What If?

The business cycle has been repealed. That's what many Wall Street pundits are saying.

They are very convincing, because the economy keeps chugging along, and as each month passes it breaks the previous record for longevity. So maybe the pundits are right.

But what if they are not? After all, the Federal Reserve is doing everything it can to rein in this "exuberant" economy in the interest of subduing any potential runaway inflation - although during this whole expansion period, inflation has been very subdued.

Regardless, the Fed apparently believes that a healthy economy will eventually lead to high inflation.

In spite of the fact that I think this is nonsense, I believe the Fed will continue to raise interest rates and people could eventually overreact, causing the economy to slip into recession. Therefore, it would be smart for any business to prepare for this in their forward planning.

If the Fed continues to raise interest rates, borrowing will become very expensive, and people will be inclined to reduce spending. This would cause a slowdown that could quickly spread from industry to industry. The auto industry always seems to get hit first because cars are high-ticket items, and when times get tough, people will decide to make do with the car(s) they have.

This time, when a downturn hits the auto industry it's not going to be the same. In the last big downturn you could lay off hourly workers to adjust the reduction in production. With the addition of robots, computers and automatic transfer machines, if you have a reduction in production now, you can't lay off a robot. Tough new labor contracts also make it more difficult to lay off hourly folks.

The one area that has the potential for major cost reductions would be the white-collar workforce.

To begin with, they would probably cut out all seminars and pointless training. Then they would ban all team junkets. If it were necessary to investigate something, then one or two knowledgeable people would be sent instead of the whole team.

Tier 1 suppliers would be given full responsibilitiy for all of the parts they supply. If this results in any in-house redundancy, such as in purchasing or engineeing, the people involved would be eliminated. If this action frees up any satellite office space, the vacated real estate would be sold.

Having done this, automakers could now put pressure on their Tier 1 suppliers to review all of their Tier 2 vendors to be sure they are delivering the lowest prices. It's possible that many parts, as a result of this pressure, would be resourced to Mexico or China.

Unfortunately, all of this action involving reducing your workforce and business to your American suppliers would have the effect of worsening the recession.

As the recession deepens, the earnings of most companies would nosedive, and so would their stock prices. A lot of peoples' savings would shrink because they are tied up in stocks. Consequently the "wealth effect" that everybody talks about, which encourages people to spend, would disappear. People would cut spending to the bone, which would further deepen the recession.

Because the stock prices of many American companies now would have sunk to new lows, they probably would attract foreign buyers. Consequently, the profits of these companies, that would have supported our economy, now would go overseas, making the recession even worse.

I'm painting a pretty bleak picture, I know. However, the point that I'm trying to make is that once you get the ball rolling, it'll start to snowball, and it's hard to stop.

I know the people at the Fed don't want to cause a recession, they just want to slow the economy down a little bit. The economy is way too complex to manage in this way. I tend to believe that the market, if left alone, is self-correcting and will do a better job of solving its problems than the Fed ever will.

Still, there are many people that believe that Alan Greenspan is the greatest Federal Reserve chairman we ever had, and if anyone can manage this soft landing, he can.

But what if he can't?

- Stephan Sharf is a former executive vice president for manufacturing at Chrysler Corp.