The last few times I was at a local mall, the number of people there has been noticeably higher than just a few months ago. Some of this is probably related to the seasonal issues, such as back to school shopping, but in the early months of this year, the malls resembled ghost towns.
How good an economic indicator is this? Well, you can't have spending unless you have shoppers. The shoppers may be more value oriented but the folks were carrying packages and even more importantly looked sort of happy.
Going back a few months, the people who I did see at malls looked like they were sorry to be there. It almost seemed that they had to be there because there was something they had to get because they really had no other choice. Now the shoppers seemed more relaxed, and happier, chatting, going to the food court and generally creating a familiar buzz that was missing a few months ago.
I think the consumer is coming back, not at the same level as during the bubble but at a higher level than the last nine to twelve months. Considering how the companies have reduced cost, even small growth in revenue will result in significant profitability.
Wednesday, October 7, 2009
Tuesday, October 6, 2009
Cost cuts equal Productivity
I keep hearing how companies can't keep cutting costs to improve profitability. Well, from a purely mathematical point of view, I agree that cost cutting has a limit after which we would have liquidation. However, mathematics also tells us that profits can be made at any sales level as long as costs are less.
The cost cuts that business has undertaken, as well as other productivity improvements were designed to allow them to make profit with lower revenue. Once these reductions were obtained, they merely need revenue to stay flat, or increase. However, if revenue is seen to be decreasing further, there can and will be additional cost cuts.
Now one of the outcomes of this is that companies that have heavy leveraged positions are faced with fixed debt payments that can't be easily reduced. Basic accounting talks about fixed vs variable costs and the various permutations thereof and the more costs are variable the easier they are to reduce. Many companies have outsourced a lot of what once were considered core capabilities and in a downturn can simply reduce orders to reduce costs. Personnel are of course generally a variable cost and the high unemployment we are seeing is evidence of that.
So, companies that have kept fixed costs at a reasonable level can cut costs to a very low level to maintain profitability. The companies that had high fixed costs (debt) have either gone bankrupt or may end up there. This is the way weak companies get shaken out of the market and the more adaptable companies get bigger eventually. So, if a company made profits last quarter because of cost cuts, it will most likely make more profits this quarter. The three scenarios we face are revenues got worse, not the most likely scenario, revenues were flat or revenues increased. In the latter two of the scenarios profits will be the same or higher than they were last quarter. In the first scenario, the profitability will depend on additional cost cutting. However, this is the least likely outcome, since clearly economic activity was higher last quarter than it was in the preceding one.
The cost cuts that business has undertaken, as well as other productivity improvements were designed to allow them to make profit with lower revenue. Once these reductions were obtained, they merely need revenue to stay flat, or increase. However, if revenue is seen to be decreasing further, there can and will be additional cost cuts.
Now one of the outcomes of this is that companies that have heavy leveraged positions are faced with fixed debt payments that can't be easily reduced. Basic accounting talks about fixed vs variable costs and the various permutations thereof and the more costs are variable the easier they are to reduce. Many companies have outsourced a lot of what once were considered core capabilities and in a downturn can simply reduce orders to reduce costs. Personnel are of course generally a variable cost and the high unemployment we are seeing is evidence of that.
So, companies that have kept fixed costs at a reasonable level can cut costs to a very low level to maintain profitability. The companies that had high fixed costs (debt) have either gone bankrupt or may end up there. This is the way weak companies get shaken out of the market and the more adaptable companies get bigger eventually. So, if a company made profits last quarter because of cost cuts, it will most likely make more profits this quarter. The three scenarios we face are revenues got worse, not the most likely scenario, revenues were flat or revenues increased. In the latter two of the scenarios profits will be the same or higher than they were last quarter. In the first scenario, the profitability will depend on additional cost cutting. However, this is the least likely outcome, since clearly economic activity was higher last quarter than it was in the preceding one.
Monday, October 5, 2009
Simple things
The economic recovery we have started is going to build up momentum as soon as we turn the corner on jobs creation. Of course, a certain number of jobs have been cut and they will never come back due to productivity improvements in the form of technological improvements and other factors. So to really get job growth, we have to stimulate new growth industries and reform our tax system to encourage jobs in this country instead of overseas.
I believe renewable and domestic energy as well as the growth in technology offers our best opportunity for significant job growth. I've discussed it before and if you want to have effective stimulus programs, it should be directed to home and industrial energy improvements and conversion to domestic and renewable energy sources.
Secondly, we need to change our corporate tax structure to tax items sold in this country no matter where manufactured. This change would level the playing field and reduce incentives to shift employment overseas.
These simple steps would go a very long way in putting a solid foundation under the recovery.
I believe renewable and domestic energy as well as the growth in technology offers our best opportunity for significant job growth. I've discussed it before and if you want to have effective stimulus programs, it should be directed to home and industrial energy improvements and conversion to domestic and renewable energy sources.
Secondly, we need to change our corporate tax structure to tax items sold in this country no matter where manufactured. This change would level the playing field and reduce incentives to shift employment overseas.
These simple steps would go a very long way in putting a solid foundation under the recovery.
