April 2010 - Global Economic Watch

Small Business Owners Still Looking to Cut Expenses

04-30-2010 8:26 AM with no comments

Judging by the latest Intuit Money Matters Town Hall Small Business Survey, many small business owners are not overly confident that recovery is underway, and continue to focus more on ways to cut costs.  Take a look at how many small business owners say they are responding to the recession now, compared with two years ago and four months ago:

Take a look at other results from the survey here. (hat tip: Small Business Trends)

Posted by Graham Griffith

Hewlett-Packard's Major Mobile Play

04-30-2010 4:42 AM with no comments

Hewlett-Packard is acquiring Palm for $1.2 billion.  And Barron's Eric Savitz says H-P is going to have to pay a lot more to make the deal work out.  Which begs the question: what is behind this deal?  Savitz, the Wall Street Journal's Justin Scheck, and MarketWatch's Dan Gallagher say it has everything to do with H-P not wanting to get any further behind in the mobile market:  

Posted by Graham Griffith

Top Ten Social Media Savvy Companies

04-29-2010 10:20 AM with no comments

Some interesting new data from NetProspex via the influential Aussie social media blogger Jeff Bullas shows Microsoft employees are the most networked employees when it comes to use of social media.  The rest of the top ten (from Bullas):

Rank 2: eBay with a score of  208

Rank 3: Amazon.com with 202

Rank 4: Walt Disney 181

Rank 5: Google with 172

Rank 6: Electronic Arts with 164

Rank 7: Intuit scoring 163

Rank 8: Raytheon with 157

Rank 9: Best Buy on 155

Rank 10: Apple with 153

Read Bullas's take here.  

Posted by Graham Griffith

Federal Reserve Basics, from the Cleveland Fed

04-29-2010 5:31 AM with no comments

The Associated Press and others are reporting that President Obama will nominate three new members of the Federal Reserve Board of Governors later today.  Janet Yellen, currently president of the San Francisco Fed, is set to replace Donald Kohn, who is retiring as Vice Chair.  MIT economist Peter Diamond and Sarah Raskin, Maryland commissioner for financial regulation, are also expected to be nominated.  And lest any of them have any questions about how the Fed works, they could do worse than to watch this Drawing Board primer from the Cleveland Fed:

Posted by Graham Griffith

Government Policy and Entrepreneurship: The Case Against Targeted Funding

04-29-2010 4:39 AM with no comments

William Kerr and Ramana Nanda, assistant professors at Harvard Business School, are "all for policy support for entrepreneurs," but the currently favored approach of governments--at the state level primarily--is not effective, they argue.  Writing at Forbes, Kerr and Nanda remind us that most successful new businesses start out with 5 or fewer employees.  So when policymakers select "hot" new companies to support, and those companies that get attention are frequently large enough to get noticed, they undermine "creative destruction"--"whereby entrepreneurs with new ideas and methods of production displace less efficient incumbents."   And targeting sectors, Kerr and Nana argue, is also ineffective:

Every politician loves to announce that their city or state will be home to next biotech cluster. In fact, 49 of 50 states have made such announcements in the US despite the fact that most biotech activity funded by venture capitalists tends to cluster in Boston and San Francisco (Lerner 2009). Public efforts to boost such innovative start-ups tend to be unsuccessful because policymakers find it hard to shut down "experiments" that yield negative information. How many politicians want to announce that the biotech cluster idea did not work?

In short, targeted funding may be effective politically, but it is not effective in spurring real growth in the small business sector, they conclude, and should be dropped in favor of policy that supports improving the overall economy.  Read How Governments Should Spur Entrepreneurship here.  

Posted by Graham Griffith

A Multi-Power Future for Global Business

04-28-2010 9:13 AM with no comments

As emerging markets rise in global influence, Edward Tse, Booz & Company's Chairman for Greater China, envisions a world where multiple powers will all influence global business rather than one or two "superpowers."  He also believes that, because of the way business works in likely powers the U.S., China, Japan, and India, businesses will have to "combine the globalness of companies as well as to become very local."  Here is Tse discussing the multi-power future:

You can watch the full interview at Big Think, here.  

