Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management
GDP Growth = Healthy Economy? Uhm No
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Earlier today, CNN Money released a new gallery report asking: “Are Things Really Getting Better?” Meanwhile, on their front page, the headline reads: “Economy Finally Back in Gear.”
So does the government’s recent announcement that GDP grew 3.5% last quarter, the economy’s first growth in a year, mean that we’re out of the recession? Um, not exactly. Lets put some additional analysis behind the “Getting Better” article. CNN broke economic indicators down into 7 segments. We’ll tackle them one by one:
1. GDP Growth: As I just mentioned, the economy grew by 3.5%, a strong figure when it stands on its own. But many observers believe this represents artificial growth fueled by government spending (i.e. stimulus dollars and the Cash for Clunkers). Now that many of these dollars have been spent, where does the economy go from here? In other words, are these number sustainable?
2. Job Growth: For the 21st straight month, the economy is expected to layoff jobs, to the tune of 175,000 more losses this month. Here is where things get interesting. Job growth is seen as a lagging indicator for an economic recovery. Many economists will tell you we should see a return to job growth in early 2010. But where will this job growth come from? Which sectors of the economy are set to deliver enough expansion to bring the unemployment rate from near double digits to calmer numbers?
3. Housing: This is probably the ugliest chart CNN has posted out of all of them. Home values are still declining, but at a slower rate. Unfortunately, there’s still a glut of supply out there. Many people are buying homes simply because the government is holding interest rates at all-time lows. It’s never been more affordable to buy a house. But once again, how long can this last? What happens when the government begins raising rates to combat fears of inflation? Will the improvement hold?
And that paragraph doesn’t take into account the expected Commercial Real Estate market bust. That bubble still needs to pop, and its effects on the economy or unforeseen.
4. Inflation: This is an area of concern further down the road due to the still present risk of deflation (if the economy hits the skids again) and the risks of hyperinflation, if the government doesn’t reign in low interest rates quickly enough.
5. Manufacturing: CNN describes growth in the manufacturing sector as “tepid.” The reason its tepid will be made obvious in my next point.
6. Consumer Spending: This is the traditional boon of the American economy, accounting for 70% of our total GDP. Unfortunately, Americans just aren’t spending the way they used to. The recession has seriously spooked people, and our country has been long overdue for a deleveraging process. Simply put, people are saving more and spending less. That’s why manufacturing growth is down. People just aren’t consuming as much as they used to, and as a result businesses are making fewer items for sale. This also ties back into the job growth picture. If companies aren’t manufacturing, jobs aren’t being created, money isn’t being spent, and the economy continues its downward spiral.
7. Ironic that CNN’s last point of analysis would be a stock market that’s “roaring back.” Smart analysts out there understand that the surprisingly strong bull run over the last six months has been driven by two primary forces. First, we’ve seen a correction off the absurd lows of Q1 2009. Second, we’ve seen investors speculating that global government stimulus would be enough to drive us out of the economic doldrums. Meanwhile, several multinational companies that compose the DJIA and S&P 500 indexes have been reporting strong earnings reports over the last 2 months, serving to fuel the run up even more.
However, I would argue that the stock market at its current point is overvalued. See Tyler Durden’s analysis of market correlations over at Zero Hedge for why fundamental market indicators point to retreat off the bull run we’ve witnessed through the spring, summer and into fall.
In short, our economy is still in grave peril. Real manufacturing growth is tepid at best. Job losses are still the norm. Worst of all, the financial institutions are back to operating the way they were two years ago. Their balance sheets are still saddled with toxic assets. And the national debt continues to explode. Many economists are now saying that this could be a “jobless” recover (which isn’t really much of a recovery), with the most pessimistic saying we could be looking at a decade or more of fluctuation between recession and rebound (think of Japan’s lost decade).
Buckle up folks. This is going to be a hell of a ride.
Economic Impact of Oil and Coal: Not Good
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Those damn scientists are at it again. One of the major arguments against implementation of energy reform and climate change legislation is that putting together such a system would impose a huge drain on our economy. Guess what? That drain is already happening.
