There are many aspects of the economy that attract attention. There are worries about debt and deficit and concerns about when inflation becomes an issue. There are fears that trade patterns will turn against the US and there are concerns regarding whether the US economy will be ready for the challenges in the next decade. But one issue always stands out above the others when it comes to the economy – employment. To most people all the other stuff is pretty abstract – what matters is whether they have a job or could get another one if they tried. For all the attention paid to the issue there is much that is not really known about why the pace of hiring has not improved.

There are plenty of theories and they all take slightly different approaches to explain an unemployment rate of 7.5% and the fact that 2.5 million people have lost their jobs since the recession started. The number of people working or actively looking for work is smaller than it has been in over 30 years and that means that millions of people have dropped out of the workforce entirely.

Some analysts point the blame at the structural elements of current unemployment. The business world has changed radically in the last few years and the skills that were once in demand are not anymore. These are the people who can’t find new jobs with their old skills and they have to either retrain or stay unemployed. The part that this theory doesn’t explain is the thousands of people who can’t find jobs even though they do have skills that are relevant in today’s economy.

A second dominant theory is that other economic issues have affected the way that people react to the jobless rate. The weak housing market has trapped many people in communities where there is no job growth and has kept them from moving to the places where jobs are more plentiful. Then there is the fact that most households are dual income these days and unless both can move to a new place there is little incentive to give up one good job to possibly find another one.

There have been suggestions that extended unemployment has kept people from looking for work but studies have not reinforced this notion. Some clearly take advantage of the assistance and stop seeking work but the vast majority are actively looking for employment.

Analysis: Through all of this analysis there has been one set of arguments that rests on one of the tried and true economic theories – Okun’s Law. In simplest terms this theory holds that there is a reliable relationship between economic growth and employment. If the rate of growth is over the long term trend the rate of unemployment will fall by half the level of the additional growth. The long term trend for growth in the US is 2.5%, if growth is 3.5% that is 1 point over that trend and that means that unemployment would fall by .5%. By the same token if the rate of growth was 1.5% that is a point less than the norm and unemployment would rise by .5%. A couple of years ago it looked like Okun’s Law was not behaving as expected but today there is more evidence that the assessments are correct.

This essentially simplifies the unemployment debate as it asserts that the real problem with job growth is that the economy isn’t growing fast enough to justify more hiring. Add in the uncertainty issues that surround economic decisions and one has a business community that is simply not confident enough to add people. This puts the challenge of joblessness in a subservient position – it is not about creating jobs, it is about creating economic growth sufficient to justify adding people. Much of the emphasis when it comes to national policy has been on the peripheral issues and not on the core issue of growth.

Anemic Global Growth Concerns

The latest reports from the international institutions that monitor the health of the global economy are universally glum and this has provoked some urgent policy advice – especially directed at Europe as the weakest of the regions. There is a growing consensus that something new or different has to be tried if there is to be a break in the current pattern. The OECD released its latest report and the good news was not all that good. The developing world saw overall growth in the first quarter of the year of a whopping 0.4%. That is about as close to recession as these nations would like to get. Granted this is a 34 nation organization that has members in some real trouble (Spain, Italy, France etc.) but growth that anemic means that the US, Germany, Japan and others can’t carry the load anymore.

Analysis: The OECD is not the only organization that has been reporting weak projections. The IMF sees global growth at no more than 3.3% and it was only a few years ago that the global growth numbers were at 7% and higher. The engines of global growth have been slowing and that has had a very negative impact on the nations that have been struggling to get back to some kind of economic expansion. If nations like the US, Germany and China can no longer drag the rest of the world along on their backs what are the real options as far as global growth is concerned.

There are three suggestions as far as policy emphasis is concerned. All assert that they are different enough from the current efforts to have a chance of success and all three have their critics. None have reached the point of consensus as far as the decision makers are concerned but all three are getting some attention from those who would need to shift from their current plans to adopt some version of these newer ideas.

The first is hardly new but has not really been part of the effort over the past few years. Japan has become the champion of this approach and the effort has deeply divided analysts. It is simply fiscal stimulus and on a grand scale. After over a decade of slow growth and deflation Japan is pulling out all the stops in an effort to slam the economy into gear. Initial reports suggest that “Abenomics” is having the desired impact as the Japanese economy has grown at a 3.5% pace in the first quarter – the fastest growth that Japan has seen since the recession started. There is no much about this approach that is mysterious or even untried. It has been the standard reaction to recession for years – spending by the government, job creation by the government and radically lowered taxes. What makes this different is that this is generally not a tactic undertaken by a nation that is seriously in debt. Japan is already looking at a debt that is 250% of its GDP and by the time the whole strategy is rolled out Japan may be facing a 350% of GDP debt. No nation has been able to knock down that level of debt without growth rates that exceed 6% or 7% – at least double what Japan is sporting now. Thus far there is not much appetite for this approach in the US or in Europe.

