Using Economic Forecasting To Strategically Plan For Your Business

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Podcast Transcript

Announcer

Welcome to the Change the Game podcast, where we bring together CEOs and business thinkers just like you to talk about what executives are doing to change the game, what it takes to build a healthy company, and how organizations can be a force for positive change within their communities.

Kylie Jackson

Thank you everyone for tuning into this conversation. We've got Taylor St. Germain here from ITR Economics. We've got Jack Stack here from SRC Holdings. We are really coming out to you, talking about economic forecasting and how you can use that in your business's strategic plan. This will be a wonderful conversation and I'm just here to act as the student of, we are all students of planning and forecasting and predictability, and we just want to talk about the importance of this relationship.

So just to start with introductions, Taylor St. Germain, you have a degree in mathematics with a concentration in statistics from the University of Vermont. You've got a master's in applied economics from Southern New Hampshire University. You've spent some time in the tech industry working for private equity, providing market intelligence and integrating acquisitions. And in your five years with ITR economics, you've worked with various distributors, manufacturers, producers, helping each client navigate the business cycle and optimize their corporate strategy. Taylor, can you say a little bit about ITR Economics? I've got a little blurb about, you know, you provide, ITR economics provides the best economic intelligence to reduce risk and drive practical and profitable business decisions. They've been around since 1985, 94.7% forecast accuracy at one year out, and I think what we love about you guys so much is that you're privately held and you're politically agnostic. So it really is data, they try to suck the bias out of it, but can you explain a little more about what ITR does?

Taylor St. Germain

Yes, thank you so much and thanks for having me on. ITR Economics, as you mentioned, our mantra is exactly as you said, to reduce risk and drive practical and profitable business decisions through the intelligence that we provide companies. We do that in multiple different ways, but the three primary mediums in which we drive these practical and profitable business decisions is through our keynote presentations. So, have someone like myself or our principles of the company or some of our other speakers on site to actually deliver a customized economic presentation to your audience.

Then our second bucket is reports in syndicated content. So very famously, our trends report is an example of that, where we're providing general economic forecasts for the overarching economy, but also for individual market segments.

And then the third way that we help organizations drive those business decisions is through our consulting arm of our business, which is where we'll actually interact with our clients' data and find them leading indicators and produce an independent forecast to serve as an input to their forecasting and planning process. And they get to meet with people like myself to discuss how to read these forecasts and implement strategic initiatives. So those would be the three primary ways that we're helping businesses with the economic information we provide.

Kylie Jackson

Thank you. We also have Jack Stack here, who is the founder and CEO, current sitting CEO of SRC Holdings Corporation. You've been called the Smartest strategist in America by Inc. Magazine, one of the top 10 minds in small business by Forbes Magazine, The father of open book management, and the author of The Great Game of Business, as well as Stake in the Outcome, and Change the Game. SRC Holdings Corporation lives in many marketplaces. It's a complex business. Anything from manufacturing to service. They do power units, energy consulting, marine – ranging in businesses with size of as little as 18 employees to over 400. And I know that SRC has closely followed ITR for decades. And Jack, you are a huge fan of ITR and you really use their information to make strategic moves within SRC. Do you have anything you want to add to that?

Jack Stack
Well, I'm an average handicapper at the racetrack.

Kylie Jackson

Yeah, that's true. I told you Taylor, he'd say something about that.

Jack Stack

And a wanna be poker star. Okay, so I think having those DNAs inside of you, you have a tendency to be able to want to figure out something before it happens. And it's ironic that ITR started two years after we started, and we started following ITR around 1990 because in the early eighties we developed a commitment to transparency amongst all of our associates.

And we went employee owned. And if anybody has an employee owned company, you gotta worry about liquidity in terms of the future. And you begin to quickly understand just how much, when you put earnings on a bottom line, the wealth of the company. It's exponential, it's crazy how fast it grows. So it really became apparent to us to try to figure out the future as best we possibly could.

And we sought out a lot of information for about 3, 4, 5, 6 years. And in that period of time, our stock price was going through the ceiling. When you're, when you're negative net worth and all of a sudden you start making money, my God, you just can't believe what equity is all about, right? And so we were putting our, trying to put our hands around equity and that really required us just to go get the best data we possibly can. And we were making big bets going forward. We were making big bets in the right direction, and we didn't find anybody that even came close to ITR in terms of giving us a ceiling.

In other words, they gave us a a point of reference and it was data based and it was effective. And we had followed it for a couple years, and I'm the CEO of the company, okay, who's responsible for transparency. And I would use ITR all the time, every time we would have our sales and marketing meetings and volley the employees.

I mean, I used to come in with all the statistics about ITR and I sounded really smart, you know, and then all of a sudden the people in the company started peeling back my onion and they're wanting to know where I get all this data and then all of a sudden fast forward 40 years and I can't go into a meeting where it isn't the data that's ITR based, and all my secrets are out. Okay. So I've obviously had to find new ways to be able to stay ahead of my crowd.

Kylie Jackson

I think the Great Game is probably responsible for that because we've shared our relationship with ITR and saying, you know, this is the best kept secret. So now, now a lot of Great Game companies that are practicing also utilize you.

