Yesterday we announced that our company,  Network Communications, Inc. , had opened conversations with its creditors in order to restructure its balance sheet.  The  development was reported in Business Week and has appeared in numerous news outlets across the web.

The Business Week reporter did a balanced job in describing the situation.  I think one quote sums it up pretty well.

“It’s not a company with a fundamentally broken business model,” McCarthy said. “It’s a company that’s gone through a radical adjustment in size.”

I’m not going to comment on the restructuring process.  A lot of media companies, such as  Reader’s Digest and Freedom Communications,  have gone through restructurings the last two years, emerging successfully as viable businesses with manageable capital structures.

Right now we’re focusing on communicating clearly with our core constituents about what the announcement means for our business.  The short answer is, It’s business as usual.    NCI is in the enviable position of generating more than enough cash to fund its day-to-day operations.

To help spread that message, we sent out copies of our press release and a detailed Q&A to our employees and business partners.  I’ve held a series of webinars to review the materials and address any specific questions.  We’re also reaching out to our key vendors and customers.

I’ve also focused on another message:  Our future is what we make of it.

The difficult market conditions of the past two years have driven us to be more disciplined, more resourceful and more innovative.  This approach has borne tangible business results:  We have expanded our customer relationships, we have built new products, we have strengthened existing products and we have managed in such a way that we’ve been able to sustain our business model.  We’ve been able to do this because of the remarkable focus and commitment of the people who make a difference every day:  The employees and independent distributors associated with the company.

Right now we are facing two basic facts.  Unquestionably, an economic recovery is underway.  Unquestionably, our customers have been shocked by the changes in their business and are reluctant to increase their marketing spend.

To rebuild our business, we need to help resolve the contradiction between those two facts.  We can do this three ways:

• We have to be in front of our customers and help them see that market has improved enough for them to feel confident that they will get a return on increasing their marketing spend;
• We have to be fluent in explaining why our traditional businesses continue to provide value to our customers, in terms of visibility, leads and business results.
• And we have to be energized in showing our customers how our innovative new services, particularly in Internet and social media marketing, can give them powerful ways to expand their brand footprint and build their business.

Executing on these three activities is the most important thing that we can do right now.  That is how we will make our future.

A note:  I have closed comments on this post because of the sensitive nature of this dialog.  If you have any questions you can e-mail me at dmccarthy@nci.com.

There’s been a lot of data points over the past month or so pointing to the economic power of women. Two generations of workplace advancement and educational commitment have put women in the singular position of having more opportunity for independence, advancement and earnings than at any other time in our nation’s history.

A CitiGroup unit, Women & Co., released an edifying study today that examines how these strides in economic status have influenced the way that successful women think about the obligations and opportunities of money.

Not surprisingly, as women gain more control over money, they are talking about it more and more.

Women’s rising financial influence is also breaking down the long-standing taboo of talking about money. As revealed in 2008, money is the #1 topic between mothers and daughters. This year’s results find that 91% of women are talking about finances with family members. These conversations are now extending outside the family, as well. The majority of women, over two-thirds, believe that in the wake of the economic downturn, talking about money is much more socially acceptable.

Financial success and knowledge is a responsibility; 84% of mothers are using the financial crisis to teach their children lessons, and 64% of all women are sharing their financial values with others.

The image is compelling: The most valuable lesson a woman can give her children is the lesson of financial independence. This is lightyears away from the image of a mother preparing her daughter to be the best wife she can be.

I’m struck by a disconnect in our social dialogue, though. If women are comfortable with talking about money and feel like sharing knowledge about money is a responsibility, why is there so little sensible discussion about how to make our nation more fiscally responsible on the national stage?

Could it have anything to do with the fact that Congress and the media is dominated by men? And that for men, Money (with a capital M) is a validation of power and authority, something that is highly self-reflecting? That last observation isn’t a statistical fact, just an impression, but still….

(Disclosure: My wife’s firm, TMG Brand Communications, is the public relations representative for Women & Co.)

The components of residential investment in the fourth quarter GDP report (which is subject to revision, of course) is worth looking at more closely.

Single-family housing, which made up more than 3.5% of GDP at the peak, has declined precipitously, but registered a slight increase in the fourth quarter. Another driver of growth in residential investment was brokers’ commissions, which were sparked by the rapid rate of home sales. These drivers were offset by continued declines as a percentage of GDP in multi-family investment and residential improvements.