The second approach is one that focuses almost exclusively on what can be done to bolster growth itself and that looks quite a bit like the Japanese strategy except it places the emphasis on the private sector. The notion here is that debt and deficit are still issues that have to be addressed and that it will do no good for a nation to make that crisis worse than it already is. The push should be to boost the private sector and use it to grow the economy. This would mean that private sector companies would do more hiring and that consumers would spend more because they had more job security. There would simply be more economic activity and this would be accomplished by reducing regulatory barriers, reducing taxes and providing more infrastructure for the business community. When polled these are the three short term concerns of the business community and the reasons that many of them give for their slow response to the nascent economic recovery. Needless to say there are many who oppose this approach vociferously but Spain and Greece are looking at this very closely.

The third approach making the rounds is a more radical and controversial and threatens a kind of global competition that could prove destructive in the longer run. There have already been warnings from many in the international community as currency wars start to break out. The notion is simple enough – lower the value of one’s currency to the point that the export sector thrives. The problem is that every nation ends up competing in the same way and there is essentially a race to the bottom. In the 1930s this was referred to as “beggar thy neighbor” and it has been blamed for making a shallow recession into the Great Depression. It works for a while for the first nations that adopt the policy but at some point it tends to fold in on itself. It is sign of today’s desperation that national leaders are advocating this policy openly despite the obvious risks.

Yes – You Can Apply Economic Principles to Anything

There is a great little textbook from a few years ago called “The New World of Economics” by Richard McKenzie and Gordon Tullock. It was in many ways the precursor to Freakonomics as it strove to apply the ideas of economic to issues like lying, cheating, marriage and a host of others. On occasion the WSJ runs a column called “Ask Emily” and she points out the value of economic reasoning in our day to day lives. There was the one that allowed one to use the “S” threshold as a means by which to determine if one should get back together with a girlfriend or boyfriend. This principle is important in business as it holds that there is a threshold that causes actions when crossed. If it is a good thing the business has a reason to expand or make some other positive move. If the event is a bad thing it is reason to reduce commitment to some project or to reduce the size of the company. The trick is knowing what that threshold is. When it came to the girlfriend example the “S” threshold seemed to be when he realized that she had another lover.

Analysis: The basic idea in most of the economic principles is cost-benefit analysis. If it costs more than one stands to benefit the action is not a good one but if the benefit exceeds the cost at some juncture the plan is a good one. This is pretty easily applied when it comes to investments and transactions but it gets complicated when the benefits are hard to quantify or they are deferred. The costs of a university education are very high – both in terms of time and money. Do these investments pay off right away? Not usually, it may take years to see the real balance. The debate now is over what people should do to adjust to the current economic situation. Is it a good idea to train for a new career, move to a new place, start a new business? It all depends. The principles are the same as those outlined in the McKenzie and Tullock book when they discussed safe driving. The system now is counterintuitive as all the safety features actually reward unsafe driving by reducing the penalty. Their suggestion was to place a razor sharp spike in the center of the steering column. This would ensure that everyone kept 45 car lengths between them and other drivers and would never exceed 5 mph.

The Battle Over the Caribbean

This is one of the most consistently ignored regions of the world and for all the right economic reasons. The fact is that these tiny nations have relatively little to offer the big economies in the world. They do not possess much in the way of raw materials and they don’t have populations large enough to attract manufacturing. They are not big consumers either – that small population is an issue here but so is the fact that these are poor nations for the most part. The best that most of these states have been able to expect is benign neglect from the European states that were once their colonial masters or from the US which has been the primary economic partner for the majority of their history. There are some nations that attract a bit more attention than others but that is only a matter of degree as this region is far behind Asia or the rest of Latin America. Even Africa in general gets more economic attention than these island states.

The one thing that this region has is geopolitical importance. This is apparently what has been attracting China to this part of the world as there is no real economic value to the Chinese economy. There is nothing in the way of resources to extract and no robust consumer market for China to sell to. The power of the region lies in the fact that these countries all have votes in the United Nations and other international bodies. China has long worked to set itself up as the champion of the developing world and strives to communicate that it is a member of that community despite the fact that is the second largest economy in the world. Throwing money at these nations will cement China as an ally in their minds. This Chinese largesse is also coming at a time when the US could not appear to be less engaged and less interested in the affairs of the Caribbean.

These are all nations that are in desperate economic distress and they have asked for substantial American help. The US has its own issues and has largely ignored the pleas from these states. There has been some limited engagement with Puerto Rico and Jamaica but even nations like Haiti have slipped off the radar. The US has disengaged economically and politically and the Chinese are filling the void to some extent. There is unlikely to be a dramatic Chinese engagement – this is connected to their greater effort in Latin America and nations like Venezuela, Argentina, Ecuador and Bolivia are far more important to the Chinese at this stage.

Analysis: There are a couple of important reasons that the US should be more engaged in this region – apart from the desire to keep China out of a traditional sphere of US interest. The first is that the economic desperation in the area feeds the development of criminal activity that soon becomes an issue in the US itself. There are more drugs coming through these states than ever and the Caribbean has surpassed nations like Columbia and now rival Mexico. The gangs that are connected to drug operations in Jamaica, Haiti, Dominican Republic and others have become established in the US and they have become some of the most violent and predatory. The deterioration of these Caribbean economies have helped fuel the drug trade and other illicit activities.