Jack Stack

I don't think anybody really recognizes when, that when you lay out a plan, your probabilities of being able to make it are so great and then you could influence so many lives and people are focusing on doing the right things that they could almost make it happen. You know, if you believe that the data is logical, achievable, and beneficial. You know, even the bad news that comes outta ITR is beneficial because they blend it with a certain amount of optimism, on don't be afraid of it, understand that it's coming, and do something about it before it comes – which led us to every plan that we put out. Now we not only rely on the data, but then we also micro develop our own plans to ascertain the accuracy of it. But more importantly, I think what happens is, you know, we've been able to – we've had 39 successful years out of 40 in terms of following the data, believing in what the outcomes are, projecting the catastrophic events of the future, and also to be honest with you, preparing for those catastrophic events. So we've learned a lot from ITR. We really, really, really have benefit significantly, and believe me, anywhere I go right now, I see a presentation. Somewhere on their presentations they're always on the board. So I'm a big, I'm a big fan of ITR.

Kylie Jackson

Yeah. Taylor, just piggyback off of that, can you just start off by talking about the importance of taking a look at the economy whenever you are strategic planning for businesses? You know, what does that relationship look like and and how closely are they tied?

Taylor St. Germain

Yeah, that's a great question. The easy answer is everyone's tied to the economy in some way. And we see that through all of the clients that we work with. You know, whether you're 40 million a year in revenue or 1 billion a year in annual revenue, there's an economic indicator that correlates to your business. And so I think that's really important for everyone to understand that even in the early years of your business, when you're growing like crazy and you feel like there's no end in sight, your business will mature and start to align with the economy at some point. And we see that.

And so it's really important as you're looking forward to merge this economic forecasting with your strategic planning. A great example I just had today actually, I was talking with a client that said, you know, we put our internal forecast together and late last year when we were at record high levels and we projected further record high growth with some additional growth, and then we worked with ITR and you showed us this downturn that was coming and now nine months later, you know, we sort of manifested itself in our business and thank goodness we reached out to you because we would've had a forecast that wasn't even close. And I think that's really the importance of understanding these economic indicators and economic forecasts.

We often get caught straight line budgeting when times are good – we think times are going to remain good. And the economy has told us all throughout history that everything's a cycle and what goes up does come down and it's, so, it's really important not to get caught unprepared because, and like as we'll talk about a lot today, there is a big difference between prepared phases of the business cycle and unprepared phases of the business cycle.

And even when a recession's coming, if you're prepared, it can be a really great time, you know, to implement some of these initiatives and take market share and grow your business. So I I think that's the main importance for me. You need to understand when these cycles and different phases of the cycles are taking place because not everything is going to continue in that straight line like you might be experiencing.

Kylie Jackson

I think that's something I've learned just since working with you guys, is that there is a cycle. And I think what's also important to note is that you all truly believe that there is no bad business cycle as long as you're prepared. So with that fact, can you explain how we at SRC, all the divisions, I say we collectively because we're part of SRC, how we do our strategic planning process, which is what we call high-involvement planning and how we incorporate it – why is there such a strong emphasis on the marketplace? I mean, Taylor, you touched on it, but personally how...

Jack Stack

Oh, listen, the reason we do it is to have an accurate forecast. If we have accurate forecasts, we have better margins, and we have better returns, and we're moving always in the right direction. I'd like to tack on to what he was just talking about. It's because we've been through four recessions in a pandemic and they've been pretty darn close on getting us prepared for each one of them.

Yeah. I'd also, statistically, I can tell you that five years after every single one of the recessions that we've had, and now this is going on since the pandemic is over, is that we've actually doubled the value of the business five years after a downturn. So, I mean, that's pretty powerful validation looking back in terms of what you can do, when you truly understand what's going to happen to you.

Now what we got to do is, we got to filter down what's happening to us into terms by which we can share it with all our associates. And we've got everything from maintenance to mechanics to assemblers, to electricians, to accountants, to lawyers. And the idea is – try to get as much input from everybody in the organization as to the direction that you really wanna take.

You can't set the direction unless you get some idea on what the market is and where the market's going to be, and what place you play in the marketplace that you're in. So, by using the statistics in terms of ITR, we can look at a macro idea and have faith in their forecasting methodologies right now. From that, we then take it to our sales and marketing people and say, go to your industries and find out what you're hearing from the customer. Validate what they are telling us.

We'd have a second step in our high involvement planning process, that once we've really, really thoroughly researched ITR's forecast, we then go to the streets, we knock on farm dealers, we have marine dealers, we have automotive dealers. So we really want to make certain that even though the macro element in the economy is looking a certain way, we don't want to miss maybe an uptime or downtime. And we really got to clarify ourselves because we're in 12 basically different markets. Some of our markets go up when others go down and some of them go down when others go up. 

So the idea is that if you're running a labor intensive industry like we are, we want to have steady, steady, stability of our labor and our manpower. We always want to have something available. I think another validation is that we've never had a layoff in 40 years. Because we've been relying on the forecast and just in the last two years, for instance, we were all drinking out of a fire hose. Our growth, 20 over 21 was 20%. 21 over 22 is 23%.

ITR said there'll be a softening. I I think I would prefer to use the word softening as opposed to a recession. Politicians use the drastic words. I think if they had used "there'll be a slight downturn," more people would be less fearful. And we listened. We believed the fact that "hey, we needed time off, we needed a breath of fresh air." I think the ITR analysis said that we'll grow 23 - 24 at 5.8% versus the 22% we rose over the last 24 months. So that gave us the capability then to be able to do things that we needed to get done in order to be able to get ready for the next cycle.

