In search of answers to crucial economic questions, Chicago companies employ the latest data-modeling tools–and scan the city skyline, check out action on the golf course, tally pedicure treatments and count heads at the local tavern.
The use of econometrics, which is the application of statistical methods to evaluate the economy, is not restricted to ivory tower economists. According to what could be called the Hyde Park Pedicure Index, for example, the nation’s economy seems to be on the upswing. And the “on-premises” liquor consumption ratio is flashing the same upbeat economic signals.
Before making their bets in the stock market, investors routinely try to discern the economy’s next move by scrutinizing data on housing starts or consumer confidence trends. They read up on the latest monthly gross domestic product figures and study the data on sales per square foot at retail stores.
Companies make the same effort to peer into the future, and more. After all, corporations are investors, too, even though the wagers they put down are not on stocks or bonds. Instead, managers must decide whether it’s time to bump up prices or reduce output, whether to close an inefficient plant or trim research and development spending. And, of course, they need to provide Wall Street with at least a modicum of guidance on earnings prospects.
Even though the stream of conventional data is large, companies often want more. To anticipate future energy requirements, Commonwealth Edison parent Exelon Corp. uses traditional econometric input such as gross regional product, income per household, office vacancy rates and housing starts.
But it also counts cranes, which pop up like steel dandelions at heavy-construction sites, through a helicopter survey.
That helps it get a handle on how many new high-rise office buildings will be seeking to connect to ComEd’s grid. Crane counts aren’t exactly hard data, but they can help sharpen the focus of other information.
“When I drive around, I’m always looking for cranes. When I’m out for lunch, I’m looking out the window for cranes,” said Pamela Strobel, vice chairwoman and chief executive of the holding company’s Exelon Energy Delivery group.
The practice “actually goes back to our horrible experiences in the summer of 1999 when we had our outages,” she said. “One of the things we learned from that is that we hadn’t developed [an optimal] information base of how load growth was occurring in our service territory.”
As for other forecasting tools, Strobel said she watches the Weather Channel “like a fanatic” because weather drives ComEd’s business more than any other single factor.
At auto-parts maker BorgWarner Inc., “I could tell you I look at consumer confidence, interest rates, affordability, and you’d think I’m a great guesser,” said Chairman and Chief Executive Officer John Fiedler. “But really, I’m not.”
As a major component supplier to automakers, BorgWarner is privy to the dense matrix of auto sales data that enables the car industry to practice Japanese-style “just-in-time” production practices. Under that technique, Fiedler said, “We use information technology in place of inventory. I can tell you right now what the Ford dealers sold yesterday, what Ford’s going to build today, and as a result of that, what I have to build tomorrow.”
The new manufacturing technique is great for managing day-to-day operations, Fiedler said.
“Rather than try to predict when we’re coming out of this recession, we just know what to make every day,” he said. “We just run our operations that way.”
In trying to read future trends in consumer demand for cars, and thus orders for BorgWarner car parts, Fiedler said, the most reliable thing over the years is the consumer confidence index.
The correlation is a strong one, he said. Soon after confidence begins to rise, auto sales begin to strengthen.
In earlier times, the company was obliged to follow assorted short-horizon indicators that were so inexact that BorgWarner had to keep extra inventory on hand, which hurt profit margins.
“One of the least reliable ones was to go out and ask people” about their car-buying plans, Fiedler said. “They don’t know. It seems they kind of decide on Saturday morning and then do it,” he recalls, and so surveys were often “frightfully wrong.”
Tee times, bar tabs reviewed
In suburban Lincolnshire, officials at Fortune Brands Inc., which produces Jim Beam bourbon and Titleist golf balls, also pay close attention to consumer confidence data.
“People tend to drink in all economic conditions,” said Chief Financial Officer Craig Omtvedt, but their confidence in the economy determines where they drink.
For example, he says, in New York after the Sept. 11 attacks, “off-site” liquor consumption rose while the amount of spirits sold in bars and restaurants temporarily tumbled.
Omtvedt also tracks a statistic that is less widely followed, the number of golf rounds played nationwide each month. Since 1999, the research firm Golf Datatech has been publishing the National Rounds Played Report, depending on data e-mailed and faxed in from golf courses in the United States and Canada.
Thanks to the report, the golf ball manufacturer knows that since the new year started, rounds played is up a solid 6 percent.
Big businesses aren’t the only ones to rely on seat-of-the-pants measurements.
Price quibbling factor
Daniel Lynch, owner of Evanston-based Lynch’s Lawncare, said calls from prospective clients have strengthened a bit, and he’s keeping his fingers crossed that business will continue to improve.
Lynch’s rule of thumb for deciding when the economy is on the mend is simple: “Whenever you give a price to someone and they don’t give you a hard time,” times are getting better. During a recession, he said, “people tend to shop around a bit” before committing.
At Julia’s Studio East hair salon in Hyde Park, owner Julia Smith said she has seen a pickup in business in recent weeks.
In the competitive and economy-sensitive market she serves, Smith finds pedicures a good economic barometer. And that small-luxury expense is on the rise. People “are starting to splurge a little more,” she said.
Customers who last autumn cut back on the frequency of hairstyling appointments are coming in more often, she notes, in part because they’re resuming business travel curtailed last autumn.
At Lettuce Entertain You, the company behind such restaurants as Tru, Everest and the Corner Bakery chain, “We’re getting more solicitations from hotel concierges, which means the hotels are getting more reservations,” said President Kevin Brown.
Weekend business is less cyclical than weeknight dining, he said.
“During a recession you lose some of the earlier part of the week and some of the business travelers,” Brown said.
“It’s not excessive, but I see a lot of encouraging signs.”
The signs of economic spring aren’t everywhere. The Chicago commercial printing giant R.R. Donnelley & Sons expects a tough climate going into the year, although conditions probably will show marked improvement in the second half of 2002, Chairman and Chief Executive Officer William Davis said.
“Broader economic activity is beginning to look more positive, but we are not seeing it yet in most of the markets that matter to Donnelley,” he said, and “our customers are not seeing it either.”
The role of trucks
Because trucks play such a central role in hauling raw materials and factory output, said Navistar International Corp. Chairman and CEO John Horne, “the truck industry provides a true, tangible assessment of the economic outlook.”
While the suburban Warrenville company tracks a number of economic indicators, the one it considers key is not showing strength yet.
“We need to see our truck dealers and those of our competitors begin to voluntarily restock their inventories,” Horne said, but that hasn’t happened and won’t until dealers are confident they have ready buyers.
Things appear brighter at the upscale River North-area furniture and accessories store No Place Like, said co-owner Lee Pomerance. When economic times get tough, as they did late last year, customers buy accessories “but they’re not willing to commit to a new sofa or a new dresser.”
But furniture inquiries have picked up lately, Pomerance said. “There’s a general sense of an end to the recession, or at least moving forward.”