Posted by Graham Griffith

Graphic Visualization: Income Tax Brackets

04-28-2010 7:19 AM with no comments

Photographer, software engineer, and blogger Stephen Von Worley put together this visualization at his Weather Sealed blog:

In short, it reveals a lot about how income tax on those in the highest tax bracket has shifted considerably since World War II--and especially since the Reagan years.  It was inspired by this Henry Fetter article piece in The Atlantic in which Fetter argues that the 90% tax rate for top earners in the 1950s and 1960s had a big impact on prize fighting.  

Read Von Worley's Net Worth Fighting For here.  (hat tip: Catherine Mulbrandon)

Posted by Graham Griffith

McKinsey Quarterly: The Optimism of Analysts Skewing Projections

04-28-2010 4:26 AM with no comments

McKinsey consultants Marc Goedhart, Rishi Raj, and Abhishek Saxena have a report in the latest McKinsey Quarterly in which they analyze the analysts.  And they conclude that the analysts' have a history of optimistic projections that rarely prove true.  

Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.

Alas, a recently completed update of our work only reinforces this view—despite a series of rules and regulations, dating to the last decade, that were intended to improve the quality of the analysts’ long-term earnings forecasts, restore investor confidence in them, and prevent conflicts of interest. For executives, many of whom go to great lengths to satisfy Wall Street’s expectations in their financial reporting and long-term strategic moves, this is a cautionary tale worth remembering.

Exceptions to the long pattern of excessively optimistic forecasts are rare, as a progression of consensus earnings estimates for the S&P 500 shows (Exhibit 1). Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught up with earlier predictions, do forecasts actually hit the mark. This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions. When economic growth accelerates, the size of the forecast error declines; when economic growth slows, it increases. So as economic growth cycles up and down, the actual earnings S&P 500 companies report occasionally coincide with the analysts’ forecasts, as they did, for example, in 1988, from 1994 to 1997, and from 2003 to 2006.

Read Equity Analysts: Still too bullish here. 

Posted by Graham Griffith

The Future of MBA Programs

04-27-2010 8:23 AM with no comments

Harvard Business School professor David Garvin has spent the last two years examining the very nature of business schools, and attempting to identify ways for MBA programs to adapt to changing times.  He says that business schools should help students develop in three key areas: knowledge, skills, and a sense of purpose.  Since their inception, business schools have been excellent at developing knowledge, but less strong in building up the other two areas, Garvin argues. 

In this Harvard Business School video, Garvin discusses his findings and his book, Rethinking the MBA: Business Education at a Crossroads (co-authors Srikant Datar and Patrick Cullen) with Harvard Publishing's Sarah Green:

Posted by Graham Griffith

Abacus, Goldman, and the SEC

04-26-2010 9:13 AM with no comments

Four current Goldman Sachs and one former Goldman trader will testify at a Senate hearing tomorrow over SEC charges of fraud.  The former Goldman trader, Fabrice Toure, met with congressional investigators over the weekend, the Wall Street Journal reports.  Toure is a person of particular interest these days, as the man who created the Abacus 2007-AC1 financial instrument.  In short, Abacus allowed Goldman to profit off of the collapse of the housing bubble.  For a more comprehensive explanation, here's Paddy Hirsch at the Marketplace Whiteboard:

SEC goes after Goldman from Marketplace on Vimeo.