So we use the slower cycle to polish the apple, to pick up the crumbs of what happens when you go through this accelerated cycle. Level yourself off. And we believe that in 25, 26 we'll see a significant upturn and we're doing everything we can now to get ready for it.

Kylie Jackson

And so Taylor, we've got, can you just go over the cycles really quickly and then from there, I would love for you to talk about what's happening right now in the economy with the Fed, the interest rates, and then, you kind of hinted at it, Jack, what's happening in 2024.

Taylor St. Germain

Yeah, I'd be happy to. So in terms of the cycles that we identify, I'd just like to start off by saying we identify four phases of a business cycle.

Kylie Jackson

Yeah, sorry, that's what I meant.

Taylor St. Germain

Yeah, yeah, of course, of course. I knew what you were getting at. Phase A, phases are dependent on where your annual growth rate or your 1212 rate of change is compared to zero.

So when you're below zero, but you're moving back up towards that zero line, that's a recovery phase. That's phase A recovery. When your growth is accelerating in its pace, that's our phase B accelerating growth. Then when your growth rates peak, are still positive, but are slowing down, that's phase C, slowing growth. That's exactly where we are in the economy right now.

And then phase D is a recession phase, and that's when your annual growth rates are contracting. So in terms of where we've been first in 2021 and the majority of 2022, we were in that accelerating growth phase of the business cycle coming out of the pandemic.

So it was a time where businesses were achieving record high growth, you know, certainly challenged with the post-covid environment, but inflation was increasing, price increases were going through, profits were increasing. It was a very attractive time to be in business. And the US economy was hitting new record high with almost every quarter of data. Then all of a sudden the second half of 2022 rolls around and we start to see these growth rates transition to decline.

Now, they're still growing year over year, but the pace of growth is slowing. And that's, Phase C, stands for slowing growth, but we also call it our caution phase because what often comes after phase C, is that Phase D recession. And so we've been working with our clients throughout later 2022 and the majority of 2023 as they're watching their growth rates slow, talking about how we mitigate the severity of a downturn.

So that's in terms of where we are as an economy. We're in that slowing growth phase of the cycle. We're still growing year over year, but we're seeing those caution warning signs out there for 2024. I think Jack made a really great point, which is by economist definition, it is a recession that we're forecasting in 2024.

However, let's put this in context here because I think when I say recession, everyone has the PTSD of the financial crisis of 2008, 2009, for example. And that's, that's not the case. We are forecasting a bit of softness in the industrial economy, but the low point that we're forecasting in 2024 is down around 2.5%.

Put that in perspective when you think of the 12.5, 13% we saw in the financial crisis. So this is a very mild downturn and we are calling this an opportunistic downturn because it really is slowing from this crazy busy environment we've had over these last couple of years. And we're hoping that organizations really take advantage of this growth. And, that's the way we're positioning this recession is it's mild, use this slower period of time that's developing in the economy right now, but will really hit us as we get into 2024 to be looking at investing for the upcoming growth years that we have in 25 and 26. As Jack mentioned, training individuals, making sure the quality of your business is, your quality control is on track after these capacity constraints we've been dealing with. So it's really a fundamentally different downturn than some of the downturns of the past.

Not as bad as the pandemic or the great recession from our perspective – very mild. And something that if, again, if we're prepared for, there's a lot of ways to take advantage of this and position ourselves well for what's coming in in the years to follow 2024.

Kylie Jackson

And I think, you know, you mentioned it. Oh, go ahead.

Jack Stack

The hidden advantages are, if you've been using this thing for as many years as we've been using it, the soft landings, the hard landings, the downturns, the upturns, they really taught us to, they taught us diversification – whereas we don't have all our eggs in one basket as a result of really, really understanding. What it is that is being said here is that you can prepare and you can really see, for instance, in consumer demand drops, you see trucking get affected. Okay. But if you're in the construction industrial business like we are, we see it as a lagging indicator and we know exactly how much it can cover us in terms of, you know, what you might see is that opportunity cycle. I don't want to miss this opportunity, that once you establish the basis of thinking here that comes out of working with ITR, not only benefits you in terms of the present and has your entire organization thinking about the future, but more or less preparing for what the expectations of the future is. And that has really been our secret sauce.

Kylie Jackson
Yeah, I think I was just gonna emphasize what you said Taylor, about that caution. Because we've got so many people, and like you said, Jack, are drinking from a fire hose and you're thinking, well, I don't see it, we're still doing great. And you're still toasting your champagne thinking that business is just going to stay nuts. Just, what would you say to them when they're not seeing it yet?

Taylor St. Germain

Yeah, and this is a really important point of why looking at your pace of growth is so important. Not just looking at your sales figures, your revenue figures, but taking it a step further and understanding the pace at which they're growing.

Because you're exactly right. When we're in this caution phase of the cycle, the business is still growing. You're still seeing your sales numbers rising, your profits, your margins are typically still very strong. But you have that caution sign by looking at your rates-of-change and saying, wow, even though the business is still growing at record levels, the pace at which it's growing is slowing down.

So that's why it's so important to not just be tracking those financial figures like sales, but understand the pace at which they're growing or contracting because you get a lead time, you get your own internal leading indicator by just looking at your rates-of-change. And that's really the benefit of the methodology.

