1. True Globalization: i.e. a multi polar production and consumption global economy with instant communications and viable markets everywhere. Since WWII the US has played the role of consumer of last resort. The US consumed more of everything than anybody else and was, thus, the epicenter of economic activity and consumer acuity. If you could sell it there you could sell it anywhere. US corporations were dominant, US culture was dominant, US standards were dominant, US finance was dominant. Sure, there were exceptions, lots of them, but that was what they were, exceptions. Over the last 15 years Globalization has been condemned by kids in the street everywhere as Americanization. As the world recovers from the current downturn the declining role of the US in the global economy will become painfully obvious. After decades of surviving by keeping an eye on the US, businesses and consumers everywhere will find the competitive threats and big money opportunities coming from all directions at once. Minding ones business will become a multicultural, multi-tasking non-American nightmare.

2. The end of Dollar Dominance and Accelerating Financial Risk: After a generation of purchasing power stability the US political economy and financial system have ODed in an orgy of debt the dollar briefly got to the point that Havana cabbies would no longer accept the dollar in payment and African immigrants in the US were sending food back to relatives since their US currency was of little help. As it turned out, however, there currently is no viable alternative to the dollar. Neither Euro nor Yen denominated financial instruments exist in sufficient volume to fill the role in the global economy so long played by the dollar. This does not mean that the dollars future is secure given the mess that it has made of the global economy and the vast quantities that the Fed is creating to stimulate growth. Inflation is on everyone’s list of coming calamities. Without a readily available understudy for the role of the dollar, financial improvisation will dominate the post downturn recovery, which means a proliferation of new financial centers producing greatly increased financial risk and uncertainty.

3. The rise of the World’s Moneyed Class: From 1917 to 1989, Socialism of one form or another was a real threat to the very rich. After keeping a low profile for most of the 20th Century the very rich have once more come into their own. Marginal tax rates have plummeted everywhere. In Red China to be rich is glorious. It is not just that opulence is in; it is the more fundamental fact that the rich now move and act without fear. In the US the smell of populism is in the air seasoned with wide spread debt and asset deflation. However, a return to Clinton era tax rates is hardly pitch forks and torches. There is, however, a growing awareness in the US that recent pretensions to wealth, so briefly enjoyed by the affluent in their Mc Mansions, was illusionary and that the top 1% really are different from you and me. The power that comes with wealth is now exhibited without shame, and the centers of wealth and power are now multi-national and global. The confidence and assurance with which the truly wealthy, as a secure global class beyond the populist pretentions of the US, will act to secure their own ends and objectives will be unapologetic in both business and political matters.

4. A return to the Classical Paradigm: A surplus of Labor, a surplus of Capital, a shortage of Land. The Infosys/Freidman Flat-Earth paradigm tells us that labor anywhere in the world with access to the Internet can now be arbitraged against labor anywhere else. As a result there is now a global surplus of college graduates and factory workers. At the same time investment capital once it gets its act together is unlikely to remain tightly controlled by a few Anglo-American financial centers. It will instead become obvious that it is distributed globally and in the control of a wide mix of individuals, corporations and sovereign powers all seeking a secure and profitable return. What is in short supply is land in the classical sense: basic raw materials, from energy to food to water to clean air and a viable climate. We bumped into this ceiling at the peak before the downturn but that ceiling has not gone away. In short, the recovery will be a Malthusian world.

5. The demise of Intellectual Property Rights: For much of the 20th Century intellect and its products were in short supply. From pharmaceuticals to popular music, from software to brand names a mix of limited talent, tightly controlled production and distribution and strong political patronage created a brief period in history during which artists, intellectuals and scientists could amass great wealth. The US, with Mickey Mouse on one shoulder, a Coke firmly grasped in its hand and the Microsoft cape waving in the wind, did battle on all fronts. The global economy, however, has now entered an era of surplus talents, multi polar, Flat-Earth production and internet distribution. As a result a shift of wealth and political power has shifted to patrons with little interest in intellectuals or their property.

