U.S. Economy Is In Recovery

Popular Economics Weekly

I mentioned last week that the U.S. economy is now growing faster than the rest of the developed world. How can that be, you say, with all the election propaganda saying the recovery has been a failure?  Here’s why.  The IMF has now chimed in to the chorus of voices that says the U.S. is the first to repair the destruction wrought by the Great Recession. 

The International Monetary Fund’s latest World Economic Outlook projects that the United States will be the strongest of the world’s rich economies. U.S. growth is forecast to average 3 percent, much stronger than that of Germany or France (1.2 percent) or even Canada (2.3 percent).

“Increasingly, the evidence suggests that the United States has come out of the financial crisis of 2008 in better shape than its peers — because of the actions of its government,” says Fareed Zakaria in a Washington Post Oped. “In addition to providing general liquidity, the Fed and the Treasury rescued the financial system but also forced it, through stress tests and new rules, to reform. The result is that U.S. banks are in much better shape than their European counterparts.”

And the Fed announced it will discuss a possible expansion of the size of its third round of bond buying and “better ways to guide markets about future policy actions” at its last FOMC meeting.  This includes setting actual employment targets to reduce the unemployment rate to 6 percent or below.  This is huge, and markets rallied on the announcement because there is no other stimulus spending in the works with austerity in Europe and even China slowing. 

One major issue that hasn’t been discussed is debt deleveraging, and the U.S. is outperforming other developed—and underdeveloped—countries in reducing its debt, contrary to the contentions of politicians who have been repeating their charge that Obama is making the deficit worse, though most of it came from the Great Recession.

Graph: McKinsey and Company

Also, a McKinsey and Company study noted that “Debt in the financial sector relative to GDP has fallen back to levels last seen in 2000, before the credit bubble. U.S. households have reduced their debt relative to disposable income by 15 percentage points, more than in any other country; at this rate, they could reach sustainable debt levels in two years or so.”

Then U.S. corporations have bounced back. Corporate profits are at an all-time high as a percentage of Gross Domestic Product, and companies have $1.7 trillion in cash on their balance sheets. The key to long-term recoveries from recessions is reform and restructuring, and U.S. businesses have responded with government help.

And there is America’s energy revolution, which is also bringing back manufacturing. U.S. exports, which have climbed 45 percent in the past four years, are at their highest level ever as a percentage of GDP.

The facts speak for themselves, in spite of the ‘fiscal cliff’ scares, and most of the euro zone in recession.  The best way to weather any future downturn is to have paid down their debts.  So it looks like the U.S. will once again be the world’s engine of growth that prevents another recession, as I’ve said.

Harlan Green © 2012

Are We Ready For The ‘Big Data’ Revolution?

Popular Economics Weekly

Is the Information Age intimidating? Have you been struck with information overload? Help may be on the way. There is so much in the news about it, but little on how to manage so much information inundating us daily—not only via computers and emails, but our 24/7 news cycle. But research is beginning to show us how we can benefit from such increasingly available information.

Kinsey and Company consulting has taken the side of businesses in its McKinsey Quarterly report, Are You Ready for the Era of ‘Big Data’? “In 15 of the US economy’s 17 sectors, companies with more than 1,000 employees store, on average, over 235 terabytes of data—more data than is contained in the US Library of Congress”, said its report.

All of this new information is laden with implications for leaders and their enterprises, said the Kinsey report. “Emerging academic research suggests that companies that use data and business analytics to guide decision making are more productive and experience higher returns on equity than competitors that don’t. That’s consistent with research we’ve conducted showing that “networked organizations” can gain an edge by opening information conduits internally and by engaging customers and suppliers strategically through Web-based exchanges of information.”

And the big data revolution will result in much greater efficiency on how private households use information as well. Yale Economist Robert Shiller looks into the future in his book, The New Financial Order, Risk in the 21^st Century. In it Shiller describes six fundamental ideas for using modern information technology and advanced financial theory to temper basic risks that have been ignored by risk management institutions--risks to the value of our jobs and our homes, to the vitality of our communities, and to the very stability of national economies.

“Right now we are witnessing an explosion of new information systems, payments systems, electronic markets, online personal financial planners,” he says, “and other technologically induced economic innovations, and consequently much in our economy will be changed within just a few years. Almost all of our economy will be transformed within just a few decades.”

Informed by a comprehensive risk information database, this new financial order would include global markets for trading risks and exploiting myriad new financial opportunities, says Amazon’s description of The New Financial Order. “From inequality insurance to intergenerational social security. Just as developments in insuring risks to life, health, and catastrophe have given us a quality of life unimaginable a century ago, so Shiller's plan for securing crucial assets promises to substantially enrich our condition.”

As information becomes more readily accessible across sectors, says McKinsey, it can threaten companies that have relied on proprietary data as a competitive asset. The real-estate industry, for example, trades on privileged access to transaction data and tightly held knowledge of the bid and ask behavior of buyers, information owned by Brokers. Both require significant expense and effort to acquire. In recent years, however, online specialists in real-estate data and analytics have started to bypass agents, permitting buyers and sellers to exchange perspectives on the value of properties and creating parallel sources for real-estate data.

So the results will give us a better understanding of our own finances as well. But greater access to personal information that big data often demands will place a spotlight on another tension, between privacy and convenience, says McKinsey. Their research shows that consumers benefit greatly from data in lower prices, a better alignment of products with consumer needs, and lifestyle improvements that range from better health to more fluid social interactions. The tradeoff is less privacy, as companies collect more information on individual consumer’s behavior.

Professor Shiller is one of the economic trail blazers of the information revolution. Not only did he study U.S. stock market behavior over the last century in his book, “Irrational Exuberance” (Princeton U. Press, Princeton, N.J., 2000) that predicted the dot-com implosion (and the housing bubble, in its second edition). He and Wellesley Professor emeritus Karl Case have set up the S&P Case-Shiller Home Price Index that tracks the historical swing of home prices in 10 and 20 metropolitan markets, which has helped to establish a futures’ market for home prices, and in turn helps to make such market swings more predictable.

Establishing and disseminating the historical record should also help policy makers avoid endlessly repeating history’s mistakes, which is something easy for the general public to understand. I.e., historical study of the Great Depression is one reason Presidents Bush and Obama were able to inject enough stimulus into our economy to avoid another Great Depression. And it helps bring about our own greater awareness of the financial environment that affects us as consumers and investors.

So the information age is a two-edged sword. The greater access of consumers to information via the Internet means companies will collect more privately held information of consumers. But, conversely, as more information becomes public, less can be hidden by insiders such as financial traders, corporate executives, and the like. More transparent financial markets should also decrease the occurrence of busted asset bubbles—two of which we have experienced just since 2000 (i.e., dot-com and housing)—which were mainly based on irrational exuberance—i.e., ignorance of the underlying facts.

How to manage such information then becomes ever more one of individual choice, thereby placing more responsibility on the informed consumer. That is really the sword’s other edge. More than ever, we are living in a ‘buyer-beware’ world of individual decision-making, requiring ever higher levels of education.

Harlan Green © 2012