HugeNerd - 7:34 pm on Jun 25, 2008 (gmt 0)

We do get paid per word for our posts, right?

Okay, okay. Gas prices (more importantly crude oil prices) are rising. Everyone's costs are increasing. Panic in the streets...

IMHO, we (by this I mean Americans) have been underpaying for oil/gas for quite some time. As the largest consumer of petrol, I imagine this deflated the price per barrel on the open market to an artificially low level.
What we have been seeing, then, is an equilibration of supply and demand...to arrive at the actual market value of a barrel of crude oil. Factor in an understanding that we have no clue how much oil is really left/available and cannot, therefore, acurately assess our future supply; we're probably right where we ought to be...paying for the difference between what crude oil should have cost all along and what we have been paying for quite some time.

I would liken this to a balloon payment on a mortgage. We simply deferred payment to keep the economy chugging along. The payment is now due and we do not have, nor have we ever had, a plan, not even a contingency plan, for this reality. Adam Smith's invisible hand is having tangible effects; slapping the unprepared!

A major impetus for my analysis is based upon Dow Chemical, now the largest US chemical company and one of the biggest on earth. Why? This week on Tuesday, June 24, Dow Chemical announced their second major price increase, 25% across the board, in a month -- the first was 20% across the board -- and the inclusion of freight surcharges as well as reduced output. What does this mean? Only that the cost of making plastics just increased by as much as 45% (so if you purchase or use any item involving plastic AT ALL, prepare to pay more). Soon you may have the choice of "Paper or no bag?" at the grocery store.

While the ecommerce sector seems to think we may be somewhat isolated from oil price increases, or even benefit from them, I doubt we shall be shielded.

My honest assessment: Inelastic goods = fine. Elastic goods = many business closures, lay-offs, downsizing, etc. in the short run only. In the long run (next year or two for this exercise), I picture business as usual. Remember, we are talking about a possible recession; unemployment is still rather stable and low in a historic sense; the rate of inflation is not absurd given the dramatic increase in energy costs; and output, productivity and efficiency are still increasing, albeit at decelerated rates. Look for inventory levels to drop and factory floor orders to decrease but don't get too worried: American's don't know how to save money. Most of us will spend 90% of every earned dollar; this isn't a habit we're likely to change just because the sun is behind a cloud. We might be more careful what we spend it on (for a time, anyway), but we'll spend it just the same. Once we get settled into our new budgets it will be business as usual...our societal memory is notoriously short!

You ask: And if we do have a recession?: Shove off with your doom and gloom! A recession means more opportunities for the well positioned and astute. It'll be rough for a bit, but we'll (think "we" as an aggregate, macro economy) simply shed some detritous and return with renewed strength based on necessarily increased efficiency.

My evidence: Have you had friends laid off? Anyone started walking to work because it was the only way to feed their children? Anyone shot Old Yellow to cut costs and make a meal? I live in Chicago and there aren't any more panhandlers or busking on the street corners than there were 6 months ago, let alone 5 years ago. I'll continue to plan for the worst and hope for the best. Smart investments and business plans are smart by design, not by economic trending -- most success stories have little to do with luck.

Currently: Traffic is steady, gross sales are down. I have cut AdWords spending to 50% of last-year-to-date (LYTD). Conversions on what have always been my best selling widgets are up (some days as high as 15%). High-end widgets are converting at usual or increased rates (luxury goods tend to be somewhat immune from recessions as the wealthy still are, well, rich) for the summer. The "window" shoppers have dried up. Strangely, I have had more elderly customers, more sales to businesses, and the call-in orders have spent less time on the phone and appear to be better researched and more educated (quite a few orders shipping to doctors offices or paid for by credit cards registered to Dr. John Doe or Jane Doe, MD., PhD. etc).

:o)