What should you read into the numbers? The recovery is in the timing; the new home and resale home market began its decline earlier than other segments of the residential investment economy. Improvements are driven partly by home values and partly by income; multi-family investment is driven by access to credit markets and property valuations.

Sustained improvement in the residential real estate market will help to drive increased investment in home improvements. The dynamic for the multi-family is somewhat more complex, but hinges to a large degree on stability in the employment markets.

Thanks to CalculatedRisk for the chart.

What role is human emotion playing in the prospects for an economic recovery?

Robert Shiller expressed his concern in this Sunday’s New York Times that a deflated population, burned by the excesses of the last decade, are feeling detached from the responsibility and opportunity to drive an economic recovery.

A USA Today/Gallup poll, for example, found this month that about two-thirds of Americans say they think that economic recovery won’t start for two more years, while 28 percent say it won’t begin for at least five years.

The workforce has been in a long period of disenchantment, Shiller suggests.

According to the Bureau of Labor Statistics, annual growth of business output per labor hour averaged 3.2 percent from 1948 to 1973, but only 1.9 percent from 1973 to 2008.

Ever since the long-term productivity slowdown became visible, the economist Samuel Bowles, now at the Santa Fe Institute, has said that its causes are to be found as much in the loss of “hearts and minds” of workers and investors as in technology.

This month at Yale, in lectures titled “Machiavelli’s Mistake,” he spoke of the error of thinking that a high-performance economy could be based on self-interest alone. And he warned of the overuse of incentives that appeal to individual gain.

The path back is to regain the interest and the energy of the people who make the engine go — workers and investors.  A sense of the possible, combined with a sense of purpose, can have a tremendous impact.

Solutions for the economy must address not only the structural instability of our financial institutions, but also these problems in the hearts and minds of workers and investors — problems that may otherwise persist for many years.

What are the factors that can drive that feeling of potential?

As I read the Shiller piece, I wondered to what degree the emphasis on “inventing the future” during the technological and financial boom of the last 20 years has left the rank and file feeling disengaged and uninspired.  Our business mythology off the last two decades has focused on hero-stories, individuals who have invented the future whole cloth, made great wealth, retooled the way business works.

But so many of these hero stories have ended up being all smoke:  Internet companies sold for billions of dollars end up vanishing; the great wealth of the financial services economy evaporated almost overnight.

Our current mythos is of the worker as disadvantaged, of an economy that doesn’t make things, that is at a disadvantage.

If Shiller’s observations are right, and that the national character has been distressed by the economic downturn, then what can set it right?  Is this as easy as picking the right narrative, picking the right goals to set, so that people can feel like they are picking the country up by its bootstraps and setting it right?

This has the feel of a big week. The headlines that clicked by on Bloomberg today captured a different zeitgeist than last week, a sense of a logjam of rhetoric and disconnection break open.

Commentators will have a field day, but it’s worth taking a look at how the rhythm of the news shifted.

Here’s the summary of the day.

• The activity that drives jobs and the economy — manufacturing and services — is gearing up, albeit slowly.
• The employment market continues to stabilize.
• Obama, faced with a strategic defeat in Massachusetts, quickly tunes into popular opinion, backs off health care and goes straight after the Wall Street titans.
• Consumers are beginning to spend more, and the biggest Wall Street giant of them all bows to popular opinion to cut back its bonus pool, after using a Federal subsidy to post its highest earning year ever.
• In the midst of this sudden shift in momentum, the market slides, unclear what the implications are and in a hurry to hedge its downside risk.

Here’s the highlights from Bloomberg:

U.S. Economy: Leading Index Rises More Than Forecast

The New York-based Conference Board’s gauge of the outlook for the next three to six months climbed 1.1 percent, the most in three months, after increasing 1 percent in November. The gain exceeded the median forecast in a Bloomberg News survey for a 0.7 percent rise. Another report showed Philadelphia-area manufacturing expanded in January for a fifth straight month.

Factories in Philadelphia Fed Region Grew in January

Increases in exports and business investment, combined with a need to stabilize inventories, may promote further gains in manufacturing in early 2010. The report corroborates figures issued by the Fed Bank of New York last week that showed factories in that region accelerated, indicating the rebound is broad-based.

Jobless Claims in U.S. Unexpectedly Rise on Backlog

The jump was due to an “administrative” accumulation from late December and early January holidays, and did not reflect “economic” reasons, a Labor Department spokesman said.

Obama, Democrats Signal Willingness to Scale Back Health Bill

President Barack Obama and House Democratic lawmakers signaled a willingness to scale back legislation overhauling the U.S. health-care system after the party suffered a defeat in a key Senate race.

