This current economic recession may not mean the sky is falling, according to a research study posted on the McKinsey Quarterly. In Mapping Decline and Recovery Across Sectors, McKinsey partner Timothy M. Koller and two McKinsey consultants, Bin Jiang and Zane D. Williams, analyzed the financial performance of U.S. companies across 10 various economic sectors in the last four recessions, and then looked at return to shareholders, revenue growth and growth in earnings before interest, taxes and amortization (EBITA).
Their assessment: “…so far at least, the current recession—despite claims of its being “unprecedented”—seems to be following many of the patterns that previous ones did.”
To wit:
- Shock and a fall. As with the four previous sessions, some kind of shock event hit the economy, followed by a fall in consumer discretionary spending, and in three of the four recessions examined, a drop in IT spending.
- Uneven impacts. Consumer discretionary, energy, industrials and materials have suffered the biggest slowdown in the last four recessions, while health care and consumer staples have faced much slighter impact on revenues and EBITA.
- The cliff effect. Sales drop off a cliff, and take a long time to climb back up, on average six to eight quarters are needed to hit the bottom of EBITA, and the recession of the 1980s took many companies the better part of a decade to recover from.
- Share price doppelgangers. Sectors tend to have share prices that react similarly, regardless of actual financial performance by individual companies in the sector.
How will we know when it’s over? Well, increases in consumer discretionary spending and IT spending have signaled the end of three of the last four recessions.
Sadly, McKinsey stops short of suggesting what it thinks might happen. For instance, if consumers do start buying non-essentials, it’s obviously not going to be because they got bored of living in a recession. But we are seeing savings rates increase in the U.S. for the first time in years — so if we are in a new era of consumer saving in the U.S., does McKinsey really expect to see this sector lead the way out?
What if health care spending and spending on staples were to fall? Would that mean this is not your run-of-the-mill recession? (and can one really compare the 1980 stagflation to the quick recovery seen after 2002?)
Or what if EBITA falls for longer than six to eight quarters (i.e., second half of 2009/first half of 2010)? What then? (To be fair, most economists seem to expect the bottom to happen in this same timeframe, including Nouriel Roubini, the economist of doom.)
What do you think — has McKinsey lost sight of the forest because of its statistical trees?
