Economic Crisis - Have we even defined the problem right?

Early on during the current and ongoing economic crisis, I had asked the question whether we had even defined the problem right as I strongly believed to find the right solution we have to have defined the problem right. Find below the links to the two earlier posts

Follow up Post# My Views on Business and Technology: Economic Crisis - Have we even defined the problem right?

Original Post# http://kunamneni.blogspot.com/2009/03/economic-crisis-have-we-even-defined.html

Yesterday, I heard this commentary on Marketplace, asking the same question with regards to fixing the banking crisis and avoiding a future meltdown like we the one we had recently: The question again is have we defined the problem right?

To read click on this link:
http://marketplace.publicradio.org/display/web/2009/09/30/pm-banking-crisis/

To listen click on this link:
http://marketplace.publicradio.org/www_publicradio/tools/media_player/popup.php?name=marketplace/pm/2009/09/30/marketplace_cast1_20090930_64&starttime=00:07:58.500&endtime=00:10:47.0
Listen / Read / Think before accepting solutions on their face value !

I welcome your comments.

Thanks
Nagesh

Jobless Recovery: Is it a fact or fiction?

Every time employment report gets published and given we are still losing jobs, albeit fewer than the previous report, Now we are hearing more and more from the pundits about the notion of a jobless recovery!

I guess, I do not need to post links to the articles on "Jobless Recovery", you can just Google It or Bing It, and you will find many articles.

In simple terms, the term recovery is being used to state that the economic size, which is measured as GDP, will or is growing again, and since we are still losing jobs, the pundits are calling this a "Jobless Recovery". The assumption is that that productivity gains far exceed growth being experienced, hence no job growth. This slideshow in business-week, august,2009 issue, titled "Welcome to a flat productivity world",raises doubts on whether productivity assumptions are really true.

Hence my concern whether; this notion of “Jobless Recovery” in the current situation a reality or a myth? OR a fact or a fiction?

The rest of this post is my attempt to find an answer to the above doubt/question.

I am an Engineer first, so I wanted do a 50,000 foot view of this concept of “Jobless Recovery” from an analytical perspective. So

First, let's look at how GDP is measured:
The most common approach to measuring and quantifying GDP is the expenditure method: (Source: Wikipedia)
GDP = C + I + G + (X − M)
or
GDP = private consumption + gross investment + government spending + (exports − imports)

Second, let's analyze what each represent

1. (X-M) or Exports – Imports: The june report, published at http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm), shows US deficit at $27B (i.e 27 Billion). This is has been the trend for a while and I have not come across a credible report that will change this from a deficit to surplus. As of News release on "GROSS DOMESTIC PRODUCT: SECOND QUARTER 2009 (SECOND ESTIMATE)" this deficiency was a staggering -707.8B, or about 5% of GDP. Changing this to surplus would either require us to export more, consume less or combination of the two. As you will see later consuming less will not be encouraged as that is biggest chunk of GDP, although that may be the right medicine.
2. Private Investment: The GDP Second quarter report has this at 2,136.1B of 14,441.4B, about 14.8% of GDP. To impact this, will require lots of additional investment from private sector. However given the uncertain economic times. Keeping this at this at the current levels will be a challenge. Even if we go optimistic and estimate that business will grow this by 50%, the impact to GDP will be about 7.35%. Personally, my most optimistic estimate is to hold this at the current levels.
3. Government Spending: The GDP report on second quarter has Government Spending at 2883.2B; this is about 20% of GDP. Of the 2883.2B, 37.5% was federal and 62.5 was State and Local Government Spending. If you look at this more closely, State and Local Governments spending across the country is being squeezed and cut, and they are the lion's share of government spending. So for every 1% cut in State and local spending, an additional 2% will have to be spent at Federal Level. This gets even more complicated if we take a deeper look at the breakdown of federal spending. It shows that Non - Defense Spending is only 344.7B of 1082.6B, about 31.8%. So in reality of all the government spending, Federal Non-Defense Spending is only meager 2.4% of the GDP. Assuming we hold the Defense budget constant, this means for every 1% cut at state and local, Federal Non-defense Spending has to go up by 6%, just to hold the GDP component of federal spending at current levels (no growth). Given what we see in California and other states with regards to local budget cuts, we can quickly get to a point where we can question whether the current federal stimulus money is big enough.
4. Private Consumption: Second quarter GDP Report shows Personal Consumption Expenditures is a whopping 10,129,1B of the 14,441.4B, i.e 70% of the GDP. Now you can see why our leaders quickly come up with Programs like “Cash for Clunkers”. Programs like these make us Spend Money. i.e. Consume, which then lowers inventories, which then makes manufacturer start-up their factories, which then leads to Jobs/Wage growth, which then leads to more consumption – the cycle finally resulting in growth, and ending recession. However, this logic has had a negative impact on the average citizen, who is now saddled with debt he cannot repay.