The National Research Council recently released a report estimating the hidden costs of our petroleum and coal-based energy system. The NRC puts the quantifiable costs at $120B. And yes, that’s a B, not an M, as in $120 billion. These are just the measurable costs. According to the report
($120B is a) number that reflects primarily health damages from air pollution associated with electricity generation and motor vehicle transportation. The figure does not include damages from climate change, harm to ecosystems, effects of some air pollutants such as mercury, and risks to national security, which the report examines but does not monetize.
I’m not qualified to get into a deep policy discussion around the merits of a cap-and-trade system vs. a straight carbon tax. Nor am I ready to dig into other policies and incentive systems that could mitigate the problem, but it’s clear that the economic argument against action isn’t nearly as strong as it once was. Will effective energy reform legislation cost a lot of money? Yes. But according to this report we’re already paying a good chunk of that in hidden costs that show up in our health care bills right now. And that doesn’t even include the unquantifiable damage done to the environment and our addiction to Middle Eastern oil.
More on China
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Following up on my post from a few days ago about China, none other than foreign affairs expert Fareed Zakaria penned a story seconding my opinion on China’s emergence during the global downturn:
China entered the crisis in an entirely different position. It was running a budget surplus and had been raising interest rates to tamp down excessive growth. Its banks had been reining in consumer spending and excessive credit. So when the crisis hit, the Chinese government could adopt textbook policies to jump-start growth…
And look at the nature of China’s stimulus… China will spend $200 billion on railways in the next two years, much of it for high-speed rail. The Beijing-Shanghai line will cut travel times between those two cities from 10 hours to four. The United States, by contrast, has designated less than $20 billion, to be spread out over more than a dozen projects, thus guaranteeing their failure. It’s not just rail, of course… Two out of the world’s three largest ports are Shanghai and Hong Kong.
China is also well aware of its dependence on imported oil and is acting in surprisingly farsighted ways. It now spends more on solar, wind, and battery technology than the United States does.
Zakaria is positively glowing about China and its prospects for joining the United States as a true global superpower. However, there’s another side to this argument. For all that China has accomplished in the last decade, and especially in the last 12 months, it still has a long ways to go to match the United States. The Economist articulates this position quite well in its special report on the Sino-American relationship. Key graph:
China may have growing financial muscle, but it still lags far behind as a technological innovator and creator of global brands. This special report will argue that the United States may have to get used to a bigger Chinese presence on its own soil, including some of its most hallowed turf, such as the car industry. A Chinese man may even get to the moon before another American. But talk of a G2 is highly misleading. By any measure, China’s power is still dwarfed by America’s.
While China may indeed be a long ways from matching American influence and power, there is no doubt that it has emerged as the nation most likely to make that attempt. Any attempt to battle climate change, prevent another global financial meltdown, contain rogue nations such as North Korea and Iran will have to start with the United States and China as the two main players. Everyone else will be following their lead.
Tags: China, Economist, Economy, Fareed Zakaria, Newsweek, United States
The New Global Economy
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Just a few hours ago, China announced year-over-year economic growth of 8.9% for the third quarter. This news spurred economic activity around the world as investors from the United States to Europe to Asia reacted to the strong report. Amongst the effects:
- The Shanghai Composite Index fell as investors worried that China may now withdraw stimulus funding
- The US Dollar strengthened against all major currencies based on the same worry about China withdrawing stimulus funding and its continual purchase of government-issued US Treasuries
- Growth in industrial production has helped companies with a manufacturing presence in China. The Bloomberg article makes special note of Volkswagen, who saw a 13.9% increase in sales over last year of their automobiles
Watching the global economic recovery unfold, it’s clear that China and other surplus-carrying nations will be the ones who lead us out of the recession. If China continues to spur consumer spending, its huge population has the potential to move alongside the United States as the primary driver of global economic growth. Since WW2, US consumer spending has driven the global economy forward, but one of the causes of the global economic downturn has been over-reliance on the US economy and consumer spending to drive growth. By mid-2005 the US consumer had reached a negative savings rate, and this was obviously an unsustainable means for driving expansion. Meanwhile, China (and many other Asian countries, i.e. Japan and Korea) that were sporting large foreign account surpluses also had populations with very high savings rate.
