Week of September 28, 2009. Long Term Sustainable Economic Growth. Is it possible in the US?

September 28th, 2009

One of the disadvantages of GDP is that it does not tell us how wealth or economic growth is distributed among a country’s population; nonetheless, along with other economic indicators, it is used to develop economic policy intended to improve the lives of people living in the United States. The problem with this practice? Short term GDP can be manipulated by programs such as “Cash for Clunkers” which can generate a short term increase in GDP but cannot generate long term sustainable economic growth nor lasting industrial production and employment.

A better measure of economic growth to set economic policy in the US would be the ratio of middle class real income growth to real GDP growth and its trend over time (by real I mean adjusted for inflation). If this ratio were greater than 1, we could expect inflation; but as the number gets closer to 0, we could anticipate hard economic times ahead as the middle class income growth won’t be able to support or absorb increases in GDP.

In addition, we could also use such economic measure to evaluate the effectiveness of economic policy and could hold government officials to higher standards to make sure taxpayers’ money is managed in a way that generates not only short term increases in GDP, but also, long term economic growth for the middle class. As the middle class income grows, employment will also grow due to consumer spending and everyone -individuals, business, government and non-profit organizations- will benefit because the invisible hand takes over.

Of course, the challenge for US elected officials is to develop economic policy that has less to do with political ideologies and more with generating long term sustainable economic growth that can directly benefit US taxpayers. Can you think of ways to generate long term sustainable economic growth using economic policy?

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Week of September 21,2009. What can GDP tell us about the economy?

September 20th, 2009

Last week, we talked about a report published by the census bureau reporting that in 2007, after adjusting for inflation, middle income Americans experienced the lowest income level since 1997.

Your assignment was to comment on the kind of impact that middle income Americans would likely have in the US economy going forward and how it will impact consumer spending which represents about 2/3 of the US economy.

In my opinion, the US is about to move from a market driven economy to a government driven economy. The numbers reported by the US Census Bureau revealed what many middle income Americans already knew, their disposable incomes are stagnant or declining. Furthermore, the inflation-adjusted value of their investments, both fixed and non-fixed, have declined over the last ten years forcing middle income Americans to cut back on spending. Second quarter GDP statistics reveal that personal consumption expenditures were down 1%, non-residential fixed expenditures were down 10.9%, and residential fixed expenditures were down 22.8%. At the same time, Government spending increased 11% during the second quarter. With unemployment approaching 10%, I expect to see this trend to continue. Government spending will likely increase as a component of GDP as consumer spending continues to decline. As a result, I would expect the government to continue to spend on economic stimulus programs to try to generate short term economic growth as measured by GDP, and in the process, it will become the decisive player determining economic growth in the US for the next few years.

Nevertheless, economic stimulus programs designed to influence GDP in the short term may not generate long term, sustainable economic growth. According to Federal Reserve Chairman, Ben Bernanke, the US recession is likely over but unemployment is expected to remain high at current levels through 2010.

How is it possible that a recession can be over and unemployment can remain at about 10% even after 12 to 18 months? Is it GDP alone a good measure of economic growth? Or is it unemployment and national disposable income growth a better measure of a country’s real economic growth?

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Finally, your first Blog! Have fun!

September 13th, 2009

Happy to see almost everyone has registered, and even happier to see that you are helping one another with technical issues! Great!

Last week the census bureau reported that in 2007, after adjusting for inflation, middle income Americans experienced the lowest income level since 1997.

What kind of impact are middle income Americans likely to have in the US economy going forward? How will this impact consumer spending which represents about 2/3 of the US economy?

I will share my thoughts on this with you next week after you have a chance to voice your opinion.

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Non-Profit Fundraising Message Appeal

August 6th, 2009

Building Bridges through Music, Inc. is organizing a gambling fundraising event for the fall of 2009. They need your help to develop an advertising strategy that will draw 100 affluent gamblers to the event. Help them develop a “message” by using the information you learned in Chapter 9. Be creative and have fun!