Kylie Jackson

Yeah. You already mentioned some moves that businesses can make during this downturn. Jack, can you speak to some business moves that you're making? Not only based on the information that's coming today, but maybe give an example of something that you've heard in the past that has informed your business.

Jack Stack

I'll say the changes, I'll tell you the changes that we're making, and again, the hardcore data that we use is on ITR, but we are now coming to a realization that we have to think about 2-year terms versus 12-month terms.

The manufacturing lead times are really long. Building buildings are 18 months, you know. I mean, if you're going to put out a new product or a new service. It's just incredible with what we've seen in terms of the supply chain. And so one of the biggest changes that we're making now is a really concentrated effort on looking at 24 months is short term, three to five years is medium term, and five to 10 years is long term. And with the benefit of ITR, you get everything. You don't only get what's happening in a 12-month period of time, you're able to sit there and determine what the ride's gonna be like.

And this has worked really well for us. In '08 when the downturn had hit, we had been following ITR and we'd built a war chest getting ready for a downturn. And when assets fell, we were able to make some significant moves that then heightened our growth in terms of the upside. As an example of that kind of short term thinking today, you know, we, we totally agree that the economics that we've reviewed in 2030, there's going to be a tremendous amount of overhead. There's not going to be a lot of workers to be able to absorb it.

So we agree with them that it's beyond caution when you get to 2030. So what we're doing right now, for instance, is that we're investing in real estate and we're investing in real estate because we have to provide liquidity to our ESOP shareholders, our employee shareholders. And in order to be able to make certain that the liquidity continues, even in the downturn, we see real estate as a hedge against a downturn in 2030. So we're making investments right now. Substantial investments to see, to look at a 10% return, to be able to get ready for 2030 to be able to make absolutely certain that if someone retires and they wanna leave the company, that we can make certain that we've got a consistent flow relative to cash.

Where did we come up with this idea? We came up with it by looking at the tenure periods. The facts that are in front of us. The realization is that this is real and we decided to do something about it now. So it's, what I'm learning is that the more you go beyond the 12-month period of time, the stronger the organization gets because you're taking the organization out of the present. You got them completely focused on the future.

Any little problems that they have today are insignificant to the challenge that they have in the future. So that's the beauty of, for instance, just the trend reports that we get on a monthly basis out of ITR.

Kylie Jackson

Before we get into what economic indicators to look at, I just kind of want to piggyback on that and kind of go in a different direction.

How can, I mean, yes we have forecasts, but they always change. You know, on Monday I could think it's going to be sunny on Saturday, but then by Wednesday I have to get an umbrella out. So I'm wondering, how can you look at what you were, you know, 2030 we know that this is going to be a downturn, but other things are going to happen. You know, how do you recommend that businesses stay flexible because it is a sliding scale a little bit?

Things happen, you know, like the pandemic, or the war in Ukraine. And I know that Alan talks about that a lot. Or even when the news is telling you that, you know, these economic realities, is what Alan was just recently talking about in his Trends Talk Podcast, that the Fed might not be living in the economic reality that you guys are seeing in the data. So how do you recommend that businesses stay flexible? And then Jack, I'll ask you to say, how do you guys maintain that? Like, we're looking out, but we're kind of always adjusting our strategy.

Taylor St. Germain

Yeah, I I think there's a really delicate balance that Jack touched on earlier between the information that we provide from a macroeconomic level, but also building your grounds up perspective of how it fits into our economic outlook. When one of the beauties of the consulting that I get to do with businesses is when I present to them a forecast. And ours is top down, right?  We're taking all of this high level information and providing you with it, and then our clients build their bottoms up forecast. And there's a difference between the two. Even though people might say, well that's not good. Well that's where some of the beauty comes in. Because that's where we talk about what are you missing, what are we seeing that you might not be seeing, those types of trends. So that's the beauty of this. You need to be able to take the information that ITR is providing and bring it down to a level that's applicable to your business. But you still see the correlations with what we're saying, with what's going on in your business.

And then we refine those relationships as we have these types of conversations. So I think that's the, it it's not just, "hey, take ITR and and trust everything they say," which we certainly hope you do. But it's also marrying that with the grounds up approach that all the businesses ultimately have to take.

Kylie Jackson

And recognizing how to read the trends because trends are always changing. So if you're seeing that your pace of growth is slowing, that's a trend that can give you an indicator in your own business of, "oh, I learned this with ITR, I might need to rethink."

Jack Stack

No, no, let me just tell you the takeaway, okay? I don't mean to be negative, and I'm not. But the takeaway is that you develop the hunger to learn more about what you're looking for. And what it does is that, you wanna create desire in your people to give you the best data they possibly can. So you have to have a beginning point to be able to start collecting the data to us. ITR is that beginning point.

So we take the data that we have, then we go to the farmer. Cause we make a product line that goes right to the farmer. We talk to the farmer every day. We want to know what his inventories are. We want to know how they see their forecasts. We want to know what they see. Right Now, I just talked to someone this morning, it's crazy that we're talking about agriculture forecasting at 10-15% in the areas of business that we're in right now. So we're constantly doing checks and balances, but let me take it to you on a broader scope. Once we, we have the foundation, which I would consider the forecast from ITR. We then send it out to everybody and we now want everybody to have input into buying into the forecast. We have a massive high-involvement planning process where we want the janitor, all the way to the CEO, to sign off on the forecast – the buy-in. We want to have communications.