Obama Calls for Limiting Size, Risk-Taking of Banks

President Barack Obama, tapping into voter anger over bank bailouts, called for limiting the size and trading activities of financial institutions as a way to reduce risk-taking and prevent another financial crisis.

American Express Profit Surges as Spending Rebounds

“We still face the challenge of high unemployment levels, depressed real estate values, and shrunken household balance sheets, but the overall economy and our company are in stronger shape than they were a year ago,” Chenault said in the statement. “While the economic recovery now under way is likely to be modest, we expect it to continue and have begun to shift our focus to growing American Express for the longer term.”

Goldman Sachs Posts Record Profit on Bonus Pool Cuts

“The big story is the compensation,” said Keith Davis, an analyst at Farr, Miller & Washington LLC in Washington, which manages about $650 million, including Goldman Sachs shares. “They got the message that politically they can’t be paying out close to 50 percent of revenues anymore, at least for the time being. Obviously, that’s the primary reason for the beat.”

Stocks, Commodities Slide, Treasuries Gain on Obama Bank Reform

“Financials are selling off and dragging down the market,” said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages about $2.5 billion in San Antonio. “There’s concern about an overhaul of financial services companies, with increased regulation, hurting the bottom-line of banks.”

The ultimate measure of consumer confidence, particularly during unsettled times, is driven by their pocket book. What money do they have, what bills do they have, how do the two match and how do they feel about their ability to keep their equilibrium.

So, when you are thinking about the near-term prospects for the economy, run all the news you see through that filter of self-interest and well-being. You should be able to guess how consumer confidence will be trending at any single moment.

The best way to feel the squeeze is to look at just how much variable cost an average consumer has in their monthly budget. Yesterday, I shared a chart from Column Five Media that showed how the distribution of consumer spending has shifted over the past 100 years. Today, I’d like to share a chart that digs in to exactly what the consumer of today spends money on. (These Column Five folks make GREAT infographics.)

Fixed costs are close to 70% of total expenses for the average consumer. These are expenses, like housing and transportation costs, that can’t be changed without a significant life restructuring. Truly discretionary expenses, like entertainment, gifts to charity and eating out, amount to close to 18% of total expenses.

Here’s what that means in real dollars:

• The average consumer takes home about $4,205 each month, after taxes.
• Housing, transportation, healthcare and insurance costs $2,820 each month.
• Of the remaining $1,385, $616 goes to food, education and assorted items for personal care.

There’s not much margin for error. A downturn in hours, a cut in salary, a job elimination, an expected expense can put this average U.S. Consumer Unit in a bad spot.

The reality of this math puts the results from BIG Research’s continuing survey of Consumer Intentions and Actions in context. In their January briefing, the analysts at BIG Research paint a picture of a consumer who is becoming warily confident, but who does not intend to stop their new habits designed to make them more financially stable.

From the report:

While the current double-digit U.S. unemployment rate is likely keeping consumer sentiment and spending depressed, consumers remain relatively positive about the employment outlook for the first six months of the New Year…in January, 31.0% indicated “more” layoffs over the next six months, down just over a point from last month (32.5%) and nearly half the reading from a year ago (59.9%). Close to one in two (45.8%) contend that layoffs will remain the “same,” stable from December (45.7%) and rising from January ’09 (30.5%). Nearly one in four (23.2%) are predicting layoffs to decline, up from 21.8% a month ago and more than double the figure recorded a year ago (9.6%).

Consumers also retain their optimism with their own job security this month…4.4% are currently concerned about becoming laid off, flat from last month (4.6%), but lowering by 50%+ from January ’09 (9.6%).

It looks like many consumers vowed to rein in spending and control debt in 2010…nearly two in five (37.9%) are prioritizing paying down debt over the next three months, rising from 34.4% in December. Almost as many (37.0%) contend they will decrease overall spending in Q1, up more than five points from last month (31.6%). Consumers are also increasingly focused on adding to their savings (30.0%) and paying with cash more often (25.7%).

Within the context of this wary stability, one can understand the visceral resentment of the bailout of the financial industry, the concern about home values, the despair that creeps in when the media bleakly reports the future and the desire for clear and decisive leadership from the government.

None of those external factors is going to change, so we should expect a wary consumer and a volatile body politic for a while yet.

Congratulations to my friend and former colleague Doug Manoni, who was named CEO of Source Media this week.

Doug and I worked at Cowles Business Media through the better part of the 1990′s. At the end, Doug was my CFO.

