Friday Rant: Demand Forecasting — Active End-Users are the Designated Drivers

Procurement needs to buy what is being sold -- and if we ignore indirect spend, no more and no less. Demand forecasting to drive your buying is both a science and an art, with many sourcing and procurement solutions now capable of broad collaboration around the order pipelines, PLM plans, PR efforts, etc., across an enterprise. And accuracy is getting better and better. Still, perfection is not realistic as there are so many variables and the end-users. After all, John and Jane Q Public are fickle and prone to quickly changing their minds. Especially important to strong demand is if John and Jane are both employed, and brimming with (justified) confidence about their economic futures: this makes for a healthy economy.

Since we are in the middle of an election year, regardless of which side you sit on, there is a good deal of uncertainty. Throw in a yo-yoing stock market and historically high unemployment and it gets worse. If you're unemployed, under employed, or fear losing your job -- your spending pattern will look a lot different than what it would be if you were confidently employed. So the question is: how many are unemployed and what does the trend look like?

Unemployment is measured in many ways. U-3 is the "official" unemployment number you will see in the news; this is the active, job-seeking unemployed. Below I will use images from a site that tracks government-reported unemployment numbers.

This is U-3 from 1991 to present, with a peak of 10% in 2010, and in the low-to-mid 8% at the moment.

Since this economic downturn has lasted so much longer than other recent times, a concern is that the U-3 number does not accurately reflect "true" unemployment in that it constantly removes those who give up in the job hunt, as well as those who settle for a part-time job and are thus "underemployed," as the econ term goes. In fact, some of the part-time workers counted as employed by U-3 could be working as little as an hour a week. See the problem?

There is another unemployment statistic, the U-6, which is arguably more accurate since it counts not only people without work seeking full-time employment (the U-3 rate), but also "marginally attached workers and those working part-time for economic reasons." "Marginally attached workers" covers those who have stopped looking, but want to work.

U-6 from 1994 to the present

Note the crash and subsequent unemployment rise kicking in around 2001, which was then hammered with 9/11 (though still, "W" held it at or below the 10% mark, so maybe his deficit spending worked?) Then we have the financial crash of 2008 and the election of a freshman Senator from Chicago as President, and the deficit spending continued.

Note the (relative to U-3) fairly flat U-6 unemployment level, meaning that there is unemployment buildup that is not reflected in U-3. This nearly total lack of improvement in U-6 under the current administration has taken place despite ongoing massive federal deficits. Even with a good amount of lag time -- liquidity needs to work its way into the system, say the economists -- this is not confidence inspiring. Perhaps "W" sucked all the juice out of the Keynesian lemon back in his 2008/2009 deficit budgets and it is too late for Obama to try to prime that pump?

Back to procurement: with one sixth of the economy benched, it is first of all clear that demand is not what it could be, but also that things can change rapidly should employment pick up. As the charts show, there is a widening gap in the reported U-3 versus U-6 numbers that can be worth paying attention to -- something to keep you from overestimating demand (and I don't mean that sarcastically).

I end with raising my Friday afternoon cup of coffee and hope for an election campaign focused on improving the economy and getting climate for new businesses.

- Thomas Kase

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