You know, I used to go to New York and I used to get stock tips from taxi cab drivers. I would take information anywhere I got it, In order to bring it back home. And then every six months, we do this every six months, we take as much data as we possibly can. We get together and we keep massaging our forecast. We keep moving our forecast around, we change them around. But the stability lies in the fact that we need to have contingencies relative to our forecast.

And that's different than in most companies. In other words, we go out and say, we think that the consensus of the company is that we're going to be growing at a 10% rate. The next item in terms of the high involvement planning, is what are we gonna do if we don't? Because if we don't grow at 10% and we brought people in to create jobs, their jobs could be at risk if we're wrong relative to our forecast.

So, I mean, we have this passion to make absolutely certain that people are fully employed and it provides that extra thrust in terms of its accuracy. So our people then have to say, okay, this is a forecast that we really buy into. Now we're going to go back and develop at least a 10% contingency in case we're wrong.

One of the most powerful things is more of that micro thing that we were talking about earlier. The digging, the deep dive in terms of the validation in terms of making absolutely certain, right? And I believe you can only get that by the wisdom of the crowd. So we go out to everybody in the company, we say, this is the game you're in, this is the competition. This is how we see the marketplace is going forward, and this is all the data we have. Do you have any more data that you want to add to this? Because we'll be more than happy to go through it, look at it, and then we finally sign off. It's incredible to have your entire organizations, whether it's 18 people or 450 an organization to buy into your forecast. I mean, it's really powerful.

Kylie Jackson

Yeah. And I think just to emphasize, SRC does it twice a year. That helps with that flexibility and agility.

Jack Stack

Market's change. I mean, we forecasted a strong marine market and had a $4 gasoline price, and the market wiped out, right? It happens that fast.

Taylor St. Germain

Yeah, and that's why we meet with most of our clients quarterly. Because it's either semi-annually or quarterly where we're meeting with our clients because things do change, and a lot of things outside of our control. And that's, and we often have to make adjustments. Forecasts are born to die.

At the end of the day, we pride ourselves on our accuracy, and we always strive to keep a forecast in place as long as possible. But like Jack said, that flexibility is really important, constantly revisiting the plan because we're in a very dynamic environment, especially, I think Covid really brought that all to our attention, but that's always been the case.

Jack Stack
Yeah, I think it's volatile. I think the word is volatile. I think dynamic is short. It's so, I mean, every economic missile being thrown at you right now and the economy still perking along to what your original forecast was of slower growth.

Kylie Jackson

Well, okay, so I'm listening to this, I'm bought in on being a data junkie. Where do I look? What are the key economic indicators, Taylor, that you would think any business should look at and how does it affect the industry? You know, I know we have five that we've talked about previously.

Can you go over those, what they mean to a little theater major like me. What do they mean to what matters to me? And how does it bucket into each industry?

Taylor St. Germain

Yeah, of course. We have a database of over 10,000 of these. So it can get quite vast in terms of what, depending on what industry you're in, what you're looking at. But you know, you always have to start with GDP, and the reason we start with GDP is because it's the benchmark for the overall size of the US economy and the goods that we're producing in the US economy. So if you want to know how big an economy is and how well they're performing, you look at GDP. And I know that was one of the five that we had previously shared with you. Another one of our favorites because of its correlation to all of the businesses we work with in the overall economy is our CapEx indicator – non-defense, capital goods, new orders. If you want, CapEx gives you a great idea into, not just the business cycle of the general economy, but because we understand when businesses are investing in additional equipment and additional capacity or when they're pulling back. And that has, of course, a massive impact on the overall economy because of the business-to-business activity makes up a really significant portion of that.

Kylie Jackson

So an example of that would be, like you said, machinery, and when I'm investing in my business. Like if SRC bought a new machine. Right?

Taylor St. Germain

Exactly. That would be caught in that indicator. Exactly. If a construction company says, Hey, we need a new fleet of equipment, that's going to be captured in CapEx. And typically CapEx, because of that definition, right,  as people are investing more, you see CapEx rising with the economy. So there's that relationship there. Another one that we looked at and shared with you all is wholesale trade. It's really important. We look at industrial production as a macroeconomic benchmark, but that's a volume based series, right? You have to look at dollar denominated series too. Like wholesale trade, which it has inflation impacting it.

So you can see, and that's the diversity of these indicators I think, you can see what I'm getting at. Sometimes we're looking at volume, sometimes we're looking at investment, sometimes we're looking at inflationary impacts, which is why you'd want to look at a series like that. And then of course, we're constantly following the housing market and the commercial construction markets.

The housing market leads the economy. Not many people know that. Wherever the housing market goes, the US economy follows shortly later. So in terms of getting the leading indicator that's most forward looking, housing's right up there. And so that's why that's a really important indicator that we report on the trends report. And then conversely, commercial construction where so many of our clients live, and I think everybody lives to some extent, because of the space that they own that lags behind the economy. And so, you not only are looking for this diversified group of leading indicators based on what the actual definition is, but you're looking for diversity in terms of their timing relationships. And that's really important in a cycle like what we're in right now, where the market's slowing. So what are our clients doing? Well, they're looking for markets that are lagging and performing well. They're looking for markets that aren't poised for a recession to mitigate some of their decline. And that's why it's so important to look at a diverse, a large range of these indicators. And like I said, we have 10,000 of them. So there's a lot. But those would be the big five for me that you should be paying attention to: GDP, CapEx, wholesale trade, and then residential and commercial construction. That's going to give you a very full, diversified picture of the economy.

