As companies age and become more successful, they grow. As they grow, company leaders have more to lose, so they may be more cautious. And, Steve Coley, a director emeritus for McKinsey & Company and co-author of The Alchemy of Growth, says that usually leads to declining growth "as innovation gives way to inertia:"
In order to achieve consistent levels of growth throughout their
corporate lifetimes, companies must attend to existing businesses while
still considering areas they can grow in the future. The three horizons
framework—featured in The Alchemy of Growth,—provides a structure for companies to assess potential opportunities
for growth without neglecting performance in the present.
Horizon one represents those core businesses most readily identified
with the company name and those that provide the greatest profits and
cash flow. Here the focus is on improving performance to maximize the
remaining value. Horizon two encompasses emerging opportunities,
including rising entrepreneurial ventures likely to generate
substantial profits in the future but that could require considerable
investment. Horizon three contains ideas for profitable growth down the
road—for instance, small ventures such as research projects, pilot
programs, or minority stakes in new businesses.
Coley explains the three horizons of growth further in an interactive piece over at McKinsey Quarterly. Click here to watch and listen.
Of all the lists of "Best Business Books of 2009," our favorite is that of Marketplace host Kai Ryssdal. And we have a few reasons. First, it includes some of the top books that addressed the changing nature of the markets and the financial system--namely Andrew Ross Sorkin's Too Big to Fail, and Ken Rogoff's This Time is Different. Second, it includes books from some of the top online econ and finance writers, like Barry Ritholtz of The Big Picture, and Justin Fox, who blogs at The Curious Capitalist. Third, it has some refreshing surprises, like Chemical Cowboys--a look at the fall of the ecstasy empire by Lisa Sweetingham. But the main reason this is the Best of the Best of Business Books for 2009? It is a list of books AND a collection of interviews with the authors of those books. Take a look and a listen by clicking here.
Bill George says American business needs leaders who "will always put their institution ahead of their self-interests." George, former CEO of Medtronic and author of 7 Lessons for Leading in Crisis, teaches management at Harvard Business School. And he finds plenty of future leaders in his classroom, so when he points to a crisis in leadership as one of the causes of the financial crisis, he does not mean to suggest that we have a scarcity of leaders. Rather, there are, in his view, too many leaders with skewed priorities:
Watch the full interview with Bill George at BigThink, here.
The recovery has been slow moving in Europe, (and some wonder whether it is coming any time soon in Britain, which is now in the longest recession in the nation's history). But Jonathan Loyne, Chief European Economist for Capital Economics, is expecting a relatively good year for the Euro Zone in 2010. From the Wall Street Journal:
In case there is any doubt about what the biggest news story of the year was, here's a graphic visualization of the amount of coverage devoted to the topics that most captured our attention. The graphic is from Good.is/Transparency, using data from Journalism.org:
Click here to use an interactive version of the visualization.
(Hat tip Barry Ritholtz)
Ron Ashkenas, author of Simply Effective: How to Cut Through Complexity in Your Organization and Get Things Done, says no CEO sets out to make his or her company as complicated as possible. And yet, as businesses grow, they tend to become more complex. And taking the time to readjust and cut out inefficient institutional complexities is essential to continued growth. Ashkenas discusses some of the ways managers can create simpler workplaces in this interview with Harvard Business Publishing's Sarah Green:
Greg Mankiw challenges the notion put forward in this Wall Street Journal article that a rapidly expanding--or "exploding"--monetary base is a sign that inflation is around the corner. While this graph seems to spell out inflation:
Mankiw writes at his blog that much of the monetary base is being held as "excess reserves," and The Fed is paying interest on these reserves. This in turn gives banks incentive to hold the reserves, as long as the interest rate is high enough:
Here is one way to think about it. The standard way of reducing the monetary base is open market operations. The Fed sells Treasury bills, say, and drains reserves from the banking system, reducing the monetary base. But consider what this means in the monetary current regime. An open market operation merely removes interest-paying reserves from a bank's balance sheet and replaces them with interest-paying T-bills. What difference does it make? None at all.Both reserves and T-bills are interest-paying obligations of the Federal government (including the Federal Reserve). They are essentially perfect substitutes. The monetary base, however, includes one of them but not the other, largely for historical reasons.The bottom line is that when reserves pay interest, the monetary base is a pretty uninteresting economic statistic.