He’s an interesting study for people who wonder about the future of business-to-business companies. Doug is a logical and sensible guy who understands that everything in the end comes down to cash: Who will pay you and who do you have to pay? He’s intellectually curious and enjoys interacting with new people. He doesn’t get overwhelmed by the things he doesn’t know and he’s grown more and more confident over the years in his own decisions.

This personality has helped Doug develop a bias towards extending diversifying his businesses to incorporate higher value content. He’s made this transition twice before from traditional advertising-based businesses successfully. I’m sure he’ll manage to do it again in this role.

[A note: the Chairman of Source, Marty Maleska, is member of the NCI board.]

Martin Feldstein, the Harvard economist, today in the Wall Street Journal offers an attractively succinct and common-sense assessment of the effect of Obama administration programs on the economy.

A stimulus was needed, Feldstein writes. The problems was that it had the wrong emphasis.

The result was an unnecessarily large increase in the national debt for a very modest rise in gross domestic product, with too much emphasis on redistributing income and preserving public-sector jobs and not enough on raising economic activity. Only about one-fourth of the nearly $800 billion will be used for government spending that adds directly to GDP.

Simply focusing on the right things would have had much more impact, Feldstein says.

The flaw in the stimulus package wasn’t, as some say, that it was too small. It was that it was poorly targeted. Instead, Congress and the president could have gotten more stimulus from accelerating the repairing and replacing of equipment in the civilian and defense sectors. Long-term reductions in marginal tax rates of the type used by Presidents Kennedy and Reagan would also have been better than temporary tax cuts that have no positive incentive effects.

Feldstein doesn’t offer a solution, except to suggest that administration needs to shift its focus. The Congressional Budget Office recently completed a paper showing the impact different job stimulus initiatives could have on employment.

The chart to the right is from the director of the CBO’s blog and shows which initiatives would have the most significant impact on employment. A big impact would be from reducing payroll taxes. This effectively reduces the cost of having an employee. In theory, this is good for the government, for while the company would contribute less in tax, this decline would be offset by an increase in personal income tax.

But, in a faint echo of Feldstein’s comments, the CBO director has a caution. We’ve already run up a big bill with the stimulus programs and those bills have a price.

CBO concludes that further policy action, if properly designed, would promote economic growth and increase employment in 2010 and 2011. Different policies vary in cost-effectiveness as measured by the cumulative effects on GDP and employment per dollar of budgetary cost and in the time patterns of those effects. Moreover, despite the potential economic benefits in the short run, such actions would add to already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been.

Here’s an underlying issue for a consumer-driven economy: a change in demographics will reduce the volume of consumer spending.

From Nielsen’s research blog:

CPG Spending Declines
As population growth slows in the U.S., so will spending on consumer products. Household size will decline across the board, the largest families will be smaller and a large share of the population will live in one or two person households. Nielsen projections demonstrate that households closest to the poverty line will gain in share at the expense of all other households, but especially those in the middle and upper middle classes, who will shrink the share the most. The impacts of these two trends means that after 2020, Nielsen projections show per household spending on packaged goods will begin to fall. The current recession is already impacting spending in the short-term. Growth will be very hard to come by both now and in the coming decades.

So, while the global population will continue to grow, the U.S. population will slow, and households with children under 18 will drop to 30% of all households by 2020.

Another data point supporting the assertion that the economy that we had for the last 20 years isn’t the right economy for the next 20 years. Consumer consumption is not only experiencing a short-term change, but is manifesting a trend that will continue over the long term.

Here’s two clear charts that capture the work the American consumer is doing, with some aggressive prodding from a financial services industry that is clamping down on credit every way it can.

The first chart shows trends in Consumption and Real Household Net Worth from the mid-1960′s to today. Recessions are indicated by the grey bar. The second chart shows the change in outstanding consumer credit from 2005 to today. (Again, the great recession is indicated by the grey shaded area.

From the early 1980s to the beginning of this century, consumption increased as a percentage of household worth. This trend was not driven by real wage growth, but by the ability to borrow more money against future earnings.

By 2002, consumer debt secured by wages was basically tapped out. The growth in consumption in the 5 years following that was spurred by the housing bubble, which used booming home prices and easy access to equity loans to fuel more consumption in the economy.

Today, the consumer is back to living on their wages, with the ability to borrow against future wages highly constrained. The relationship we see between these three data sets — consumption, household net worth and consumer credit — are going to continue along these lines for the foreseeable future. This is the most important statistic in the recovery: the consumer balance sheet.