Jack Stack

I think it's, you got to keep finding as much information as you can to put it into the decision making process. I mean, I can see cranes every single day. I can then go look at the customers like Genie or JLG that makes the cranes. I can see how busy they are and what their order board's at. I can start micro discoveries in terms of whether I want to be in that position to be able to service those cranes.

Those cranes are indicative that construction spending, it could go back to where the government is now putting 510 billion in construction. Check that off as another indicator, that maybe ought to be in the crane business right now. I mean, I don't look at, you know, I'm an information junkie and the reason I get this, is to get as close to an accurate forecast as I possibly can.

So I'm looking at everything. I'm looking at the news in the morning, I'm looking at the news in the evening, and if somebody gives me an idea of an economic indicator, I'll explore it. I mean, we just have this passion that, you know, hope is not a strategy and you could only have a strategy based on the information that you have in front of you.

Kylie Jackson

What are your favorite economic indicators?

Jack Stack

I love the GDP. I mean the GDP was 10 years running, 12 years running, and then all of a sudden these crazy guys started to say, we're gonna go from a 2.6 to a 6. And I'm going, how in the hell can you triple your production? I mean, it doesn't, it's insanity. What's going to happen is you're going to get into a train wreck, and sure, we go out there, we stimulate, stimulate, stimulate, and then all of a sudden, lead times, manpower, materials, everything falls short because we weren't prepared for that kind of an upturn.

So, you know, I mean, I definitely follow what the GDP is. I thought it was unusual that it was, it was changed again this morning toward last quarter. Now it's a 2% versus 1.4%, but, 2% is fine. 2% is what we existed on prior to the pandemic for a long period of time.

Now, does anybody want 2% to continue? No, we'd like to see kind of a smaller increase in terms of what's going to go forward. But, you know, again, I I think the macro is so darn important because it really gives you the cover, it gives you the roof. It gives you the, and now what you gotta do is you gotta figure out how it's going to really affect you in terms of the business and the industries that you're in.

Because every business and every industry is a little bit different. And yet at the same time, they all accumulate into the GDP. That's why I tell people often that, hey, we're exactly like the GDP.  If you think our businesses goes down in a recession, it does. If it goes up in an upturn, it does.

We are an average middle America mid-sized company, that just fortunately has a lot of different industries that it supports, and those industries combined support our continuity going forward. So yeah, you got to do it with data. It's the data.

Taylor St. Germain

And there's so much out there that it can get overwhelming. But I think that the point is, there's an economic indicator out there for everyone, and we all, for the most part, in some sense, correlate with the macro economy. And that's how we approach our consulting programs is, Hey, here's how your business fits into the economy. I know you think you're only 50 million in annual revenue and you might not have a relationship, but look how close this relationship is. And now here's the indicators for your micro markets that are important to you. And oftentimes you see that correlation increase when we boil it down to that level. But that's not to knock that they still most often, you know, 90% of the time are trending with the overall economy when you take a step back and look at those higher level trends.

Kylie Jackson

I wanted to also ask you, Jack, about, you know, I've heard you say a million times the price of copper. It's kind of like the simplified version of looking at raw materials that, you know, you'll kind of gain that conclusion.

Jack Stack

Taylor's right. I mean, Taylor said that the housing market kind of leads everything. And if you think about how the copper that goes into the housing market or commercial buildings or, you know. Yeah, I like to watch copper. Copper was selling at $2.50 cents at a 2.6 GDP. All of a sudden we go to 4-6 copper selling at $4.50. Now it's back down to like $3.68. It's kind of ironic that, here we have this tremendous price in terms of the demand of copper, and now it's slowing down relative to what the macro economics kind of expected the GDP to do. Right? I can see it in so many, I mean, the price of gasoline has an impact. The weather has an impact, in terms of the industry that we're in. If there's an el nino out of Mexico, we've got it figured out in terms of how it's going to affect the crops in Texas and the Midwest. It's just, you get into this passion of trying to predict what's going to happen because if you predict right, the benefits are extraordinary. Timing.

Kylie Jackson

That's where the gambling comes in.

Jack Stack

Timing is everything, right? I mean, timing is absolutely everything. When you go, when you hit a downturn, asset values drop. If you got money, if you got cash in a downturn, you can make significant purchases during that particular point of time. In '09, we were able, because of listening to ITR and playing the game in terms of forecasting and planning, we were able to buy buildings at $10 a square foot. I mean, today the new ones are at $75 a square foot and a used one is at $55 a square foot. So think about the asset value increase by being prepared at that particular point of time in the downturn to be able to put yourself into a position to just absolutely capture the upturn.

Kylie Jackson
Right.

Taylor St. Germain

Yeah. And I I would add too, on the copper front, we call copper, Dr. Copper, and we say copper has a PhD in economics because of how widely used it is in the industries, and thus how great its predictability is. So we one hundred percent agree with copper as one of the best indicators for a diversified amount of markets.

But to Jack's second point too, I look at 2030 and ITR is forecasting this great depression, as many people know. And I look at that as, wow, what an exciting opportunity for someone like myself who has this window of multiple years to prepare and be ready to take advantage of, like Jack said, asset values dropping, being able to buy homes at a much cheaper price, and then watching that post 2030 upswing and the wealth creation opportunity there is for me. So I think it just gets back to our theme of there's a big difference between unprepared and prepared phases of the business cycle. And if you're prepared, boy, even recessions and depressions can be a wonderful opportunity.

