Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management

Thursday Quick Links

February 4, 2010
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Today is all about jobs, jobs, and the complete lack of jobs:

– The Bureau of Labor Statistics revised the number of jobs lost during the recession up by 824,000 bringing the total job losses to nearly 8 million people. Mike Shedlock has a nice analysis of the BLS’ Birth-Death model and why this happened over at his website, Global Economic Analysis.

Jobless claims also rose to 480,000 in January, another sign that the employment situation is not improving. Employment will be the biggest drag on any type of economic recovery America hopes to experience. If employers don’t start hiring soon, expect this miraculous bull run in equities to end soon enough.

Royal Dutch Shell announced it will cut 1,000 more jobs on slightly disappointing 4th quarter numbers.

Greece’s debt troubles are continuing to worsen, according to the Wall Street Journal.

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Wednesday Quick Links

February 3, 2010
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The US economy shed approximately 20,000 jobs in January, just beating forecasts for the month. Following the 5.7% growth in GDP last quarter, many economists expect employers to start adding jobs over the next few months.

– In a separate, but related item, Bloomberg reports that the economy most likely added service jobs over the same time period. This is an important development because services are now the vast majority of the US economy.

– From bad to worse for Toyota. The automaker suffered another blow with more than 100 complaints about the brake pedal in its Hybrid Prius model. Needless to say, the company’s sterling quality reputation will take another hit.

– The situation in Greece becomes more interesting by the day. The EU has approved a plan from the debt-ridden country to get its fiscal situation under control, but the plan demands heavy cuts from public sector employees. As a result, government workers are preparing to strike next week.

– Both Time Warner and Pfizer announced strong fourth quarter numbers, with each company posting higher profits than the same quarter last year.


Some Thoughts on the Economy

January 28, 2010
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Last night, President Obama made his State of the Union speech to the nation, during which he spent nearly 30 minutes talking about jobs, the economy and our financial situation. He also outlined a number of initiatives to help create job and to begin reforming the financial system. Instead of breaking down those proposals though, I’d rather talk a bit about why I’m fundamentally pessimistic about any sort of near-term economic recovery.

It’s obvious to anyone who has been paying attention that the American economy is in real trouble. We are burdened by a debt level that will soon reach 100% of GDP. Unemployment is very high at 10% and not likely to come back anytime soon. The real estate market is still relatively unstable. While the stock market has had a nice bull-run, many analysts believe the Dow is oversold. And there are several advanced foreign economies (the P.I.I.G.S) who are also facing a pile of debt and the real possibility of becoming insolvent.

Lets break these down a bit. The debt in and of itself isn’t a direct or immediate threat to our situation, but as it continues to grow unabated, it will continue to exert more and more pressure on everything the United States wants to do, from funding services to fighting wars. While the debt level does not have an immediate impact on economic recovery, it sets the stage for later points.

The fallout from the financial crisis has devastated the American workforce. These massive lay-offs capped a decade that had net negative job growth. In other words, many of these jobs are gone forever. The manufacturing sector has been pummeled, but other service sectors have shed jobs as well. These jobs aren’t coming back.

Even worse, the financial crisis exposed a hard truth about America. We are broke. At every level of society, we are out of money. The federal government is broke. The states are broke. Individual consumers are broke. One direct consequence of this situation is that consumers aren’t spending money. Consumer spending is the engine behind the American economy, accounting for up to 70% of our economic output. Now people aren’t spending money, and if they aren’t spending money, then businesses can’t grow and hire more people. We are witnessing the deleveraging of 30 years of out of control spending, and it’s not a pretty picture to watch unfold.

This alone would be enough to make me pessimistic, but there’s more. The real estate market is still in a highly volatile state. Once the Obama administration pulls out the tax credits and the Fed stops buying Mortgage-Backed Securities, there will be a vacuum of demand created. Oversupply is still the primary threat to the housing market, and I wouldn’t be surprised to see further falls in real estate prices as those policies expire. Another real estate collapse would have a hugely detrimental impact on the recovery. More homes underwater, and more borrowers trapped with payments they can’t afford.

Finally, activity in foreign economies poses a real threat to our recovery. There are five countries in Europe, Portugal, Italy, Ireland, Greece, and Spain, collectively known as the P.I.I.G.S, whose debt situation has become critical. Greece in particular is dangerously close to declaring insolvency. Spreads on their short-term bonds relative to the German bund have grown to nearly 350 basis points, a clear indicator that the country is in financial ruin. If Greece were to collapse, it would send shockwaves through the financial system. A meltdown in Greece could have a domino effect on other advanced economies featuring a cycle of ratings downgrades, higher yields and even more printing of money to pay for all the interest. Rapid inflation is a real threat in this scenario.

Other advanced economies are in creaky shape too. The UK has a well documented debt problem. And Japan’s debt is now at 220% of GDP, and they have experienced over twenty years of anemic economic growth. This is why our national debt matters. We are more vulnerable now to financial and economic shocks than we have been in decades. It’s a scary situation.

When I put all these pieces together in my mind, I see a bleak situation. These are not short-term problems that can be worked out in a matter of months. Paying off debt takes time. Building new economic sectors that can provide real long-term job growth takes time. Letting the oversupply on the housing market readjust will take time. The 2000’s were a rough decade, but the 2010’s could be even worse.


Wednesday Morning Quick Hits

January 27, 2010
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An exciting day lined up:

Apple is making a big announcement at the Yerba Buena Center in San Francisco later today. Many expect Steve Jobs to introduce the Tablet computing device. According to CNN, Jobs has been heard to say that this is, “the most important thing I’ve ever done.” Pretty big news.

The debt situation in Greece continues to worsen as spreads on Greek 10-year notes have reached new highs. This is definitely a situation to keep an eye on as Greece defaulting on its debt would send financial shockwaves throughout the global markets.

The Federal Reserve may consider halting its program to buy mortgage-backed securities in March. If this happens, it would be a huge test of the strength of the economic recovery.

– Toyota is dealing with a major body blow to its earnings recovery after announcing an unprecedented stoppage of US sales due to a faulty gas pedal. The recession hurts, but self-caused failure hurts even more, especially for a company whose reputation is built on quality.

– And oh yea, the President of the United States is delivering some little speech tonight. I think it’s called the State of the Union?? You can bet I’ll be watching that closely, and you probably should be too!


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