There is also the problem of immigration. While much of the focus of illegal immigration has been on Mexico there have been increased numbers of people fleeing the poverty of the island states and they soon become an issue for the US – both in terms of trying to halt the flow and in terms of what happens to them once they are in the US.

It is not clear what the US can do to offset the influence of China but some suggest that the US would be well advised to open more trade opportunities for the farm output from these states. The sugar lobby in the US remains strong and has successfully blocked that import from many of these states. There is also a desire to see more of the private investment that these states need. The problem is that tourism is really the only industry that attracts attention and the US consumer is not yet returning to these countries in sufficient numbers.

North Korea Still Behaving Badly

The press has apparently moved on and has found something else to obsess over. It must have been boring to report on the latest round of rants from Little Kim but the fact remains that Pyongyang is acting in every bit the bellicose manner it has adopted for the past year. In the last three days there have been six short range missile launches that have been accompanied by a whole host of thundering threats to retaliate against any provocation from the US or South Korea. The analysts in the region worry about these constant “tests” as any one of them could go “off-course” and strike a target other than the ocean.

Analysis: This is the kind of provocation that would severely strain the US and South Korea. If such a missile struck US, South Korean or Japanese territory or personnel it is likely that the North would assert that something had gone wrong and that throws the burden of response on the US. If the reaction is extreme the US looks like the aggressor despite not firing the first shot. A weak response allows the North Koreans to engage in more such attacks with the assurance that none of their enemies will have the guts to retaliate. Nobody seems to be able to control the boy dictator and that is a very destabilizing situation for the region.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

Storms

As I was headed to Las Vegas last Sunday the weather report for my hometown of Kansas City was ominous. We had not had our usual barrage of severe storms this year because the temperatures have been unseasonably cool. Now we are getting what we often get in April and the forecast for that evening was for hail and high winds and maybe twisters. Given that I had spent the previous two days assisting the master gardener in putting in the veggies and other plants there was great concern over what was coming. But I had to watch all this from afar and in a town that is not subject to this kind of activity very often. In the end all was well despite the high winds.

Then comes the story of the Oklahoma disaster and I feel even more cut off. This is my business partner’s part of the world – he has lots of family scattered hither and yon over Oklahoma and I was anxious to know if any of them had been affected. The good news is that the only casualty seems to have been a boat that blew into a tractor. The stories coming from the community ravaged by the storm are heartbreaking and I am not sure that anyone who has not been in the vicinity of a tornado can quite grasp the primal fear that these monsters can evoke. There is no resisting; there is no control – just pure survival and trusting to luck. I have not been affected directly thus far but I have seen them closer than I would have liked. They are almost alive – or at least it seems that way. The rebuilding starts now but it will be very hard to move past the deaths of over 100 people. The storm that destroyed Joplin a few years ago killed some 161 people and that town will never be the same.

The really odd thing is that the Joplin storm took place on May 22 in 2011 and I was at the Nashville meeting of NACM’s Credit Congress and now I am in Las Vegas for the 2013 Credit Congress as the tornado hits Oklahoma. One would think there might be a connection. Mostly it is just a discomforting feeling to be away from home when tragedies strike.

The latest data from the Thomson Reuters/University of Michigan consumer confidence survey is in and it has come as something of a surprise to the economic analysts that track the vagaries of the consumer mood. After months and months of a poor consumer confidence level there is suddenly a change in mood and the confidence level is back to what it was prior to the arrival of the recession. In April the reading was about what it had been for the bulk of the year – an anemic 76.4. There had been some expectation that it would improve in May but the majority of the analysts expected to see no more than a reading of 78. Instead the consumer shocked everyone with a jump to 83.7. This takes the confidence reading back to the heady days prior to the recession when everyone seemed to be ready to believe that the boom of the last decade could last forever.

First there is the usual caveat when looking at the consumer confidence numbers. Consumers are among the most fickle creatures on the planet and they are fully capable of having a drastic change of heart before the next month’s data comes out. In fact there are some suggestions that people are already having a change of heart and that could lead to a big drop in confidence by the time the next survey is released.

The assessment of the survey suggests that much of the confidence jump came from the ranks of those who are engaged in the stock market. The rise has restored more than a few retirement accounts and has gladdened the hearts of those who have invested in equities. Not that this is a bad thing but as most have learned by now – what comes up most usually comes down and at some juncture there will be a market correction. Will that be enough to cause overall loss of faith in the market? Probably now but it could be enough to cause a dip in consumer confidence.

The other factor that seemed to play a role was the price of gasoline. We have noted more than once that the consumer is especially sensitive to the price at the pump. When the price of gas is down the mood of the consumer is upbeat and when the price of gas is high the consumer is bummed out. In April the cost of gas fell in most parts of the country but in May the price rose in some places and that might have an impact on consumer mood as well. Thus far that price hike has not been universal and that may keep the impact less than dramatic.