Sunday, October 4, 2009
Economic domiance
The United States emerged as the dominant economic power in the world by the end of the 20th century. This was not the case at the end of the 19th since England and Germany were at that time dominant economies. Of course, if you looked at the United States in 1899, it was up and coming and clearly had the potential to become what it did. Of course the fact that Europe went through two devastating wars and the colonies achieved Independence had a lot to do with the emergence, or at least the speed of it, but the United States clearly had much greater potential than England or Germany without colonies.
So the question is, looking forward from 1999 to 2100, will the next dominant economic power be China? The main resource that China possesses in excess is the number of people who live there. Of course, China is a large country with approximately as much land as the United States excluding Alaska, but more of China is inhospitable than is the U.S. as the entire western part of it is mostly arid. Now, those areas may contain tremendous natural resources to be exploited, but in general, the United States seems to have more natural resources than China does.
So will China's large population bring it economic dominance? There is one thing that is certain. Since China has 4 times as many people as the United States, the size of its economy will eventually surpass that of the United States through the normal course of events. China has been growing and creating wealth for its population. As the consumer culture expands in China there will be tremendous opportunities considering the size of the population.
However, does China have the wherewithal to support a standard of living for its population similar to that enjoyed by the West? Well, ultimately, yes and when that happens the economy will be dominant. Of course, India is moving in the same direction and perhaps faster.
So sometime during this century the Asian powers will emerge as the two largest economies. This isn't necessarily a bad thing, especially if American companies and workers can exploit this growth by exporting products there.
So the question is, looking forward from 1999 to 2100, will the next dominant economic power be China? The main resource that China possesses in excess is the number of people who live there. Of course, China is a large country with approximately as much land as the United States excluding Alaska, but more of China is inhospitable than is the U.S. as the entire western part of it is mostly arid. Now, those areas may contain tremendous natural resources to be exploited, but in general, the United States seems to have more natural resources than China does.
So will China's large population bring it economic dominance? There is one thing that is certain. Since China has 4 times as many people as the United States, the size of its economy will eventually surpass that of the United States through the normal course of events. China has been growing and creating wealth for its population. As the consumer culture expands in China there will be tremendous opportunities considering the size of the population.
However, does China have the wherewithal to support a standard of living for its population similar to that enjoyed by the West? Well, ultimately, yes and when that happens the economy will be dominant. Of course, India is moving in the same direction and perhaps faster.
So sometime during this century the Asian powers will emerge as the two largest economies. This isn't necessarily a bad thing, especially if American companies and workers can exploit this growth by exporting products there.
Saturday, October 3, 2009
Creating jobs
There are a number of things that are so obvious that stating them seems non-sensible until you think about it. If you want to accomplish something you have to be as direct as possible. In the years I spent reviewing costs, I lived by a fairly simple rule, "If you want to reduce costs, you have to reduce costs." Now, the reason this rule is so effective is because in many instances the proposals I would look at would have all sorts of machinations but when you really studied them, they just moved costs around, and didn't reduce them.
So applying this to our current economic situation, if the goal of the stimulus was to create jobs, it should have created jobs. Now, I will admit that I'm not an expert on every aspect of the stimulus, however, I do know that much of the stimulus money ended up funding things that had very little potential to increase jobs. Now, some of this money may be seed money, with the hope that the outcomes will eventually increase jobs, but it would seem that there were plenty of opportunities for direct job creation that could have been implemented.
You hear a lot of arguments from various politicians that the federal government should not try to dictate specific behavior in granting money. However, when you look through the stimulus plan, there is basically no money that can be clearly linked to direct job creation. One of the great mistakes you see in the bill is how much was given to the taxpayers and social security recipients. The assumption had to be that these folks would spend the money, however, in the current economic climate, more of them saved it then spent it and it provided no real stimulus to the economy at all. Second, the extension of unemployment benefits may have been altruistic, but had the money been used to actually employ some of these people, say having them work on infrastructure repair or energy projects, it would have reduced the unemployment rate and possibly forced some of the folks to be more aggressive in taking action.
How many jobs were saved or created by the stimulus? Clearly not enough. Suppose the Government created 1,000,000 direct jobs performing needed projects or funded the states to create these jobs using something similar to a program we had back in the 70s called the Comprehensive Employment and Training Act (C.E.T.A.), and if these temporary jobs with limited benefits cost $50,000 a year, it would have required $50 billion. However, 1,000,000 created jobs has a multiplier impact and a significant number of other jobs would have been created or saved to support the jobs created. Also, instead of getting unemployment benefits, the workers would be paying taxes and feeling a whole lot better about themselves.
The idea being that the best way to create jobs is to actually create them.
So applying this to our current economic situation, if the goal of the stimulus was to create jobs, it should have created jobs. Now, I will admit that I'm not an expert on every aspect of the stimulus, however, I do know that much of the stimulus money ended up funding things that had very little potential to increase jobs. Now, some of this money may be seed money, with the hope that the outcomes will eventually increase jobs, but it would seem that there were plenty of opportunities for direct job creation that could have been implemented.