In other words, a huge imbalance existed. It now appears that the global economy is beginning to rebalance as the United States personal savings rate has crept back towards the 6-8% range, and the Chinese consumer has begun to pick up spending. As China continues down this path, they should see their influence and impact on the global economy continue to grow. Now, many exporting countries and businesses are becoming more attracted to China and the explosive growth that has now apparently returned.
This is the direction of the new global economy: a waning, but still powerful, American influence complemented by the growth of the huge, emerging market that is China.
File This Under Headlines You Don’t Want for Your Company:
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Update On Microsoft/Sidekick Debacle: “Most, If Not All” Data Will Get Recovered
Ouch. If you’re Steve Ballmer, that’s not exactly what you want beamed out to thousands of tech-heads. While this is only one data point, it’s symptomatic of why Microsoft continues to lose both hardware market share to Apple, and online share to Google. It wasn’t that long ago that Microsoft was looked to as the pinnacle of the technology industry, but the company has fallen on harder times (by Microsoft standards, anyways).
The perception of Microsoft as a monopolistic-seeking soulless entity has stuck with the company through its antitrust suits. The brilliant ad campaign run by Apple through the mid-2000’s cemented an image of PC’s, and by implication, Microsoft, as out of touch, unreliable and generally not cool. Remember these:
Attending school at CBS for the last two months, I’ve noticed just how popular Apple is with the student crowd. I’d estimate that 50-60% of students here own Macs, despite their higher price. And they aren’t the only ones. Apple once again announced an increase in personal computer market share to nearly 10%. While that doesn’t sound like much, it’s important to keep in mind Apple’s vastly superior profit margins, as well as the billions it rakes in from iTunes, iPod and iPhone sales. Apple has become a giant.
Of course the irony of all this is that while Apple is viewed as a high-quality, “cool” producer, they are actually just as ruthless and controlling a corporation as Microsoft ever was.
All this and I still haven’t touched on the war Microsoft has on its hands with Google. I’m less familiar with the battle over search engine prowess and domination of the online world, but I do know Google has the upper-hand there too. From Alexa’s rankings, Google.com and its variants (Google.in, google.fr etc) are the most trafficked site on the internet. Google is visited by 40%+ of daily internet users, while Microsoft’s Live (#5) brings in around 15-17%. Of course Google also owns YouTube who is #4 in the rankings.
Needless to say, Microsoft has its work cut out for it. And losing the personal data of hundreds of thousands of customers definitely isn’t the way to kick that off.
Good Day for the Economy
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The Dow Jones Industrial Average opened near 9,960 today, and based on a strong earnings report from Intel, the most important stock index in America could cross the 10,000 threshold by the end of trading. This would be an important psychological milestone to cross for investors and for the American public. Along with Intel’s positive report, JP Morgan announced this morning that its profits grew more than six-fold on the strength of its investment banking activities.
Meanwhile the dollar continues to fall against most major currencies, hitting $1.49 against the Euro for the first time since mid-2008. While this kills my purchasing power here in Europe, it’s a sign that interest rates will stay extremely low, keeping demand for the dollar amongst foreign traders low. This should help the manufacturing sector and exporters of goods to foreign countries. The weak dollar is also helping the US to rectify its current account trade deficit. As we export more, and foreign producers appetite for selling goods in dollars decreases, the trade deficit should even out.
Additionally, the weak dollar should promote foreign consumer activity, particularly in Asia where its most needed to rebalance the world economy. China, Japan, Korea and India could all do the world a favor by using their current account surpluses to incentivize the consumption of cheap American goods. Hopefully, this will add more stability to the global system and reduce the likelihood of the financial collapse we saw late last year.
Of course, none of this addresses the core problem of the financial system at the moment. Those impossible-to-value toxic assets are still sitting on the balance sheets of major banks. And the commercial real estate bubble is still going to pop in a major way. How will recovering investor and consumer confidence react to these developments when they shake down? The answer to that question could very well determine what type (U, W, L) of economic recovery the United States experiences.
Green Shoots from Brownfields
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That’s roughly the headline of an exciting new article from The Daily Climate linking green energy and economic growth in the United States. The thrust of the story revolves around the use of “brownfields,” dirty, polluted and abandoned industrial sites for the development of solar and wind farms. According to story, the EPA in conjunction with the National Renewable Energy Lab have identified enough “brownfield” acreage to produce 950,000 MegaWatts of energy. That’s a lot, as in enough energy to power the United States in 2007.
