessions since then, the last true Shakeout Season occurred from 1930 to 1942.
In the last stage of the 80-year economic cycle, the Maturity Boom, the next generation creates an economic boom with its rising spending and productivity. This generation tends to be more conservative. Instead of being innovative, it takes the new technologies and industries that emerged in the Growth Boom into the mainstream, led by the few large companies that survived the Shakeout, and bring prices lower.
The Maturity Boom causes mild inflation after the extreme deflation of the previous stage. As this generation’s boom matures, the economy becomes fully saturated with the new technologies, triggering the next radical innovation and inflation cycle.
The last Maturity Boom occurred from 1943 to 1968.
The implications of the cycle for business strategy are enormous. We are moving in to the last years of the dynamic and bubble-like Growth Boom that started in 1983. Those companies that will be the leaders in the growth sectors of the economy for years to come are establishing themselves now, just as they did between 1925 and 1933 in the last cycle.
Your business should be investing to win this race for leadership in the growth segments of your markets and industry. But conversely, you should make sure that you become lean and mean between 2009 and 2010 to prepare for the deflationary shakeout and downturn to follow. Or you can choose to sell your business before 2010 to cash out while valuations are the most favorable.
If you choose to stay and fight through the lean years, you may be able to grow your business slowly and conservatively by buying weaker competitors. In the process, make absolutely certain that you are not saddled with debt, as this increases the possibility that you will be among those forced to sell.
When the real estate bubble bursts, there will likely be many distressed sellers who will be forced to sell at a deep discount. This may be an opportunity to buy new land or buildings on the cheap, but do not be too eager. Prices can fall for a long time, and you may have to wait a decade or two to fully reap the rewards.