Kylie Jackson

How does one prepare? Oh, go ahead. Sorry.

Jack Stack

I think that's a great question. Cause my question to you is, was it you that I was talking to, or somebody that I was talking to that just had got off the phone with a couple that had heard about the possibilities of change in 2030 and they were preparing now? They wanna have their house paid off by that particular point of time.

They do not want to carry any debt. I can't tell Taylor how many people I've talked to because of that forecast, that they're really putting themselves into a financial situation, that they're going to capsize on that opportunity. It's incredible. I, like I said, in the last two days, I talked to several people that are just absolutely getting their house in order. And that's really one of the things that you want to do is prepare for it, benefit from it, and don't fear it.

Kylie Jackson

Yeah. Can I ask you, Taylor, what makes some of this economic forecasting a little bit challenging? I know we spoke to, and maybe we can lead into the next question of how do you cut through all the noise?

Because we've talked a lot about how the media, what were you saying earlier, Jack? That it's like you can talk yourself into a problem, really.

Jack Stack

So, they can listen to idiots telling you what's happening. You know, you got a choice or you can go data, you know. I prefer to go data.

Kylie Jackson

Yeah. Well, does that make it more challenging though, when people are saying something?

Jack Stack

No, it makes it more comfortable when you're really listening to the people that are doing things out there. This is not to be taken badly, but there are thinkers out there, and there are makers and fixers. I like to deal with the makers and the fixers.

Taylor St. Germain

Yeah. And I think in the environment we're in today with the media there, there's even really great trends that are just not put in the correct context. And, you know, my favorite was a couple weeks ago, it was incomes are declining. And the reason incomes were declining was because they were propped up so much by stimulus checks.

But if you actually remove the stimulus check impact, incomes are still rising, and rising in a way that's very attractive. So that's like some of the noise that you really have to cut through. I have an exercise all the time, where I'll read something in the Wall Street Journal and then I'll try to prove it with the data. We have to see if you know what their writing is correct. For example, and to their credit, they do a great job most of the time, but there are instances where I'm like, if you put that in historical context, it's a little bit different takeaway. And that's why we just leave the political noise aside at ITR and we just point you right to the data.

Kylie Jackson
Right. So I think, you know, that is why we respect you all so much, it's because of the history and the data. And it's based on facts. So it's more comfortable then, you know. But it is, people get scared when they hear, like you were saying, the word recession, and they panic. And we've talked about, we kind of called it a panic economy in a sense. Where, really, did we have a shortage in toilet paper or did we just hear about it and we all freaked out. So, I think it's really interesting, you know, that we, keep an eye on the price. Keep an eye on the data.

Jack Stack

Listen, listen, this is not uncommon. That's why we've kind of taken a position that business has got to be educators. Business has got to teach the younger people. They got to be able to show them the data they need to be able to find the information, to be able to write the decisions, to take the fear out of not learning, not knowing, and listen to somebody else. What we're trying to do is ground them in reality, you know, in the hopes that they make better decisions, that they don't take on a lot of debt, that they avoid a lot of problems in the future. And to use these methodologies in order to be able to ascertain that there's belief in this stuff.

If you go ahead and do it and learn it, you know, I wish they were learning it in high school or grammar school. I wish they were worker ready in terms of financial literacy. But the sad part about it is that they're still relatively few and then they're influenced by just anything that comes along. I mean, they're influenced by a movie. Or a byline.

Taylor St. Germain

Yeah. And, you know, I think a lot of business owners we work with are so good at separating those things, and that's why we see the tremendous success they have. I think there's not enough said about that.

Kylie Jackson

Well, I think we're getting closer to the end of our time, but I would just wanna ask you guys to give us your top three things people should do to act today. You know, knowing what's happening. I mean, first of all, I'll say the top thing to do is pay attention to what ITR economics is telling you. So, we'll just, I'll clean that one off your guys' board, but what can they do? What can folks do today to make an action plan for tomorrow and the best practices for that. Your top three. Taylor, I'll go to you first and then, Dad.

Taylor St. Germain
Yeah, I'll give one overarching one, then I'll be specific for you. Look at your rates-of-change, please. Develop your rates-of-change. Look at your moving totals. Look at the relationship, that's just so fundamentally easy. You can have an intern do it in an Excel file in five minutes. And there's so much to be taken away from that, so please do that.

But in terms of the three things that I'm focusing on, it's cash is king. I know Jack said that and when we're in a slowing growth phase of the business cycle, cash is king. Especially as we look at some mild contraction coming next year. Inventory levels have been a huge challenge to this business cycle because of the run up, the buying activity in the pandemic. There's really challenging inventory situations that are developing. So look at leaning out your inventories, putting yourself in a better position for the downturn in the cycle. And lastly, in a place that we can certainly help, but in general, look at countercyclical markets, look at markets that aren't poised for a recession.

Look at markets that lag your business or look at markets that are on a different cycle from your business to mitigate some of the downturn here. It's really focusing on those areas of opportunity that are going to give you the most margin benefit when things start to really slow down here as we progress to the next few quarters.

Kylie Jackson

I love hearing that because SRC has been focusing on inventories, haven't they?