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Where are the Red Sox drawing revenue from?

August 6th, 2009

With the smallest ballpark, one of the highest payrolls, and home games that have been sold out since 2003; how is it that the Red Sox organization has been able to increase revenues? Where is the money coming from?

You will be surprise! Do a little research and have fun!

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It’s all about inventories!

August 3rd, 2009

Surprisingly, according to initial GDP reports for the second quarter, US GDP contracted by only 1% during the second quarter vs. a decline of 6.4% in the first quarter and a decline of 5.4% during last year’s fourth quarter. But, what is the story behind the decline of only 1%? It’s rather simple, inventories!

Inventory accumulation let to an unavoidable economic downturn in US manufacturing and now we are beginning to see the reverse. Inventory levels are so low that we will unavoidably see economic activity pickup in the manufacturing sector to rebuild those inventories. As a result, we are likely to experience economic growth over the next two quarters.

So far, according to CNBC reports, 74% of companies have reported earnings that top estimates, which could mean that analysts expected the decline in business activity to be worst than it actually turned out to be, or that analysts underestimated the ability of US companies to manage their business activity during this economic downturn by cutting costs.

Nevertheless, unemployment remains high and will likely exceed 10% by mid 2010. Whether this recent pick up in economic activity results in an increase of part time or full time employment remains to be seen. I believe employment is the key measure to sustainable economic growth; therefore, until we see employment numbers improve, the economy remains fragile. Because the US is facing high unemployment and higher taxes which don’t normally work in favor of economic growth and because they do not generate growth in disposable income, high employment is key to sustaining this GDP good news momentum given the current political and economic conditions.

But how can we improve employment, consumer confidence, and control oil prices at the same time? Should we have more regulation and taxes, or should we offer more incentives and tax cuts? Can we improve US net disposable income with high unemployment and higher taxes? And what about the housing market?

So far, I just see inventory levels low, I still do not see housing and unemployment numbers improve significantly just yet. I remain optimistic because I believe in the invisible hand, which I feel will work faster and more efficiently if left alone. Eventually, we will see economic activity pick up and housing and employment will improve. But we still need to see what will happen with health-care reform and how it will affect the US economy as a whole. I think we are still facing uncertainty in the markets and we have about another year to go before the government/business relationship becomes clear. Until then, I remain cautiously optimistic and would continue to look at emerging markets with open market policies that encourage economic growth and would be very selective to pick business in the US that won’t be surprisingly affected by government regulation. I would continue to concentrate on infrastructure and green energy for both, new employment and investment opportunities.

Share your thoughts, tell us how you feel about this current upward momentum and what you think these numbers really mean to you!

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Mixed Results in Wall Street! Is the recession over?

July 23rd, 2009

Reports out of Wall Street continue to be mixed. The index of leading indicators points to economic growth, but earnings from Microsoft, 3M and American Express today show a different story. Consumers continue to struggle to find credit and companies are trying to find their own ways to extend credit to their customers to stimulate demand for their products and services.

In the housing market, home re-sales are higher due to lower prices. It looks like the supply and demand for existing homes is finally finding the equilibrium point. The Dow closed above 9,000 for the first time since January 2009, indicating that market players anticipate a recovery regardless of current earnings.

Asian markets continue to show signs of recovery and economic growth with South Korea posting its best quarter since 2003! along with semiconductors and automotive industries showing great results coming from South Korea, China, and India. European markets are up with Credit Suisse announcing profits that are 29% higher this quarter showing a strong financial institution.

What does it all mean? Is it time to put money into equities? And if so, in which markets? US markets, European markets, Asian markets or other? Which industries in these markets are more likely to benefit from a global economic recovery and why? What does it all mean for the business environment here in the United States where we are facing unemployment of over 9%?