Read The Monetary Base is Exploding. So What? here.
The New Yorker's John Cassidy's latest book, How Markets Fail: The Logic of Economic Calamity, covers free market thinking from Adam Smith to the Global Economic Crisis. And in putting the events of the last two years into this deep historical context, Cassidy has grown skeptical about the efficient market hypothesis--the iidea that the efficiency of markets means that the "markets never depart from fundamentals." Cassidy spoke about the book at the Carnegie Council earlier this month, and he told the audience, in short, that speculative bubbles like the housing bubble discredit the notion that the "market price is always right":
You can watch the full event, and read a transcript, here.
2009 is the year of the strategic default. The Wall Street Journal has several articles this month on homeowners walking away from hefty mortgages even though they can afford to pay. (This article from James Hagerty and Nick Timiraos is a good place to start). And the Journal's online map of strategic defaults from 2004-2008 is a good tool for seeing just where people are using this "financial strategy": (click here to us the interactive version):
Earlier this month, The Atlantic's Megan McArdle wrote about her disdain for people who can pay but don't:
I am afraid that I am one of those people who have no patience for people who refuse to pay their debts. People who can't pay their debts? All the sympathy in the world, even if they accumulated those debts through a series of stupid decisions. Easy bankruptcy is a good thing precisely because it helps us sort out those sorts of situations quickly, allowing the unhappy bankruptee to get a fresh start. Yes, some of them go on to make even more stupid decisions. But most people who declare bankruptcy do so only once, which means they don't make that sort of mistake--or at least, that magnitude of mistake--again.
It is hard to argue on moral grounds that people should live up to their promises. But Daniel Gross cautions in his MoneyBox column at Slate that homeowners who walk away from their fiscal responsibility are just following the lead of America's financial leaders:
Strategic defaults are the American way, and I'm not talking about strapped middle-class borrowers who prefer spending money on vacations to staying current on their payments. Deep-pocketed companies, billionaires, and institutions that can afford to stay current on payments strategically default all the time.Morgan Stanley, for example, is a gigantic corporation. As of the second quarter, it boasted total capital of $213.2 billion. It certainly has the ability to make good on obligations incurred by its many operating units. But earlier this month Morgan Stanley said it would turn over five San Francisco office buildings to lenders rather than pay the debt on them. Why? Morgan Stanley foolishly paid top dollar for the buildings in 2007, when prices were really high. The values have plummeted, and tenants are hard to come by. "This isn't a default or foreclosure situation," spokeswoman Alyson Barnes told Bloomberg News. "We are going to give them the properties to get out of the loan obligation." Smells like a strategic default to me.
This makes for an interesting debate. Read McArdle's post here. And Gross's post here.
Count Om Malik among those who were surprised that Twitter had a profitable year in 2009. Not that he isn't optimistic about the social media wunderkind's current and future value--in fact, he thinks Twitter isn't charging Google and Microsoft (the companies that accounted for Twitter's revenue this year). It's just that he didn't expect the company to be in the black by now. But he does expect Twitter to start spending in three key areas next year:
*New management team including several new “C”-suite executives.*Infrastructure to scale their network to accommodate future growth.*Hiring more engineers and other key people as it tries to build out the service.Which means the so-called profits are going to evaporate and the company will have to dip into its $155 million (VC) cash hoard. Even the soon-to-come commercial accounts might not be enough to make up for all that spending.
Read Twitter May Be Profitable — No, Seriously! here.