Analysis: It is not that consumer data is of no interest or can never be trusted. It has to be taken for what it is. This is a snapshot of sorts, an assessment of the overall mood of people at a set point in time and what is happening at that precise moment matters quite a lot. In some cases there has been some national tragedy that shakes people’s confidence about the future and the Boston bombings did indeed cause some reduced optimism in the eastern parts of the country. On the other hand a booming stock market can make people feel good about the future – even when they are not actually engaged with the equity markets. They just assume that strong stock market performance must be good for the country’s economy as a whole.

The analysts are now in search of some kind of consistent trend – several months of good moods and confidence and there is some hope that May is providing the start. The most encouraging part of this data is that a rise in confidence right now might suggest that there is not really going to be a spring swoon in 2013 – at least not one as injurious to the economy as those of the past few years. The level of business confidence is still not what would be preferred but improved consumer mood could help alter that in the coming weeks. The business community is worried about the lack of direction from the government as well as the consumer.

Is the Future of Innovation Bright?

There are two kinds of people in the analytical community when  the subject matter is innovation – especially when innovation is discussed as the prime tool for getting the US economy moving and growing at a rapid pace again. There are optimists and pessimists as regards the role of innovation and there are several sub-groups within each category. In general the pessimist asserts that the big innovations have already taken place and there is nothing on the horizon that will have the input that previous innovations have had. The other argument is that many of the innovations area actually not that good for the economy in the sense that many of them involve replacing people with machines. The optimists assert that much of the growth in the last several decades as been due to innovation and that there are many areas remaining that cry out for innovation and improvement that would benefit economic growth.

Analysis: We will start with an assessment of the pessimist and finish on a more upbeat note. There are many variations on the theme but there are basically two reasons for the skeptics to take a dim view of the power of innovation. The first is that there is nothing on the horizon that would shape the economy as dramatically as the innovations that have taken place in the past. There is nothing like the revolution in computers or telecommunications or even something as basic as climate control. The problem with this assertion is that innovation is by definition the solving of problems that have been considered insoluble in the past and because it is innovative there is little advance warning. There are dozens of major problems that need solutions. It is not clear that innovation is imminent on any of these fronts but it is absurd to assume that none of these solutions will have the potential to drive major economic development.

Only five or six years ago it was considered nearly impossible to extract oil and gas from the fragmented and inaccessible formations in the US but today the development of the Bakken field is driving the US economy and will change the US relationship to oil and gas forever. Imagine the economic impact of a cure for cancer or diabetes. Consider the impact of the new accretive technology in manufacturing as the process shifts from cutting away what one doesn’t want to simply adding layers of what one does want to create a part or tool. There are major issues in all aspects of transportation that could use solutions and then there are the innovations that could improve efficiency and reduce the impact on the environment. There is nothing that assures that these innovations will take place but it is clear that there is demand for them and that they would change the nature of the economy.

The second argument made by many in the pessimistic camp is that innovation is not the best way to advance overall economic goals and in many cases it even interferes in the process. The assertion is that innovation takes jobs away from people. Machines replace manual labor and over time the only people working are those who know how to design and operate the robots that have replaced the entire workforce. This has been most evident in the manufacturing sector as capital investment in technology and robotics has been the competitive edge the US has employed to regain some of the market share lost in the last few decades. It shows up in other sectors as well – everything from pumping one’s own gasoline to handling one’s check-out at the grocery store. Advances in technology all but eliminated the function of the administrative assistant and other support personnel. This is innovation that may assist the elite but it detracts from the ability of others to get and keep employment.

The argument has some merit but it becomes a matter of short term vs. long term. There would be far more employment if we had no vehicles and people had to rely on horse carts and their own muscles to move things. The general trend is towards more efficiency and that means more technology. This process also opens up better jobs in these sectors. The real challenge for the society as a whole and for those working is to keep pace. The workers of today have to keep concentrating on the skills they will need tomorrow. Unfortunately that is much easier said than done. There are legions of people who have been left behind by innovation and there will be far more in the future.

What is the optimistic view of innovation? In some respects we have addressed that in the critique of the pessimist but it goes beyond this. Innovation has the ability to utterly change the current dynamic and in the process it opens up opportunities that range throughout an economy. The Bakken field development is a classic example. There is certainly money to be made in drilling for oil and gas and there are plenty of people involved directly in that industry. The greater job growth and the greater economic expansion is due to the peripheral and ancillary developments. There is construction all through the region and at a frantic pace – everything from homes to apartments and hotels. There are stores and restaurants and bars. There are communities adding schools and fire stations and sewer systems. The banks are busy and so are the insurance companies and the medical centers and the veterinarians and every other part of a modern economy. In the end these will be the developments that revolutionize the region – all on the back of a key innovation.

By definition we don’t know the impact of the next innovation. It may be minor – like some new way to text. It might be major – an end to some disease that costs millions of lives. It may be innovation that only matters to a specific industry but as that sector becomes more efficient there is always a ripple impact.