“In the next decade there’s going to be a lot of renewable energy built, and all that has to go somewhere,” said Jessica Goad, an energy and climate change policy fellow for The Wilderness Society. “We don’t want to see these industrial facilities placed on land that’s pristine. We love the idea of brownfields for renewable energy development because it relieves the (development) pressure on undisturbed places.”
Many of these brownfields are in areas that have been hardest hit by the recession, Michigan, Pennsylvania and the Mountain West. These are places that desperately need jobs and economic development if they are going to survive in the 21st century. This could be their opportunity.
Google Wave
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Last week Google rolled out their highly anticipated communication tool, Google Wave. In short, the service is designed to revolutionize how we interact with each other online. TechCrunch is all over the story. Key graphs:
The Wall Street Journal has a long article about this today, noting “The End of the Email Era
.” But most of that article is spent focusing on how Twitter and Facebook, which is to say, status updates and the streams, are replacing our need for much of what email has provided in the past. Only very briefly do they mention Wave. And I think that overlooks something…
I think we want the option to communicate in real-time at will, but also the ability to communicate at our leisure at times. I would consider this to be a desire for a “passive-agressive” method of communication.
The whole article is really worth a read for its look at the evolution of online communication and what role Google Wave might play in that process. I really believe that this could have a major impact on how corporations deal with internal communication. There’s simply too much information to be absorbed passively (via e-mail), especially because more and more people are managing cross-functionally. Receiving quick notes from multiple business units can easily lead to information overload, especially as the e-mails pile up. It becomes very difficult to distinguish between what’s important and what’s not.
Business moves so quickly now that effective managers need to have the flexibility to answer problems actively or passively, as necessary. Imagine if you, as a manager, had the ability to sort through what needed to be addressed and what could be put on the shelf in one screen. Once Google works out the kinks in Wave, I could see many companies adopting it.
For the time being though, Google has only invited 100,000 users to try Wave. In order to get access, we have to wait for one of the original invitees to invite us. Consequently, #GoogleWave and #GoogleWaveInvite are now huge trending topics on Twitter as people clamor to get their invite.
And as an avid online communicator, I’d be lying if I said I wasn’t getting a little caught up in the hype. If anyone out there is already using Wave, please let me know because I would love an invite.
Tags: Business Communication, Google Wave, Google Wave Invite, TechCrunch
Moving to the Left
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Yesterday evening, I had a brief conversation with one of my classmates (hi Lindsay) about this blog and how my writing has evolved since I came to Copenhagen two months ago. She noted that my writing, particularly on health care and climate change took a definitive liberal slant. I understand where the opinion comes from. Has my writing begun to reflect more of my personal beliefs? Probably. But I wonder how much of that has to do me being here in Europe.
As I’ve stated many times on this blog, climate change is taken as fact here, while universal health care is taken for granted. The Danes I speak to don’t really understand modern conservatism in America. They don’t understand how we can deny something (global warming) that is happening before our very eyes, or how we can allow 50 million of our citizens to go without health care. I’ve also heard a lot of laughter at the comments about Obama earning the “socialist” and “Communist” labels from his more extreme critics.
I will grant that living in Copenhagen has probably moved my writing slightly to the left, but I also think it’s moved my writing more in alignment with the rest of the world, and with the business community at large. The rest of the world is deep in a conversation about how to limit carbon emissions while minimizing the economic impact. My blog post yesterday regarding Apple leaving the Chamber of Commerce only serves to highlight that trend. The future of business is green: green energy for green money. America must become more aggressive in implementing a green-centric business growth strategy if it wants to maintain its place as a global economic leader. Denying the existence of global warming is no place to start.
Over the course of this blog, I’ve tried my best to write objectively, and to insert my opinion and analysis where I thought it could add value to the discussion. But I’m always open to airing other ideas and viewpoints. If you disagree with my writing, let me know, and I’ll publish your dissent here on the blog. Or you can e-mail me personally with your perspectives, counter-arguments, criticism or praise. My inbox is always open.
Tags: America, Climate Change, Conservatism, Copenhagen, Health Care, Liberalism