Finally, so what is my take#

This simple analysis says that if our government is targeting increasing private consumption, then it better result in Job Growth or else we are just converting tax payer money into corporate profits, which in the short run may show +ve impact on stock markets but will eventually fail to compensate for the loss of consumption due lack of job growth. Hence – Jobless recovery in the current situation is a Myth and is not something that is sustainable. Additionally, Jobless Recovery has the potential to make things worse as poverty will raise, reliance government benefits will increase and Private Investments will fall as it will become tougher to sustain lower taxes.

So what should be done! In my humble opinion:

1. We should encourage people to save as our debt burden at all levels (individuals to government) is out of control; in the short run this may be painful but today’s saving will eventually become tomorrow’s capital-leading to innovation and job growth. My original thought was that, this will eventually lead to reducing trade deficit. However a lecturer of mine was kind enough to point out that I was only thinking in absolute terms and not relative terms. Based on the feedback, I now have changed my opinion to: reduction in consumption due to savings may or may not reduce our trade deficit on relative terms as the cut in consumption will cut both domestic and import consumption. I still feel encouraging individuals to save is the right move, given our individual debt condition.
   
2. We should target some stimulus to businesses that promote investments/R&D in US. Just giving businesses tax breaks will not cut it and does not guarentee that it will increase investment in the US. A targetted stimulus for investing by business into US will help in increasing Private Investments contributions to GDP which eventually will help drive-up consumption as these investments will potentially lead to job growth.
   
3. Personal Consumption as % of GDP has gone from 61% in the 50's and 60's to more than 70% now. This change on hind sight has come from Unsustainable increase in personal debt and decrease in personal savings. Sticking my neck out as I am not an expert economist I suggest, Economists should take a hard look at this data. It looks like governments are relying more and more on private consumption at the detriment of the long-term health of the economy and citizens. There is probably a metric that can identify when consumption is changing to unsustainable over consumption, which could then become a leading indicator to make effective policy decisions?

Thanks for reading. Please free to post your comments as I would love to learn from your thoughts too!

Thanks

Nagesh

The views represented in this blog are my personal views and are not a "reflection of" or "opinions of" any of the institutions I am associated with or have worked for.

Follow up Post on "Economists/Intellectuals - Are we hurting our children?"

Recently, I posted an blog entry titled : "Economists/Intellectuals - Are we hurting our children?"

The post argued how programs like - "Cash for Clunkers", "Hiring more Govt Services Staff using borrowed (Stimulus) money leads to inter-generational transfers i.e. in simple terms - burdening our children with debt of our consumption. Interestingly today I read the following articles on Yahoo! Finance

1. Cash for Clunkers under budget with 690,000 sales
2. "Artificially Sweetened" Market Could Face "Seismic Readjustment," Harrison Says
3. It's Hard to Worry About a Deficit 10 Years Out

Correlating the articles - In US, We just bought a many "Corolla’s and other Small Cars", most of them are not even Innovative (potentially clunkers themselves). The subsidy of $3 Billion therefore will only benefit the manufacturer and buyer at the cost of the some "current or future" tax payer and can in no terms be qualified as something that will benefit the future generation, on the other hand Article 2 clearly equates that a lot of current debt accumulation will have to be repaid by our Kids - inherently lowering the standard of living for them and finally the last article argues how each one us or a future taxpayer will pay for this in the form of higher taxes.