Not Much in the Way of Data Releases This Week

The data supply will be truncated this week – mostly some data on housing and a set of speeches from the members of the Fed. The housing sector has been performing well of late despite the small slide last month. The latest news on permits has been positive and it is expected that more good news will be coming from the National Association of Realtors as they release their latest housing numbers. It is expected that home sales will have risen by another 1% and that continues a solid trend that has been pushing this sector to the position of economic engine.

Analysis: There will be some Fed speeches this week and that will provide some opportunity to gauge their opinion on when to start to ratchet back on the loose monetary policies of the last four to five years. This is also the week that the Fed releases its latest set of minutes and that will also contribute to some understanding of the mood. It appears that everyone at the Fed agrees that the economy is improving a little and that there will come a point when the stimulating will come to an end. The division is over when that point will be reached. To the hawks that moment came months ago and speeches from the likes of Esther George, Richard Fisher, Jeff Lacker and Charles Plosser reiterate that position. The ones to watch are the doves like Janet Yellen, Eric Rosengren and Charles Evans. They start to waver in their support of loose monetarism and a shift will be imminent. The speeches will provide some clues but nothing definitive until the next meeting.

Trouble in the Gold Market

The yellow metal commands a great deal of attention and there are few investment sectors that generate more intense emotion. Those who defend purchasing gold at any price assert that it remains the ultimate hedge against inflation and protection from the volatility of the investment world. This position is rigidly adhered to despite prices that have exceeded all expectations and seem to the gold critics to have long since left logic behind. The gold critics are just as determined and emotional – asserting that there is nothing to justify the adherence to gold as the measure of all value. The collapse of gold prices due to the rumor that Cyprus would be forced to sell its paltry collection was an example of how changeable this market has become. Now the price of gold has tumbled again and silver is falling even faster. What prompted this latest decline? Nobody is really certain – other than to say that the markets have been as nervous as they have ever been.

The bigger issue is what is happening in the global investment community as a whole. Gold is not the only thing that seems to have lost contact with the economic fundamentals. Nobody can really explain why the stock market in the US continues to surge when the overall economic news is not all that compelling. The data suggests that the economic recovery is continuing but at a snail’s pace, nothing that would justify the kind of surge that has taken the stock market to record highs every few days.

One of the assertions by analysts is that this recession has forced some systemic changes that nobody is quite sure how to manage. The central banks have been universally committed to asset purchases and stimulation regardless of the long term risk. There are vocal critics inside and outside the banks that assert that this extended policy of loose monetarism is inviting some risky behavior on the part of banks and other institutions and they further assert that it is only a matter of time before the inflation threat manifests. Thus far they are voices in the wilderness and the central banks press on. Part of the reason for their aggressive posture is that the fiscal side of the house is missing in action and has been for an extended period of time. In past years it would have been expected that the legislatures and parliaments of the world would be participating in the drive to bolster the economic recovery with big spending programs and tax cuts but they are all concerned about their growing debts and deficits and that has served to keep them out of the game. This sets up some serious problems.

Analysis: The critics assert that these efforts have set up a set of false expectations. There is less market volatility than would be expected and there is an illusion that there is more financial stability than is justified. The markets are expecting two things and there is considerable doubt as to whether these will continue to manifest. The first expectation is that the central banks will continue to stay committed to the current loose monetary strategy and that they will keep on buying assets as a means to bolster the economy. Given the conversation of late that may not be such a wise conclusion. The second assumption is that the US and Europe will start to get the kind of political leadership necessary to bring the economy out of its slump. This is an awfully confident position given the actions of the last several years. The investors are convinced that the powers that be will look at the economic mess and will get engaged in the kind of stimulation that has been the pattern in the past. They are convinced that the Europeans are right on the edge of abandoning all that austerity nonsense and that these Eurozone states will soon be pumping cash into the system again. None of these assessments quite get around to explaining where that money is going to come from but they seem to believe that it will be conjured up somehow. As for the US they are convinced that all the debt and deficit talk will soon fade as the US has made some progress on that deficit issue and now understands that the economy needs a jolt.

This may the prevailing opinion of the investment community but this is not the opinion of most analysts. There is little to suggest that there has been a real sea change in attitude towards debt and austerity in the places that really matter. The Germans are not prepared to back off and they are the ones that are underwriting the Eurozone rescue. The opposition to expanded debt and deficit in the US remains formidable. The bottom line is that the assumptions that are supporting the stock market and the gold market are shaky enough to give an investor reason to question current values.

Mexican Stumble – Predicted and Probably Not that Serious

The Mexican economy was perking right along at the end of last year – a growth rate of 3.2%. That made them one of the fastest growing economies in Latin America but there were some concerns emerging towards the end of the year as the US economy went into its swoon. The US in the fourth quarter fell below 1% growth and most anticipated a similar drop in the Mexican economy. Sure enough there was a slump to 0.8% growth in the first quarter and that was below even the more pessimistic assumptions of 1.2%. There is no panic in Mexico however. It would appear that a rebound will take place sooner than later as the US economy began to grow again in the first quarter.