6. The rebirth of Brand Management: As these forces come to dominate business decision making, clear identification and tight control of the value creating process will be the key to success. Extraneous activities will be off loaded as commodities. However, distinguishing value creation and value preservation from rampant commoditization will not be easy nor will the methods be obvious to every newly minted MBA. Past conventions have already proven themselves to be unreliable guides to future profitability. In a world awash in cheap generics of dubious origin, establishing and maintaining the customer confidence at the core of every successful brand will be a difficult but highly profitable challenge. The illusion that advertising can, somehow, via gimmicks like click through, drive commodity sales will die. Instead, advertising, in a host of new forms, media and methods, will return to its primary role of securing the relationship between a customer and the trusted brand.

• Goods producing employment, which accounts for only about 14% of jobs, will probably bottom out this September, but it should be expected to stay on or about that bottom through most of 2010.
- Construction employment will decline until the end of 2009, but real growth probably won’t begin until June of 2010
- Durable goods manufacturing employment will decline until August or September 2010, then recover modestly for about a year but plateau before returning to current levels.
- Nondurable manufacturing employment will decline until the end of this year and then plateau for the foreseeable future.

• Service-providing employment will bottom out in July or August and then begin an increasingly robust recovery.
- Retail trade employment will bottom out in the last quarter of 2009 and the first quarter of 2010 and then begin recovering. The peak employment of 2007 will not be surpassed until the end of 2011.
- Wholesale trade employment will bottom out in the second quarter of 2010.
- Transportation and warehousing employment will bottom out in the third quarter of 2010.
- Information employment (telcos, media, internet) has bottomed out, however, no significant recover should be expected until the end of 2010.

- Financial services employment, its major decline having taken place, will drift lower until the second quarter of 2010. The previous peak employment will not be achieved again in the foreseeable future.
- Education and health services employment growth has barely been slowed by this recession and will continue to grow at 4.5-5.0% per year.
- Leisure and hospitality employment will bottom out in June and should surpass its December 2007 peak by the end of 2010.
• Government employment, federal, state and local will continue to grow; federal at about 4.5% per year and state and local at 2.0-2.5% per year

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.

As a result of this exported recession China is now experiencing the kind of Keynesian demand contraction that drove the Great Depression. The only difference is that the reduced consumption and increased saving is taking place in the US and the accelerating collapse is taking place in China.

In addition, this collapse in demand for Chinese exports has put the breaks on China’s infrastructure construction and public works boom. Ideally such construction investment operates as a counter weight to balance out declines in consumption spending. Instead in China, it is providing the negative accelerator affect that inevitably follows a construction boom. Being China and not Southern California or Phoenix, its infrastructure construction boom has been unprecedented (10-15% higher than the other BRIC countries) in proportion (investment was 44% of GDP in 2006) and duration (investment has been above 30% of GDP for more than 20 years). Thus the resulting correction should be expected to be of comparable magnitude.

Export downturns and construction cycles are not particularly amenable to the type of business cycle twiddling with monetary and fiscal policy used for inventory cycles and financial market hic-ups. China was already running a highly stimulative trade policy with an under-priced currency and a massive trade surplus. Thus there is little room for further stimulus here.

In construction cycles, the core of the problem is invariably a large amount of investment tied up in partially completed projects that no longer makes economic sense. Generally such investments face one or two of the following problems:
• Anticipated completion schedules are not being achieved;
• Construction costs are adversely different than planned;
• Complementary investments are inadequate;
• Demand is far less and supply is far greater than had been expected.
In China’s case all of these problems are prevalent with adverse consequences for all the industries and employment that fed on the construction boom. And little can be done to correct such problems other than classic project by project “work outs”.

When US demand recovers, as it will, and US manufacturers try to restart their global supply chains with their deep roots into China, they will most likely discover that significant sources or sub-sources or sub-sub-sources are no longer functioning. In the near term shortages should be expected, probably leading to rising prices. China may be able to respond and restart its manufacturing machine. However, political unrest as a consequence of the current economic crisis may become an additional problem (see WorldBuzz.com ). As a result production should be expected to start seeking other venues. Some critical component production may even return to the US.

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.

If one digs a bit deeper it becomes clear that since this country’s last major economic downturn in the 1930’s, manufacturing, which is always highly cyclical, has gone through four distinct though broadly overlapping secular phases with ambiguous transitions:

• Arsenal of Democracy 1938-52 – During this phase which included World War II and the Korean War manufacturing output as measured by the FRB’s Industrial Production Index experienced a trend line growth rate of 4.4% per year while core employment in manufacturing grew 2.3%. Each 1% increase in employment was associated with a 1.9% increase in output.