Jack Stack

Yeah. Yeah. They've done a really good job on it though. I mean, they really have. Yeah. Well, I tell you though, I, looking back, I think that if you understand what's coming at you, you have a tendency to be able to do things you necessarily didn't do before. In other words, when we had this high rate of inflation in the manufacturing sector, you don't really get a chance to pass on price increases that frequently. And so, consequently you don't have a sales organization that's even knowledgeable about knowing how to pass through a price increase. But you know, when you see the need as a result of the dangers of inflation, you have no alternative but to be able to go there and protect the business. So what you do is, you learn to have a plan and the plan sends you the messages, the messages tells you what to do. If you do what the plan is telling you that you really need to do, you effectively execute what it is that everybody has bought into.

So my three things are, have a plan. I can't tell you the number of people that say, what's the sense of planning? Things change so frequently. They're crazy. You know, have a plan. Our plan, like I said before, every six months we go there. We accumulate where we are in a given year, then we forecast the next 3-5, then we forecast the next 5-10. We look at what our organic possibilities are, we look at what our new businesses are coming in, we then measure them against the resources that we possibly have in order to make certain that we're not falling short of anything that we need to be able to execute it.

Give it to all your people, give it to the information that you have. You're going to sound like the smartest guy in the room the first time you do it until they catch you that you're using ITR and then all of a sudden they're gonna climb all over you. And they're gonna start using it. I can't tell you the presentations that I see right now in organization have some trend report always in it from ITR.

So my cat's out of the bag. I gotta find other information now and throw these guys off center. Because my, the data, the transparency is now being used in terms of all of our organizations to be able to have a high degree of predictability. And our forecasts are not only credible on the sales line, our forecasts are credible on the earnings line, the EBITDA line, as well as the balance sheet in relative to the inventory. Everything falls in line if you get that forecast, and your forecast are in excess of what your basic lead times are. And so all that matters is measuring whether the lead times that you have sides up to the opportunities that they're on for, that's in front of you because of the plan that you've developed with everybody inside the organization. And then communicate that plan as frequently as you possibly can. And the last thing I totally believe is that if you see a weakness, develop a contingency, turn it into an opportunity. Don't be afraid of it. Don't sit there and go to the mattresses.

In the old days they used to lay people off and just kind of write it out. The whole idea is to be able to figure out what moves you really wanna make when everybody's afraid and everybody's standing there and not knowing what to do. You'll just breeze right by 'em because you got a whole organization behind you that's geared up to be able to take on the next challenges.

Planning, forecasting, it's all about seizing the opportunities. And believe me, it works. You know, you gotta end this thing by telling people, planning works. And to encourage people to be able to plan, because if they planned their lives, they're gonna be so much easier.

Kylie Jackson

Less freakouts, I'd say.

Jack Stack

Yeah. Less, yeah. Maybe less journalists that are writing things about business that they don't know what they're talking about, or less social media. Making these crazy predictions and terms of what's going to happen to us. I mean, I think of something that happens in Hollywood, everybody freaks out in terms of what's going on around them. It's crazy.

It's called stabilizing – you know, teaching people in terms of what it is coming forward. You can't predict the future. At least you could come pretty darn close in terms of figuring it out. And the 5% that you don't figure out, then develop your contingencies around the 5%.

Don't forget the element of contingencies. But I ask people, when people ask me, they say, well, when you go to your sales and marketing people and you ask for a forecast, you know, I ask 'em, what number do they give you? And the guy looks at me and says, well, the salesman looks at me and says, well boss, what number do you want to hear?

That's not planning. Okay, that's not planning. And this is all about planning.

Kylie Jackson

And you call that a trap door too, those contingencies. Right?

Jack Stack

Absolutely. You know, what else would you call it? You know, trap door contingencies, trying to get there before the shoe falls off the table, catching it before it hits the ground. Trying to figure out whether the guy's trying to draw to an inside straight or whether the castellano is gonna get back on a horse and ride that into Kentucky.

Kylie Jackson

There we go. Alright, well, do you have any parting words or? We good?

Jack Stack

Well, Taylor, I can't tell you how much we appreciate you guys, you know. We'll continue to sing your praises.

Taylor St. Germain

Oh, I really appreciate it. And I know I'm looking forward to getting on stage here soon. In the next couple of months. Yes, with you as well. So a lot more good to come from the two of us, I think.

Kylie Jackson

Yes. And thank you for that because I wanna plug that Taylor will be at our conference. Jack and Taylor will be having this conversation with Sam Reese, I believe, the CEO of Vistage. So that will be a very lively conversation. And Logan Aguire from 417 Magazine will be facilitating that conversation. So really, really excited about that. And you're also doing a breakout session as well, right, Taylor?

Taylor St. Germain

That's it. Yep. Myself and my colleague, Jason Hawks, one of our premier account executives, will be there and chatting with everyone about indicators and how to use them in their business and seeing where we can help in that regard.

Kylie Jackson

So, lot, lots of good stuff. We have a fun MiniGame that we'll be talking about later on, but we'll be dropping more training bites and more information on how to get more in tune with what ITR is doing and reading the data.

And, you know, I'm, I was just thinking when you were talking about please understand rates-of-change, maybe we'll do a training bite on that where people can understand how to do that so they know how they can easily do that within their organization as well. So thank you guys so much for this.

I feel smarter. I just really enjoy hearing you guys talk and I feel like we've got, I would be confident coming out as a business owner to hearing what you guys have to say. So thank you very much.

Taylor St. Germain

Thanks so much.