Analysis: This is also indicative of an economy that remains dependent on the US but has still managed to diversify. There is more than oil and tourism now and that gives the Mexicans more flexibility. The recovery in the next quarter will likely be led by manufacturing.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

The Origin Story

One of the joys of traveling around and flapping my lips for a living is the opportunity to talk to the people who read this screed every day. I am astonished at how many do so – more than I ever expected. I am even more shocked at how many people read this last story and assert that it is their favorite part. It is time therefore to explain where this all originated.

Many of you are reading the Business Intelligence Brief because it comes from an organization that you are affiliated with. You will notice that underneath this story there is a box that each organization uses differently. Some run announcements of the programs they are offering and others run advertisements from businesses interested in their members. Either way they want people to make it to the back of the BIB so that they at least see what is in that box. This led us to use this space for something a little offbeat and personal. Hence the litany of travel stories, cat reports and random observations. This is always the last thing I write in any given morning and it is literally what is on my mind that very instant before I send this off to Karen so that she can get it off the readers.

Over the years I had shared way too much I am sure. I run into people that have never met me but they know the names of my cats, know that my wife is a singer, gardener, exquisite cook and has excellent taste in everything but men. People know that I really like the TSA (not) and just adore the joys of flying. People who know me are now asking if every conversation we have is potential fodder for this column (the answer is yes). It is somewhat odd to find that people like reading these rants. Somewhat intimidating as well. I strive to make this stuff relevant and interesting and that is not all that easy given the fundamentally mundane life I lead. Perhaps it is time to take up some extreme sport so that I can report on life in a hospital.

The numbers from last month had started to worry those who keep expecting something to derail the housing sector. The number of starts had fallen by 16.4% and that was the steepest decline since November of last year. Granted, even that reduced number was 36% higher than it was in April of last year but there was still a shock wave through the sector on which many are now placing a great deal of emphasis. If the housing surge starts to fade this soon into its recovery there will be a lot of pessimism emerging as far as the rest of the year. The numbers from May are brightening a lot of moods as it would appear that the April slide was more anomaly than trend – something affected by the volatility of the apartment sector and not a signal that the expansion was already coming to an end.

Permits were up in April and that trend seems to be extending into May. The gain in April was 14.3% and that is largest gain since June of 2008 – before the recession hit and before the real damage had been done to the housing sector. The permit data is actually better at prediction than housing starts and that is truer now than before. In the boom years there was a lot of speculative activity and builders would get permits to construct homes that they hoped to sell but for which they had no ready buyer. The lending climate now is not all that conducive to these speculative builds and when a permit is obtained it is a good bet that there is a buyer in place already. That leads to a more direct connection between the permit process and the ultimate construction and sale of a home.

The construction of apartments can skew the start data from month to month as this sector is far more volatile than the single family residence. The most obvious factor is that apartments are planned and built in far larger numbers. The start of a multi-family unit is going to have an impact on the data that is far more dramatic than starting a single family home. By the same token when there is a slowdown in building these apartment complexes the impact on the data is significant. In April there was a 36.2% decline in the construction of the multi-family unit. There is also a transition from time to time depending on the preferences of the consumer at that moment. The single family home is getting popular again and people are reacting to the higher rents in the apartment sector.

Analysis: The housing sector is once again carrying a lot of the weight of expectations. If the sector continues to expand the economy is very likely to expand right along with it. It is hard to overemphasize the role that housing plays in the economy – directly and indirectly. It is obviously a source of jobs for those that build the homes and it makes money for the builders, banks and real estate companies. That is just the start of the impact. The home is the primary source of consumer wealth and its value determines the financial security of millions. There are all the sectors that contribute to the home during construction and after. There is the lumber and cement and carpeting and appliances and furniture – the list is long. In the boom years it was estimated that housing and related sectors accounted for as much as 30% of the GDP. That percentage fell drastically but is now starting to grow again and will be the underpinning of the year’s recovery when all is said and done. Most anticipate a good year for the sector but not one that will resemble the frantic period prior to the recession and that is a good thing. The mortgage rates will stay low through the bulk of the year so all that is needed now is more consumer confidence.

The Threat of Currency Manipulation

There are few global economists who command the respect that has been afforded Fred Bergsten. He has been an assistant secretary of the Treasury but his greatest claim to economic fame has been as head of the Peterson Institute of International Affairs. This has been one of the most powerful think tanks on the issues affecting global trade and finance for years. He has just recently retired and gave a speech as one of his farewell gestures. This was perhaps his most direct and powerful discussion of a threat that he considers very serious and one that is becoming more complex by the day. He has long argued that global trade is the most powerful tool for real economic development and he has asserted that all the barriers and protections only serve to hold back growth – even in the nations that believe that they are protecting their own economy. One of his primary targets has always been the use of currency policy to promote exports and discriminate against imports.

