When the current recession ends, the global economy that emerges will look very different from the one that entered the downturn. As the economy grows and innovation advances the pressure for institutional changes increases while at the same time the historic success of the status quo resists all such changes. In a downturn everyone scrambles to find a secure position, governments included. Expansion, when it comes, builds on a new set of assumptions. The more troubling the downturn the more pervasive the changes; recoveries are never a return to the old prosperity but rather the discovery of new ways to survive and prosper and recent innovation displaces the unchanging status quo.
Here are six of the forces for change that have been building, which will shape the global recovery: Read the rest of this entry »
Post Recession Blues
When will Employment Bottom Out?
Depends on where you work. A FutureCrunch analysis of the pattern of performance experienced in past cycles indicates where employment trends are in this downturn. In most sectors national employment should bottom out this summer, but full recovery should not be expected until late in 2011. However, individual sectors show a wide range of variation in both trend and timing. Read the rest of this entry »
China: Nothing to Lose but their Supply Chains
Over the past 20 years, ever more sophisticated global supply chains have been built using internet based technology, which made possible global control of production, logistics and inventory. China, with its vast numbers of workers and carefully managed low cost currency, captured the lion’s share this off-shored production.
As an unanticipated consequence of these tightly controlled supply chains, the collapse last fall in US consumer demand, resulted almost immediately in millions of Chinese workers losing their jobs. Just as quickly, untold numbers of small Chinese businesses, which provided simple parts that went into subcomponents of more complex parts for larger subcomponents, began to belly up for lack of work. The US has in short become a major recession exporter. Read the rest of this entry »
Manufacturing Phase Change?
So much of what we buy comes in cartons from China that it is hard to remember that some things are still made in the USA. Manufacturing is just not something that American’s do much of any more. Since the early 1950’s manufacturing’s place in the national economic psyche has been steadily diminishing with its share of national income and of employment declining from 30% to only about 10%.
In addition, much of the value-add, which is now reported for US manufacturing, is in fact little more than the value that is created when imported components are finally assembled into a branded product. This fact contributes to the rise in reported output per worker in the US. In truth, however, manufacturing in the US has been a particularly deteriorating proposition for the last decade. Read the rest of this entry »
A Major Computer Downturn Does Compute
Investment spending on computers was not as excessive after 2001 as it was in the late 1990s. Indeed, at its peek in 2Q08, investment spending on computers and peripheral equipment was still running at an annual rate that was $7 billion below the previous peak in 3Q00. Thus it has been often argued, any correction in the computer market in this downturn should not be as painful as the last time around. In the earlier period the dollar value of investment grew rapidly, while in the later period investment grew less rapidly but from a higher initial level. In terms of the total dollars spent, in the five years preceding the peak, both periods were about equal. Much of this later period spending was, however, viewed as largely sustaining, rather than expansionary, investment. The problem with this picture is that the $12 billion drop in 4Q08 is already larger than the largest quarterly decline of the last downturn, and this decline is just getting started. Read the rest of this entry »
When will the Housing Mess shake itself out?
When will it all end?
It’s been down for so long it’s become a way of life.
As the squawking heads so love to say, “There’s always something else that could go wrong.”
With that caveat clearly stated, let’s crunch some numbers.
Here at FutureCrunch we are skeptical about anyone’s ability to forecast the future. At the same time we believe that one can understand a great deal about what is happening and what is likely to happen by getting down and dirty in the data.
The market value of US residential real estate relative to the value of the services provided was bumping up against historically high levels late in 2000. The speculative bubble that followed lasted for five years. Since the end of 2005 the decline has been even sharper than the rise. By the end of 2008, the ratio of total asset value to total service value, in effect the P/E ratio for housing had returned to the 2000 level. This dramatic spike portrays a classic bubble reminiscent of the stock market P/E in late 1920s or 1990s. However, the 2000 level this P/E ratio is still at what for 50 years would have been an unusually high level.
The Federal Reserve as part of its Flow of Funds analysis has been estimating the total market value of residential real estate since the early 1950s. The Bureau of Economic Analysis has for an even longer time been estimating the value of housing services, the implicit rental value, of that same stock of housing. There is no attempt on the part of either organization in making these estimates to produce an index of housing prices or to estimate apartment rent per square foot, and yet together, as a ratio, they produce an insightful picture of the madness which so recently beset the US housing market.
For 50 years this residential real estate P/E ratio fluctuated in a range that suggests that in good times a property that rents for a $1000 per month should sell for $180,000 and in off times $150,000, thereby providing a gross return on investment of between 6.7% and 8.0%. Given the casual derivation of this ratio, these results are not unreasonable. At the peak of the bubble that $1000 per month apartment would have been selling for $240,000 and the gross return was down to 5%.
The data also tells the story of the post WWII housing shortage being worked off by the building boom of the 1950s and in the process driving down the P/E ratio. Then, in the 1970s with the rapid influx of baby boomers into the housing market, the P/E was driven up again. Next, there was another milder building boom, followed by the softening housing market of the early 1990s.
There is no need to rehash this last decade; the squawking heads are doing more than enough of that. What is important to note is that at the rate of correction that has been taking place this P/E ratio should approach historic lows some time between July and December of this year.
Now most certainly, “There’s always something else that could go wrong.” However, the more likely event will be curtailed expectations of any further decline in prices, and a revived market in which the value of residential real estate and the value of the services provided reasonably co-exist for — judging by past performance — perhaps a decade.
Consulting Market is Holding Up
Monthly establishment data collected by the Department of Labor indicates that YOY growth in total professional employment in management consulting slowed to 2.8%% with January revised down to 3.5%.
Employment growth is a lagging indicator that tends to follow the swings in market demand but typically moves quickly in response to changes in demand
Employment growth for the total economy was strongly negative in February to -3.1% YOY and January was also revised down –2.7% YOY with Unemployment for February at a high for this recession of 8.1%.
Revised management consulting employment which grew at a relatively constant YOY rate of about 7.4% from mid 2004 through January of 2008 now shows a distinct slowing trend throughout 2008. Growth in February, after an uptick in January, continues this slowing trend in YOY growth. Read the rest of this entry »
Why the Economy is Down
An unusually high price/earnings ratio (P/E) generally indicates investors have found a growth stock; whatever its earnings happen to be today, they expect increases in the future. When the market is robust and the economy appears strong, future prosperity seemingly becomes a sure thing, all uncertainty diminishes to mere nothingness and growth stocks abound. When things go sour, confidence in the bankability of future growth can vanish, uncertainty looms as through a glass darkly, P/Es contract and asset values plummet.
In the face of such swings in expectations and confidence, the much reported federal discount rate is a slender reed with which to do battle. If investors are absolutely, positively certain that an asset’s price will appreciate 25% over the next year the interest rate is but a minor matter; they can buy it with their credit card and still make money. But, if investors have serious doubts about not just the level of future earnings but even about the possible existence of any income at all, they will be reluctant to buy, even with 0% financing. Read the rest of this entry »