In my opinion, US companies should concentrate on sales to governments around the globe and Asian emerging markets. They should follow government spending and industries that are likely to benefit from government spending around the world. Investors should diversify investments they pursue in emerging markets since these markets are, in the lung run, dependent on US spending on foreign goods and services. When it comes to investing in US markets; again, I would pursue industries that are likely to benefit from government spending; more specifically, infrastructure. I would not pick individual companies, but rather diversify using index funds that include several players that will likely benefit from spending in infrastructure. I still believe unemployment will remain high even if we experience a recovery in the second half of 2009 since the unemployed are likely to experience structural unemployment as new industry opportunities emerge out of this recession. Many will need retraining and relocation before they can once again become productive members in our society.

Tell me your thoughts, feel free to disagree and propose a hypothesis of your own. Feel free to use news and other research sources to formulate your answer. Have fun!

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The New Economy: The Story Behind Financials and Unemployment

July 17th, 2009

What a week in Wall Street! Mixed news in the financials, unemployment and housing.

J.P Morgan reported profits that were up 36% for the second quarter mostly as a result of their stable and more conservative business model, but their results continue to show difficulty in the lending operations. Goldman posted their best quarter but by increasing risk since most of the revenue increase came from its investment banking and trading operations. Citi, Bank of America and GE showed how they continue to struggle as their business models continue to adapt to new the economic reality in the financial sector.

Surprisingly, housing starts were up 3.6% in June, and unemployment claims dropped 47,000 to 522,000 last week although unemployment remains at 9.4%. In addition, the Federal Reserve continues to increase the money supply by increasing its holdings in treasury and mortgage backed securities.

What do these numbers mean for the US economy and the business environment?

Well, we need a stable financial sector before we can have sustainable economic growth. Good news in the financial sector should be positive for the business environment. However, the financial sector continues to struggle with lending and profits and revenue did not come from the right places! We need to see consumer and business lending increase before we can see sustainable economic growth. US small and mid-size businesses rely of short term and long term lending to support their short term operations. Without credit availability, new projects are delayed and layoffs become necessary; which in turn, increases unemployment.

Because the government remains the only sector where spending seems to be growing, business will be more likely to survive by doing business with the government! We will transition from a B2B economy to a Business to Government economy over the next few years. Lack of credit availability will prevent the consumer from supporting US economic growth. It will be up to the government to pick up the consumer spending lost due to difficulties in the credit markets.

So, what does it all mean for businesses and consumers? Businesses should turn their production of goods and services to match the needs and wants of government spending while consumers should retrain themselves to match the skills that will be needed in the new economy. Sectors providing goods and services to infrastructure development, green or alternative technology and business services should prosper.

Tell me what your thoughts are regarding these numbers and the business environment. Feel free to elaborate and agree or disagree with my views and the views of other bloggers!

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Digesting credit, retail, and Boston sports news!

July 9th, 2009

Consumer credit went down 1.5% in May, marking the 4th consecutive decline. Retail sales were down once again, with high end retailer Abercrombie & Fitch facing a 32% decline in sales. Nonetheless, lower end retailers experienced some sales growth. Click here to see WSJ article.
Although deleveraging is good for the American consumer in the long run, the lack of credit availability continues to hurt the retail sector in the short term. As a result of the decline in sales, the sector is likely to continue to generate job losses that may spread to other sectors of the economy that provide goods and services to retailers. Firms currently serving the retail sector, such as those in the technology industry, should shift their marketing efforts to target government spending. Those able to benefit directly or indirectly from the economic stimulus package will be the survivors in the long run.

What do you think these measures of economic performance by the retail sector mean for the overall US economy; and specifically, the labor market currently facing unemployment of 9.5%?

On a more positive note, the Red Sox won against Oakland and the Celtics gave Rasheed Wallace a 3-year deal! Read more about NE sports.

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The Short and Long Term Consequences of the US Budget Deficit

June 16th, 2009

After analysing monetary policy and the US money supply, what do you think will be the short and long term consequences of the US Budget Deficit used to finance the economic stimulus package as well as the current administration’s economic, social and political goals? Think in terms of the money supply, inflation, the business cycle, interest rates, and scarcity.

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