I always believed and still do; that my parents strived for better living for me - and I want my kids to think the same of me when they grow up. I am not sure they will, given our generations lack of fiscal control and amount of debt we are piling on to them. Hopefully I am proven wrong.

Your feedback or comments on this post are welcome.

Thanks

Nagesh

The views represented in this blog are my personal views and are not a "reflection of" or "opinions of" any of the institutions I am associated with or have worked for.

Cloud Computing - Why should Enterprises Care?

Recently, I wrote a blog entry analyzing the results and what they mean - in most cases I concluded that most executives were more confidant on controlling costs than they were on growth. Links to the post: http://kunamneni.blogspot.com/2009/07/ramblings-on-economy-is-it-all-good-now.html.

This brings attention to why are the executives not confidant on growth. Innovation is key to growth, and every executive is talking about it however their immediate actions are related to cost cutting. There may be many reasons; one reason that is probably obvious is that they are not confidant bringing their investments in Innovation fast enough to the market or another reason could be that they try too few ideas and cannot reliably predict the impact on revenue due to high risk that failure of any single idea may cause deviation that will not be accepted by the markets

This then truly raises the question, is the company’s innovation process scalable and whether the costs of scaling innovation process is truly linear to number of Ideas being pursued. Should every organization not take a closer look at their “Process of Innovation” as their future may very well depend on efficiency of the “Innovation Engine”. In simple terms - if a company typically tries 5 - 10 ideas at any time, then it is probably time to ask the question - how can the company scale this 10 fold - without increasing costs linearly, decreasing quality of product and at the same time improving time to market (bringing ideas to market faster).

So what is the answer from my vantage point:- (My take)

If we assume that today’s enterprises rely heavily on technology and analytics to foster innovation; then cloud computing has the potential to provide solution to scaling of the Enterprises "Innovation processes".

Cloud computing promises to lower Innovation costs by

1. Eliminating Upfront Investment Costs by allowing “Pay for Use” and thereby avoiding the lengthy, costly and cumbersome CAPEX processes.


2. Eliminating the need to plan complex deployment processes, by inducing highly efficient scaling and provisioning processes


3. Standardizing the Management Framework to enable complete visibility to all business processes.

In summary, if the future growth of your enterprise is based on engine of rapid innovation, then it is time to analyze the innovation process and how to scale it to try new ideas in a highly efficient manner.

Thank you your for taking the time to read. Your opinions and comments are welcome.

Thanks

Nagesh
The views represented in this blog are my personal views and are not a "reflection of" or "opinions of" any of the institutions I am associated with or have worked for

Economists/Intellectuals - Are we hurting our children?

I took my economics class from Prof. Michael Brandl at the McCombs School of Business. Many a time in the he mentioned. (may not be the same words but this my interpretation of the essence).

"Not all government borrowing is the same. It depends on how the proceeds from the borrowing are spent. If the government borrows today and spends the money in a way that benefits the next generation, then that spending makes it easier for the next generation to repay the debt that has been created. But, if the government borrows today simple to increase current consumption, then the current generation is passing the bill for their spending onto the next generation. That is called a negative intergenerational transfer.".

To be honest, It did not fully sink into me the seriousness of the subject, until I started hearing and questioning myself on how the Stimulus money is going to be spent.

Today's news on "Cash for Clunkers" that the house rushes to approve 2B additional dollars really put me over the edge. I am really happy for the consumers who are taking advantage of the program to buy new vehicles. However, when buying the car, I am wondering if even one of them thought for moment - who is going to pay for the $4,500 that Gov't has convieniently agreed to pay these auto makers?

