Communications

In a recent New York Times article, Jim Tankersley notes that 40% of respondents in a Census Bureau poll conducted in July reported they had difficulty meeting their normal household expenses in the prior month. The 40% rate was the highest recorded in the past two years. Two years ago, the U.S. was just emerging from the sudden and deep recession triggered by the onset of the pandemic, which pushed jobless benefit claims in the U.S. to more than 10 million.

The culprit is twofold. Inflation has increasingly eroded consumer purchasing power in an environment where wage increases lag behind price increases. In addition, federal relief payments initiated in 2021 have run their course, which adds to the difficulties in making ends meet for a large swath of U.S. households.

As Tankersley reports from interviews with current food bank recipients, the primary solution to the inflation problem is to unlock supply chain problems, restrict rental rates, halt evictions, and substitute fresh federal or state cash support in place of the expired 2021 federal relief programs.

By implication, the worst solution to the current inflation problem is a recession that eliminates jobs and drives up the unemployment rate until price stability returns. A paycheck, even if insufficient to fully meet household expenses, is certainly preferrable to no paycheck at all.

The Census Bureau survey results seem incompatible, if not questionable, when considered against the present over-heated job market and an unemployment rate of 3.5% in July, which is hovering around an historical low. In fact, 4.5% was the highest unemployment rate for any individual state - Alaska and New Mexico - at the end of July, which is still very low by historical standards.

But interviews with food bank recipients may be signaling that the present impact of inflation, coupled with the expiration of federal relief payments, may compel an increasing number of workers to re-enter the labor market while job openings still exist. There is some evidence this is taking place since the number of job openings in the U.S. economy has fallen by 10% since March.

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The annual Jackson Hole Economic Symposium draws on the best and the brightest to provide assessment and insights into current economic issues facing the nation. Andrew Ross Sorkin, in a recent New York Times article, highlights several past predictions about the course of future developments in the U.S. economy, selecting comments and observations at roughly five year intervals.

• In 2005, Raghuram Rajan from the International Monetary Fund warned of a pending disaster should a recession emerge with housing prices at vastly inflated levels. Larry Summers, a former Secretary of the Treasury, pronounced the assessment misguided. Rajan had it right, as events unfolded. But at the time he had few others in his camp.
• In 2009, Ben Bernanke, the Chairman of the Federal Reserve at the time, declared an end to the Great Recession and anticipated a return to sustainable growth in the near term. He was correct about the end of the recession but somewhat premature with his timing about a return to sustainable growth in the economy.
• In 2016, Janet Yellen, the Chairwoman of the Federal Reserve at the time, called for an immediate increase in interest rates. Such an increase did take place but not until four months later in December 2016.
• In 2021, Jerome Powell, the Chairman of the Federal Reserve at the time, observed that inflation was a present concern. But he commented that the level of inflation was likely temporary in nature and that price increases per annum would soon return to two percent or less.

Any prognosis about the U.S. economy depends on the quality and timeliness of data and the ability of trained professionals to interpret it. The Federal Reserve, which is the sole organization able at the moment to affect the course of the U.S. economy, presumably has quality and timely economic data at its disposal and is able to draw on the best minds to properly interpret it. Yet the Federal Reserve is operating in the dark in many respects since the pandemic and the war in Ukraine introduce complexities in setting monetary policy for which there is little, if any, historical guidance.

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In a recent commentary, The Economist examines the difference between slow and fast thinking. Slow thinking uses analysis and planning to reach a decision. Fast thinking uses instinct to reach a decision. The basic question is when decision makers should find it more appropriate to trust their gut in making a decision rather than pursuing a more laborious and time consuming process of analysis in reaching a decision.

Both play key roles in a well-managed and well run workplace, as The Economist notes. Frequently, the critical consideration is whether the decision in question centers on emotion that cannot be readily confirmed by data and analysis. For example, in a difficult customer service situation, gut instinct may be the only viable option in responding to an angry client regardless of the list of possible responses provided by a written script.

Not surprisingly, academic research, as well as common sense, find that the more experienced a decision maker is in the topic at issue, the more effective his or her gut reaction is in reaching an appropriate decision. Experience does count for something.

The Economist offers three take-aways on the appropriate use of fast thinking.

• Use instinct only if the decision maker has sufficient experience with the issue at hand.
• Use instinct if emotion matters more than reasoning in reaching a decision.
• Use instinct if the delay for full bodied reasoning does not seem worth the time and effort.

In summary, slow thinking is generally needed to get the big decision right. And fast thinking is one way to stop analysis from morphing into dither.

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On Thursday, September 1st, Shockproof! Training conducts the first of its eight session Credit College Course on Using Federal Tax Returns for Ratio and Cash Flow Analysis based on 2021 federal tax returns for business organizations and individual taxpayers.

This Credit College Course is designed for analysts and lenders interested in exploring and mastering the proper computation of ratios and cash flow statements from information in federal income tax returns. The eight sessions explore in detail the following topics and issues:

• The form and content of business and personal income tax returns.
• The role of the Section 179 Deduction.
• The information content of Schedule K-1.
• The construction and use of personal cash flow statements.
• The information content of Schedule M-1.
• The construction of key performance ratios.
• The construction of cash flow proxies and the Uniform Credit Analysis (UCA) cash flow statement.

At the end of the eight online sessions, participants will know how to properly compute key performance ratios, cash flow proxies such as traditional cash flow and EBITDA, and the Uniform Credit Analysis (UCA) cash flow statement from information in federal income tax returns.

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If you would like more information about this Credit College Course, about any of our other five Credit College Courses, of about our 27 single-topic Webinars, please call us at 1-866-237-7228 or send us an email at inquiry@shockproof.com.

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