The US economy declined at the sharpest rate for 10 years in Q3. Despite the downbeat economic news, inflation is no longer a concern, and fiscal and monetary policies are in place to resuscitate the economy. However, consumers, manufacturers and retailers must not allow panic to derail the speed and strength of the eventual upturn. Instead, they should stick to their existing long-term plans as close as possible.

The US economy declined more sharply in Q3 than initially estimated, shrinking by a revised annual rate of 1.1% – its biggest drop since the last recession 1991. The GDP fall, a result of sharp cutbacks in business inventories and a decline in international trade, reinforces the evidence that the US is in the midst of a recession. The fall compared to initial estimates was unsurprising, because advance figures were completed without data from September, when the attacks on the US brought the American economy to a near standstill for a significant time.

This, along with the fact that the stock market has continued steady trading, is an indication that a further plunge may come more as a result of an overreaction by businesses and scared consumers than the market making ‘natural’ corrections after an extended period of unprecedented growth and spending.

Despite drops in GDP, purchasing indexes and factory activity, recovery may still be closer than many believe. All is not yet lost: business inventories have dropped – a good sign for production in 2002; consumer spending, despite rising more slowly than any time in the past eight years, is still rising at a rate of 1.1%; and federal spending is also up.

Most economists expect the most severe slides to come in Q4 this year, fully reflecting the reduced level of activity following 9/11. This means companies need to implement ‘one-time’ contingency strategies now and stick by them until at least Q1 2002, but (as far as possible) to avoid major adjustments to their long-term business plans. Continued contraction and rolling cutbacks may create unnecessary negative market ripples, prolonging the recession and increasing the likelihood of ‘deflation’. Ultimately, this becomes a vicious cycle, from which escape becomes ever more difficult.

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Regardless of what many are saying, restraint in cost-cutting, corporate layoffs and manufacturing contraction must be the keyword in all business objectives if the US is to see a quicker recovery.

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