Posted by Graham Griffith

Business Week: Two Nordic Telcos on Diverging Paths

04-26-2010 8:33 AM with no comments

Nokia and Ericsson have long been leaders in mobile media, but both companies lost their momentum last year and continue to report earnings that fall short of expectations, according to Business Week's Andy Reinhardt.  But Reinhardt sees the two "Nordic giants" as heading in different directions at the moment.  Nokia, he writes, has a problem with a "perceptual gap" among investors:

Nokia, whose shares have fallen 1.4% this year against a backdrop of generally rising telecom stocks, can’t seem to catch a break these days. Long the leader in mobile handsets, and still hanging on to one-third of the overall market, Nokia has been sent reeling by the success of the Apple iPhone. Sure, Nokia sold 21.5 million “converged mobile devices,” or smartphones and mobile computers, in the first quarter, up 57% from a year earlier. Apple, by comparison, sold just 8.75 million iPhones. But Apple snagged an average of $622 in product and service revenue for each iPhone, whereas Nokia’s devices sold for an average price of $207 (€155). Translation: Apple made 22% more revenue on fewer units—and its profit margins were even more dominant.

It's not as if the Finnish giant hadn't been developing smartphones for years, or hadn't spotted the trend towards mobile services. Indeed, it was ahead of the rest of the industry for many years in both areas. Recall that the original palm-top Communicator with a QWERTY keyboard came out in 1996(!), and Nokia made waves—and annoyed jealous mobile operators—almost a decade ago with its Club Nokia download center for ringtones, screen savers, and other phone enhancements. But Apple, with its snazzy design, great timing, and unparalleled ability to rally software developers, has walked away with the market buzz in state-of-the-art smartphones and downloadable (and revenue-producing) apps.

But, Reinhardt argues, the same iElephant in the room that is causing problems for Nokia is a boost for Ericsson:

Ericsson has bulked up by buying other companies, including some of the assets of failed Canadian telco gear-maker Nortel. It was the addition of those assets, plus a well-timed deal with AT&T, that helped Ericsson lift its North American sales 99% in the first quarter, to $1.3 billion, making the region now its largest in the world.

The proximate reason investors bid up the shares of Ericsson even as they hammered Nokia is, ironically, the same: the iPhone. In his conference call with analysts after the earnings announcement, Ericsson CEO Hans Vestberg pointed to the rapid growth in mobile data services in the U.S.—a phenomenon largely driven by Apple's popular device and the voracious wireless bandwidth consumption of its users. Investors see huge opportunity for Ericsson to sell equipment that serves that growing demand, which in some cities has already lead to network saturation. Credit Suisse figures Ericsson could be 20% undervalued at its current price.

Read Nokia and Ericsson: A Tale of Two Telcos here.  

Posted by Graham Griffith

The Troubled Relationship Between Wealth and Happiness

04-23-2010 1:26 PM with no comments

Here's a little something to help you head into the weekend thinking less about the takes you paid earlier this month and more about what really matters.  Derek Bok, two time president of Harvard University has been making the rounds talking about happiness.  Specifically, he's been discussing his latest book, The Politics of Happiness: What Government Can Learn from the New Research on Well-Being.  He made a stop at the Carnegie Council recently, and he addresses one of the great misconceptions people have about the relationship of money to happiness:

You can watch or listen to Bok's full talk at Carnegie's website.  Click here.  

Posted by Graham Griffith

Mark Thoma: Don't Use Producer Price Index to Forecast Inflation

04-23-2010 8:26 AM with no comments

The Bureau of Labor Statistics released Producer Price Index data yesterday, and the year over year numbers show a rise in the price of finished goods that we have not seen since September of 2008.  The monthly increase during the month of March was 0.7%.  The PPI for intermediate goods showed a similar pattern.  Here's a look at the finished goods data.  First, the monthly percent change, seasonally adjusted:

And the 12-month percent changes (this is not seasonally adjusted):

So does this data mean it is time to consider inflation again?  Mark Thoma says no.  In his latest Money Watch column, Thoma argues that the "pass through from producer prices to consumer prices is less than 100 percent in any case, and in some cases it is close to zero," and he gives an interesting lesson in why we should look at "core inflation":

First, core inflation is used to forecast future inflation. For example, this recent paper uses a “bivariate integrated moving average … model … that fits the data on inflation very well,” and finds that the long-run trend rate of inflation “is best gauged by focusing solely on prices excluding food and energy prices.” That is, this paper finds that predictions of future inflation based upon core measures are more accurate than predictions based upon total inflation.