Analysis: The temptation to use one’s currency value to dig out of an economic crisis is powerful. The process is really pretty simple. If a nation takes steps to lower the global value of a currency the export community in that country instantly has an advantage against other competitors. The goods that they are trying to sell on the international market are instantly discounted and that will attract buyers. The downside is that goods that coming to that country become more expensive as they will cost relatively more given that they are being paid for in weakened currency. This would seem to be a pretty substantial disadvantage and it is for the consumer and those who have to buy commodities and other goods from overseas. It is an advantage for the domestic industries that compete against the global competitors as they now have a domestic price advantage. The goods that are arriving in the country are carrying extra costs just as if they were being hit by tariffs.

There is no “right” position as far as having a weak or strong currency – it all depends on which side of the debate one is on. To the exporter and the domestic industry there is nothing at all wrong with having a weak currency to work with. To the consumer and the businesses that need inputs from outside the country the weak currency costs them dearly. For years the US trade deficit has worsened every time the price of oil went up at the same time that the dollar weakened as that oil import just became that much more expensive. The fact is that those who benefit from a weaker currency generally have more political clout than those who benefit from the stronger currency and many countries now push hard to keep their currencies from rising.

If one looks at the policies in place around the world there is no avoiding the conclusion that Bergsten has reached. The world is in a currency war and one that shows no signs of diminishing. The Chinese have been aggressively controlling the value of the yuan/renminbi for decades and has endured criticism from nearly everyone. This is an export driven economy and one that depends on selling cheaper consumer goods. They need every edge they can get their hands on and thus the government has maintained a policy that results in a currency that is clearly undervalued – by as much as 30% or 40%. At one time the Chinese were somewhat on their own as a currency manipulator but those days are gone.

Today almost every nation is doing what it can to influence the value of its currency and some have gone far beyond what the Chinese have done. Japan is aggressively pursuing policies that collapse the value of the yen because this is also an export centered state and they desperately need that sector to come back to life. The Bank of Japan has lowered the interest rate to zero and has pursued a loose monetary policy that makes the policy of the Federal Reserve look almost tight in comparison. The yen has fallen like a stone and the Japanese economy is growing at a 3.5% rate. Brazil has been assailing the US Federal Reserve for its loose monetary strategy and has accused the policymakers in the US of deliberately trying to wreck the economies of states like Brazil. That is probably going too far but the fact is that the low interest rates in the US have an impact on Brazil and others.

Part of the problem is that investors do not care much for weak currency regimes and they tend to direct their money towards countries that have stronger currencies and higher interest rates. If there is a nation like Brazil that favors higher interest rate they become a target for that investment money. This is not as positive as it sounds. The Brazilian economy (and others) have a bigger concern as regards inflation than some others. It has been inflationary surge that has damaged the Brazilian economy many times before and they share this issue with many other developing nations. If the “hot money” from investors floods into these states they are looking at an inflation breakout and that causes them to hike interest rates. That only encourages the investor more but it slows the economy at the same time. It is a vicious circle that is hard to break.

Bergsten also point out that currency manipulation distorts trade patterns and that this costs nations a great deal of money in the short and medium term. It is his assertion that the global economy would be ahead by over $1 trillion if the currency manipulations were removed. This would be like adding almost 1% growth to the global economy and that means millions of jobs in nations throughout the world. The race to the bottom creates strains for the consumer and that restricts growth and thus reduces expansion and jobs. It is not realistic to assume that nations will stop engaging in this practice but steps should be taken to slow down the process before the world sees a 2013 version of the 1930s –“beggar thy neighbor” policy that marked the Great Depression.

More Concern About Loose Policies

The consensus is building throughout the world. The problem is that there is no such consensus yet in the Fed itself. The latest voice to be heard on the subject is the head of the Bank for International Settlements – the central bank to the central banks. The comments from Jaime Caruana are the most direct he has made yet. The basic assertion is that the time has come for a retreat from the loose monetary policies of the past several years as they have outlived their usefulness. The underlying assertion is that the banks have been asked to do far too much and it is now time for the fiscal side of the house to take responsibility. In fact it has been their responsibility for some time.

Analysis: The comments from Caruana are similar to those within the ranks of the Federal Reserve who have been calling for a reversal of the bond buying plan. The fear is that this consistent loose policy is inviting highly risky behavior as banks and others seek to find returns. They are getting into situations that look disturbingly similar to those that preceded the 2008 meltdown. Then there is the threat of inflation at some point. It is obvious that there is relatively little threat of inflation pressure right now but that massive money overhang is not getting any smaller and if there is a rush out of the banks and corporations and consumer pockets the system will be overwhelmed by the money supply and the inflation threat becomes very real.

Bad Signs from the Transport Sector

The analyst have been suggesting for some time that global trade would be slowing in the coming year despite the fact that some of the bigger export economies are working overtime to bolster their chances to compete. The Japanese are certainly seeing far more exports action than has been the case in the last few years but China has been seeing slowdowns in their own trade numbers. The US export community has been seeing less activity and Europe is downright moribund. These are all assessments derived from the export and import data from a few months ago and that is the nature of government information – it is always rear view mirror analysis. To get a sense of the future one needs to look at the transport operation as they will reflect the pace of today as well as the future. The assessments coming from the ocean cargo carriers, the rail companies, trucking companies and the air freight operations are universally cautious and in some cases downright depressing.