• Leader of the Free World 1948-82 – During this phase, which was characterized by frequent, but brief recessions followed by rapid recoveries, the underlying trend line growth in manufacturing output was 4.1% per year while manufacturing employment grew by only 0.9%. This was a period of robust productivity growth in which a 1% increase in employment was associated with a 4.6% growth in output.

• High-Tech Innovator 1968-02 – During this phase, in which the computer and internet revolution transformed global manufacturing, manufacturing output in the US grew by only 2.9% while manufacturing employment trended down at -0.2%. But productivity was very strong with a -1% decline in employment being associated with a 15% increase in output.

• Consumer of Last Resort 1998-?? – During this phase, in which US imports and US trade deficits rose to unprecedented levels, US manufacturing output growth was only 1.4% and manufacturing employment contracted at -2.9%. Productivity barely changed with each -1% drop in employment being associated with but a 0.5% increase in output.

In some areas where engineering or design content provides a clear competitive advantage “manufacturing” firms continue to exert a degree of control over their branded products; but with an ever growing range of products, R&D and design are being imported as well with only the marketing and distribution being made in USA. If the current global downturn produces significant damage the global supply chains of the US manufacturing industry, a new secular phase in US manufacturing should be expected. Revitalization is not impossible.

The source of this problem lies in the price of computer equipment, which continues to fall at breathtaking rates. Given the rate of technological change in this industry it is difficult to make meaningful comparisons over time. Nonetheless, the BEA attempts to make such estimates and its data suggests that since 1990 the YoY price declines have ranged from -6% to -27 with the average rate running at about 15% per year.

When this rate of decline is factored in, it turns out that the investment in actual computing equipment, rather than just the dollar spending on such investments, probably outstripped the boom of the late 1990s. Despite the comparable dollar value of the investments made, the real or constant dollar value of the computing capacity put in place was probably about three times larger than during the boom of the 1990s. In addition, the recent percentage drop in real investment in computers is about twice what it was in 2001 and in terms of absolute constant dollar volume it is about four times greater.

Finally, there is the impact of price. In past downturns the decline in demand has added about ten percentage points on to the rate of price decline. As of 4Q08, no such acceleration in the rate of price decline has taken place, which suggests that yet more declines in the dollar value of computer investments should be expected.

This last point is underlined by data from manufacturing. Looking at the change in the inventory sales ratio for computer manufacturing, compared to 2001 downturn, suggest that the current downturn for computer should be expected to deepen and to continue through this year and into 2010.

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.

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.

Revised professional computer systems design employment has not grown as strongly as it did in the 1990s; since mid-2006 YOY growth has been roughly tracking management consulting but with a consistent pattern of slowing YoY growth since the beginning of 2008.

Continued slowing in the YOY growth of both categories of consulting-related employment suggests a slowdown in the consulting industry as a whole. The computer systems design numbers continue to hold up better than during the last downturn and both remain noticeably stronger than total employment at this point in the cycle in both 2002 and 1991.

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.

The collapse in consumer spending in the last quarter of 2008 was not due to an inability to finance purchases, nor to unemployment curtailing income. Both, most certainly, contributed to the slowdown; however, the main culprit was collapsing expectations and expanding uncertainty approaching economic terror. With the specter of Great Depression II slinking through the halls of Congress and stalking the talk shows, affluent consumers closed their wallets, repossessed their kids’ credit cards and began paying down their home equity loans. The savings rate went from 0.8% in August to 4.8% in December.

The slowdown in investment spending shows much of the same fear, uncertainty and doubt as the consumer sector. Investment spending on equipment and software was never particularly excessive in this last cycle and the first part of it to weaken was the purchase of trucks. As with consumers and their cars, in the face of uncertainty a business can always nurse along the old heap a bit longer and put off buying a new truck. In most cases, it is the same affluent consumers as corporate executives or small business owners who have been making the decisions to slow down investment spending.

When these affluent consumers and executives regain some confidence, come out from under the covers and begin expecting incomes and earnings to rise rather than collapse, they will start spending again and the economy will revive.