I guess, each one said or figured: "Not Me"; If it is not the guy who is buying the car, not the person who is actually selling the car, then who is? - Simple answer - That some body else is none other than our children or the collective us.

To a certain extent, shame on the "collective us" - the politicians who want to be populist, the citizens who just want to pass the buck or play ignorant, and the companies who lobby for incentives that benefits them at the cost to society.

So next time when you hear - We are going get the economy going by re-paving a road or putting more government officers on the streets - Question yourself - aren't these like paying for the maintenance your car, or paying for security system to protect your home; then why is it that we are borrowing money to pay for these, shouldn't they be paid for by current income ? To me this is classic Negative Intergenerational Transfer.

Going forward, when you hear an announcement about stimulus/borrowing - Think Again, Question it, Validate that it leads to a future benefit - if not we are just cheating ourselves and passing the pain to our children.

Thanks
Nagesh
The views represented in this blog are my personal views and are not a "reflection of" or "opinions of" any of the institutions I am associated with or have worked for

Ramblings on Economy - Is it all good now ?

Link to Previous Post : My Views on Business and Technology: Ramblings on Economy - Is it all good now ?

Continuing ramblings on economy from yesterday, it is more of the same today

Exxon quarterly profit tumbles 66 percent, shares fall - (Recession - lower demand)

Motorola posts unexpected 2Q profit and says rest of year will see improvement - However on lower sales (missed revenue target), heavy cost cutting (over 8000 layoffs)

Colgate-Palmolive profit tops expectations - Again on Lower Sales and better cost management; Sales lower by 5.5%, volume of goods sold down by 1.5% - Lower consumption

Sony, Sharp post losses, Nintendo loses steam - Folks are not even buying a WII - that hurts

Eastman Kodak moves to 2Q loss as sales slide - Not sure this has anything to do with economy; this iconic company probably has lots of other issues, Still 29% lower sales - ouch

Kellogg profit rises 13 percent in 2Q - Reaping the benefits of downturn - I guess all of us have eat, it is better to eat at home than go out for breakfast. This is a direct result of consumers cutting spending.

Goodyear posts 2Q loss of $221 million, sales drop - Sales 25% lower

When you read more, it is apparent that most companies are giving good guidance on profit expectation for next quarter, however not much on sales guidance. This also makes me believe the companies are still focused on reducing costs aggressively to meet profit expectation and kind of shows the lack of confidence on projecting sales or growth. I feel this feeling of mine is again substantiated by report this morning that - New jobless claims raised more than expected.

As I said in the previous post - if we truly are waiting for stability in housing and homeowners, I feel this this trend has to change. At some point, we have start seeing growth from companies that actually produce goods and services that drive and consume labor.

Thanks

Nagesh

The views represented in this blog are my personal views and are not a "reflection of" or "opinions of" any of the institutions I am associated with or have worked for

Ramblings on Economy - Is it all good now ?

This earnings season, I started paying attention to what was being said while companies are releasing their earlier. My curiosity was directed to understanding whether we are headed in the direction where an average citizen can actually come back after a hard day of work and not fear if he going to have a job next day.

My motivation behind this was basically simple - pretty much the pundits have tied recovery in housing sector to recovery of economy and in my opinion the recovery of housing is based on whether we can safely bet the home owners will pay for mortages without defaulting, which then relies on the simple fact that homeowner responsible for mortage will stay gainfully employed and the unemployed homeowners have a reason to believe that jobs are getting created and are on the way;