Second, we also use the core inflation rate to measure the current underlying trend in the inflation rate. Because the inflation rate we observe contains both permanent and transitory components, the precise long-run inflation rate that consumers face going forward is not observed directly, it must be estimated. When food and energy are removed to obtain a core measure, the idea is to strip away the short-run movements thereby giving a better picture of the core or long-run inflation rate faced by households. (I should note, however that this is not the only or even the best way to extract the trend, and the Fed also looks at other measures of the trend inflation rate that have better statistical properties, e.g. “trimmed mean” measures. Also, the first use of core inflation described above is for forecasting future inflation rates, the second attempts to find today’s trend inflation rate. There is a way to combine the first and second uses into a single conceptual framework, but it seemed more intuitive to keep them separate.)

Let me emphasize one thing. If the question is “what is today’s inflation rate,” the total inflation rate is the best measure. It’s intended to measure the cost of living and there’s no reason at all to strip anything out. It’s only when we ask different questions such as what the inflation rate will be in the future — essential knowledge for policymakers due to lags between the implementation of policy and its effects — that different measures are used.

Third, and this is the function that is ignored most often in discussions of core inflation, but to me it is the most important of the three, it is the inflation target that best stabilizes the economy (i.e. best reduces the variation in output and employment).

Read Thoma's column here.

For the BLS data on producer prices, click here.  

Posted by Graham Griffith

IMF's Blanchard on 'Multi-Speed Recovery'

04-22-2010 8:04 AM with no comments

New reports from the International Monetary Fund paint a picture of steady global recovery.  The latest World Economic Outlook projects 4.2% growth, globally, in 2010.  That's abig jump from the 0.3% forecast in January.  And the Global Financial Stability Report shows "risks to financial stability have subsided.," (though the report is clear that the global marketplace will continue to feel "short term strains").  

Both reports point to many potholes in the road to recovery.  IMF Director of Research Olivier Blanchard  describes the growth as "weak," and "slow," but "healthy."  And as he discusses in this short interview, the speed of recovery will be different from country-to-country:

Read more from Blanchard here.  

Posted by Graham Griffith

Innovation and Business Travel

04-21-2010 11:17 AM with no comments

After a week of almost no flights throughout Europe, thanks to the ash clouds created by a volcano in Iceland with a name few can pronounce, there was a glimmer of hope for those weary business travelers stuck in Paris, or London, or Amsterdam (we can think of worse places to be stuck, trust us) today as airports like London's Heathrow opened up their runways.  And Reuters is now reporting that almost all flights will run tomorrow.  But the shutdown of air travel in Europe prompts us to wonder whether, in the age of globalization and digital connectivity, business truly depends on air travel and face-to-face meetings.  Two economists at the University of Colorado--PhD candidate Nune Hovhannisyan and McGuire Center for International Economics Director Wolfgang Keller--have done a bit of research into that question.  And they conclude, as they write at VoxEU, that in-person meetings remain essential, at least in the terms of spurring innovation:

What is the economic importance of international business travel for innovation? The size of our estimates suggests that a 10% increase in business travellers from the U.S. is associated with 1% higher greater patent applications in the US. Take the two Latin American countries Colombia and Honduras, for example. Inventors from Colombia patent more than inventors from Honduras, and consistent with our analysis, there is also a higher number of U.S. business travellers going to Colombia than to Honduras. If, counterfactually, Honduras would receive the same number of U.S. business travellers as Colombia usually does, our estimates suggest that, all else equal, Honduras's patenting would increase by about 4 patents per year. This increase accounts for almost two-thirds of the actual difference in the patenting rates between Colombia and Honduras that we see in the data. We conclude from this that the impact of international business travel is an economically important determinant of a country’s rate of innovation.

Read International business travel and innovation: Face-to-face is crucial here.

Posted by Graham Griffith