You hear a lot of arguments from various politicians that the federal government should not try to dictate specific behavior in granting money. However, when you look through the stimulus plan, there is basically no money that can be clearly linked to direct job creation. One of the great mistakes you see in the bill is how much was given to the taxpayers and social security recipients. The assumption had to be that these folks would spend the money, however, in the current economic climate, more of them saved it then spent it and it provided no real stimulus to the economy at all. Second, the extension of unemployment benefits may have been altruistic, but had the money been used to actually employ some of these people, say having them work on infrastructure repair or energy projects, it would have reduced the unemployment rate and possibly forced some of the folks to be more aggressive in taking action.
How many jobs were saved or created by the stimulus? Clearly not enough. Suppose the Government created 1,000,000 direct jobs performing needed projects or funded the states to create these jobs using something similar to a program we had back in the 70s called the Comprehensive Employment and Training Act (C.E.T.A.), and if these temporary jobs with limited benefits cost $50,000 a year, it would have required $50 billion. However, 1,000,000 created jobs has a multiplier impact and a significant number of other jobs would have been created or saved to support the jobs created. Also, instead of getting unemployment benefits, the workers would be paying taxes and feeling a whole lot better about themselves.
The idea being that the best way to create jobs is to actually create them.
Friday, October 2, 2009
Seasonal adjustments
September jobs data like all the other months gets adjusted for what have been seasonal variations. Some of these adjustments are based on historical patterns and while they made sense when initiated, sometimes don't make sense in unusual economic times.
A lot of adjustments related to what has been historical patterns in the auto industry are simply wrong now. How much these distort the figures is open to debate, but the pattern that used to exist where many auto workers were laid off for a period while the plants retooled for the new model year has been disrupted by all the current chaos in the industry.
The question then is point is served by the use of these seasonally adjusted numbers? At one time, it was felt that the raw variations could provide a false impression as to the health of the economy. If you could predict that x thousands of auto workers let go in July would be hired back in September, the spike in unemployment they represented wasn't considered real. It was also of course politically problematic to have unemployment rates shoot up every summer and then drop again.
Statistically, if you were trying to determine the real structural trend, you had to eliminate these cyclical impacts. However, they require constant adjustment and can distort when times become unusual.
A lot of adjustments related to what has been historical patterns in the auto industry are simply wrong now. How much these distort the figures is open to debate, but the pattern that used to exist where many auto workers were laid off for a period while the plants retooled for the new model year has been disrupted by all the current chaos in the industry.
The question then is point is served by the use of these seasonally adjusted numbers? At one time, it was felt that the raw variations could provide a false impression as to the health of the economy. If you could predict that x thousands of auto workers let go in July would be hired back in September, the spike in unemployment they represented wasn't considered real. It was also of course politically problematic to have unemployment rates shoot up every summer and then drop again.
Statistically, if you were trying to determine the real structural trend, you had to eliminate these cyclical impacts. However, they require constant adjustment and can distort when times become unusual.
Thursday, October 1, 2009
Market forecasting
As we go into October, the economy looks poised to continue its recovery. It should be remembered that only six months ago, there was a lot of people who believed that the entire worlds on the brink of a collapse comparable to the Great Depression.
Very few still hold that view (some do) but it simply looks like the economy has taken its lumps and has started to regrow. Business cycles are really very predictable in the macro but not so much in the micro. Now, we are moving into another earnings system and I would think we are going to see improvements over last quarter for most companies. Of course, the companies that have adjusted better will do better than those that did not.
The next three months present some challenges to the extent that there are a large number of professional investors who would like to see a market correction so they could put cash to work at lower valuations than current. Of course a correction could happen, but it would require a significant event to trigger it. One significant danger is the CIT situation and it is unclear if a failure to reorganize CIT would be enough. Another possibility might be some sort of terrorist event and I don't think anyone wants that.
Without a major stimulus the most likely outcome over the next three months is for the market to continue its upward trend, although possibly at a slower pace than the quarter that just passed. However, I still believe the earnings that are going to come this month and the forecasts will point strongly to an S&P level of 1150-1200 and that is about a 10% increase over the quarter.
Very few still hold that view (some do) but it simply looks like the economy has taken its lumps and has started to regrow. Business cycles are really very predictable in the macro but not so much in the micro. Now, we are moving into another earnings system and I would think we are going to see improvements over last quarter for most companies. Of course, the companies that have adjusted better will do better than those that did not.
The next three months present some challenges to the extent that there are a large number of professional investors who would like to see a market correction so they could put cash to work at lower valuations than current. Of course a correction could happen, but it would require a significant event to trigger it. One significant danger is the CIT situation and it is unclear if a failure to reorganize CIT would be enough. Another possibility might be some sort of terrorist event and I don't think anyone wants that.
Without a major stimulus the most likely outcome over the next three months is for the market to continue its upward trend, although possibly at a slower pace than the quarter that just passed. However, I still believe the earnings that are going to come this month and the forecasts will point strongly to an S&P level of 1150-1200 and that is about a 10% increase over the quarter.
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