Find below some Headlines Unfiltered, on which I am going base my opinions

Drugmaker Pfizer's 2Q profit plunges 19 percent
Boeing profit climbs in 2Q on strong defense sales
Delta reports $257 million 2Q loss (double digit revenue drop)
PepsiCo 2Q profit falls 2 pct on sales drop
Wells Fargo profit rises; credit losses up
Morgan Stanley posts 2Q loss of more than $1.2B
Dominos 2Q profit plummets 22 percent
Glaxo profits up 11 percent on emerging markets
Altria Group 2Q profit rises, boosts forecast (Lower Expenses offset dip in sales)
Eli Lilly 2Q profit rises 21 percent
Apple 3Q beats forecasts despite recession
Yahoo 2Q profit rises 8 pct despite weak ad sales
AK Steel posts $47M loss for 2Q as demand falls
Coca-Cola 2nd-quarter profit rises 43 percent (rapid overseas growth offsets falling domestic demand)
Caterpillar 2Q profit falls 66 pct on weak demand
DuPont 2Q profit plunges on sales drop, charges
Lockheed Martin 2Q profit down 17 percent
United Technologies 2Q profit falls 24 percent
Texas Instruments 2Q profit falls 56 percent
Bank of America posts 2Q profit, surpasses Street
Google's slowing 2Q ad sales overshadow earnings
Sony Ericsson posts another loss in 2Q
Electrolux 2Q profit jumps six-fold
Nokia posts 66 pct fall in Q2 profits, shares drop
JPMorgan earns whopping $2.7 billion
Goldman Sachs' Q2 Smashes Forecasts On Trading Revenue

Analysis:

1. Companies in Financial Sector (Goldman Sachs, JP Morgan, Bank of America etc. ) -made a killing ( Lots of Money ) : I am not sure I can call this extortion from the poor tax payer using government support, but sure seems like one. Thanks to government, In the guise of helping the economy, they are actually helping the bank executives look like hero's. So this should really not count in the +ves for the average consumer/homeowner


2. All brick and mortar companies who actually produce some thing useful - Dupont, Caterpillar, AK Steel, Texas Instruments, Delta Airlines, Dominos (pizza) etc. (sample of a wide cross-section of great companies across multiple industries) show dismal performance - revenues are down, profits are down. The implications to the economy -> we are having a tough time. Thanks to pretty smart people at wall street, the managed to set such low expectation that the these dismal earning's look good). However for the average consumer/homeowner the results probably mean that they are not looking to add any new work force and are probably still looking to cut costs.


3. The notable exceptions to the trend of lower sales and lower earnings in the brick and mortar space are Coca-Cola, Glaxo and Apple. Apple currently has really cool products, whereas Coca-Cola and Glaxo did very well due to focus on emerging markets not domestic markets. This really does not count as trend, as Apple is truly an exception to the trend and Management at Coca-Cola and Glaxo really focussed on where they could sell. (My recent post on this subject: Consumer Spending: Are we looking at the right consumer)
4. Some companies like yahoo!, Altria and IBM post better profits on lower sales, that is primarily due to cost cutting; which again does not look good from an employment perspective.
5. Finally, Google also showed stress on revenue (ad sales) - A darling of wall street also showing some cracks.

My Take
Net Net, looking at these results, I am not sure I see the average consumer/homeowner being confidant of paying the mortgage or being comfortable with their financial future as companies that need to thrive without any Government Support and produce real goods are really struggling, where as those that seem to support from government (unfairly??) seem to be raking in the dow (money). Finally, today's report on durable goods, which are down again by 2.5% clearly show the average consumer/homeowner's reluctance to spend and backs my belief.

One thing I have not done and will probably look into later this week is to correlate the earning's data to typical business cycles. That may shed some more light in why the market/analysts are considering every bit of news - good or bad as +ve. For now, My take is that we are really not out of the woods yet. May be the next earnings season will show results that we can all look into and feel comfortable that -- it is all good now !

Thank you reading, appreciate your feedback and comments. Additionally, if you do understand typical business cycles, would appreciate your thoughts on correlation of current economic data to typical business cycles.

Thanks

Nagesh

The views represented in this blog are my personal views and are not a "reflection of" or "Opinions of" any of the institutions I am associated with or have worked for