Maersk is the largest of the ocean cargo operations and they have just lowered their expectations for the year. They had been predicting growth of around 4% to 5% and now they have adjusted to now more than 2% to 4%. The container traffic they had expected to see has not manifested as yet and there is no expectation that it will catch up. The retailers have not shown an eagerness to load up on inventory yet. There is still time to get product in for the holiday season but peak shipping season is fast approaching and there is nothing to suggest that there is a surge coming.

To further complicate the situation for the ocean carriers there is the problem of over capacity. Maersk has idled almost 50% of its fleet and they are far from alone as all the major carriers are trying to restrict their capacity in order to keep freight rates from collapsing. That capacity pressure will be on the ocean carriers for some time and that will keep prices down – along with profit potential. Right now the carriers are engaged in every tactic they can think of to stabilize prices. They are slow sailing to reduce fuel costs and to control delivery times. They are waiting until a ship is fully loaded before sailing and that can delay the transportation of goods by additional weeks. At the moment there is not the kind of demand that would require faster shipping but at some point there will be a need to speed the process.

Analysis: This is the challenge of transportation and logistics. The shippers need the service that they need and only when it is appropriate. As long as the consumer is not clamoring for the product the shipper is not in a hurry. They can wait for the slow sailing and the need to only move fully loaded vehicles. They are also unwilling to pay for anything but the most basic of services. Then demand begins to spike and the need for fast and efficient transportation increases. Now they are willing to pay and now is the point at which transportation companies can make some money. They will want to keep capacity restricted as long as they can as this is the point where prices rise in reaction to bottlenecks. In time the capacity grows to meet demand and the money flows stop. At some point there is overcapacity and prices start to fall again – it is a cycle that is very familiar to all elements of the transportation sector.

Global Executives Assess the Future

The good news is that 27% of the 1600 executives polled think that the global economy will improve by the end of the year. The bad news is that 21% of them do not expect much improvement and that leaves almost half of those polled with no idea what is going on. This is far from a ringing endorsement of the future and would suggest that all the concerns about uncertainty are still valid. The breakdown in confidence vs. pessimism was predictable and tended to match up with the industries that have been growing out of the recession and its aftermath. There was also a great deal of difference depending on where the executive was located. The Americans are more upbeat than the Europeans and most of the Asian responses were more positive than those from the US or Europe. The sectors that are most confident include those involved with energy production, housing and vehicle production. The retail sector was not generally happy and there is considerable gloom in some of the more basic manufacturing areas.

Analysis: Given the broad approach of the survey is there much that can be taken from this? In some respects the survey is too broad to provide clues but there are issues that get almost universal attention and response and that provides some good clues as to what is of greatest concern and where the strengths might lie. The surprising response is that 64% thought their company would do well despite the fact that only 21% thought the economy as a whole would improve. There are many companies that have simply adopted the attitude that they only have control over their own business and that they should get on with the task at hand regardless of the activity around them.

Another point of near universal contention is that regulation will provide the biggest threat going forward. It is not even that these companies seek a world of no regulation; they are seeking rules and regulations that make sense and do not contradict one another. There are rules that affect hiring and firing that make employment decisions tough. At the same time they are being assailed for investing in technology and not people. The right hand knows not what the left hand is doing.

The Executive Intelligence Brief

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Making Life Worth Living

There is a set of pictures making the rounds on the Internet these days. The first photo is of a woman (age 53) who is reputed to be a natural food guru and a devotee of all those odd behaviors like colonics and purges and the like. She looks to be about 106. The next photo is of Nigella Lawson and she is also 53. The gorgeous photo makes note of the fact that she eats chocolate, butter and other delectables while also enjoying a fine wine. The fact is that somebody took the most unflattering photo they could find of McKeith and she doesn’t really look that bad given that she has spent most of her life outdoors. The photo of Lawson is a very carefully presented glamour shot and she has her bad days as well. The real point is that one needs to make a choice as to how to live.

We all have our wants and needs and desires. For some the satisfaction of life lies in music or fine spirits, a day of golf or a day in the garden. Sometimes these avocations are “good” for us and other times perhaps not. The decision is ours. I have watched Nigella for a long time as I count food and wine as among the great pleasures of life. She does indeed consume butter and chocolate and rich offering of all kinds but she also does so in moderation and with an eye to enjoying these things for a good long time. It is not healthy to spend one’s life in deprivation. We all get joy from different activity and we have to make certain that we don’t sacrifice too much pleasure in the pursuit of other goals – whether that be work or the quest for some ideal weight.

For a Christian, fear of God forces them to consider their actions and understand that there are repercussions for actions that take place even when “nobody’s looking”. Because, an all-knowing, all-seeing God will someday judge us on these actions. So, if we want to live on the edge – we have to be ready to accept the possible responsibilities and ramifications that will assuredly come.

When we respect our parents or work for a company that monitors our personal life, we know

But, the map at right from NOAA is the typical 3-5 day cone graphics that we’ll use during the season to show you where a storm is forming and where it is headed.

Let’s start with the data on consumer prices. It looks pretty