In the surprisingly positive (or at least less negative than expected) unemployment numbers last month, the category that showed the highest growth was "temporary workers." As Louis Uchitelle reports in the New York Times, 52,000 temporary workers were hired last month. The hiring of temp workers has, in the past two recessions, signaled a turnaround in unemployment and the economy. Uchitelle:
As demand rose after the last two recessions, in the early 1990s and in 2001, employers moved more quickly. They added temps for only two or three months before stepping up the hiring of permanent workers. Now temp hiring has risen for four months, the economy is growing, and still corporate managers have been reluctant to shift to hiring permanent workers, relying instead on temps and other casual labor easily shed if demand slows again.
So is the fourth quarter surge in temp hiring a sign of a faster, and not-so-jobless recovery? Bill McBride of Calculated Risk isn't so sure, and he points us to an article by the San Francisco Chronicle's Tom Abate, in which one Bureau of Labor Statistics economist suggests that we probably have to wait several months to start to see real job growth:
BLS economist Amar Mann said an analysis by the San Francisco office suggests that employers are getting more sophisticated about using temp hiring as a clutch to downshift into recessions and upshift into recoveries.Mann said temp jobs started down a month after overall employment dropped during the 1990-91 recession. But by the 2001 downturn, employers started cutting temps about five months before they started issuing pink slips to the general workforce.In the current recession, he said, companies began shedding temps 12 months before they started cutting permanent payrolls.A similar pattern prevailed in the two prior recoveries, Mann said. Temp jobs came back at the same time as overall employment after the 1991 recovery. Temporary employment rebounded five months before the general job market turned positive following the 2001 dip.If that pattern holds, it could be next summer before general payrolls start to grow.
Read In economic woes, firms count on temp workers here.
One of the biggest hurdles on the path to economic recovery is the commercial real estate sector. Some economists believe the Fed's decision to keep target interest rates at their near-zero level had a lot to do with fears that this sector is not out of the woods yet. Marketplace's Paddy Hirsch explains why commercial real estate is a key place for the Fed to focus right now:
Watch out below! from Marketplace on Vimeo.
The Bureau of Economic Analysis has released a new report on compensation by county. The figures are for 2008, and they show that American jobs paid, on average, $56,116 that year. That was up 2.6%. 80% of counties across the US saw average compensation per job rise. Total compensation was up 2.3%, and was outpaced by inflation, which rose 3.3%.
The real value in this report is the county-by-county breakdown.
Small counties--those with less than $1 billion in total compensation--saw a 3.1% rise in total compensation. Average annual compensation per job rose 3.7%. Of the 2,265 counties designated "small" by the BEA, Eureka County, NV has the highest average annual compensation at $91,585, and Petroleum County, MT has the lowest at $27, 285. 72.8% of all US counties fit the "small county" designation, and together they represent 8.3 % of total national compensation.
Large counties, on the other hand, represent 5.4% of the total counties in the US, and 65.9% of total compensation. Among these counties, New York County (Manhattan) had the highest average annual compensation (and highest in the nation)--$117,509. El Paso County, TX, had an average annual compensation of $42,730.
Read more from the Bureau of Economic Analysis here.
Over at Small Business Trends, Joel Libava of The Franchise King Blog shares his thoughts on the franchising opportunities to watch in 2010. The big opportunities are tied to demographics. And Libava expects growth in businesses that cater to Boomers' retirement needs:
Millions of baby boomers are retiring every year, and medical advances will allow these folks to live longer, more productive lives. The franchise industry has been starting to capitalize on this trend, with franchise concepts being launched to allow these retired folks to enjoy themselves, longer.
That means franchises like cruise lines, and health clubs that cater to the Boomers.
Libava is also bullish on the health care sector, the "Green" sector, home-based franchises, supplemental education franchises, and some food franchises like Five Guys and several Mexican food franchises. And across all these sectors, he's looking at businesses that have recognized the power of social media to connect effectively with customers. Read The Top Franchise Trends for 2010 here.
Today people around the world are trying to figure out whether the international agreement reached at the Copenhagen Summit on climate change marks a major step forward in global negotiations, a compromise that fails to address the real challenges, or both. James Hansen, director of NASA's Goddard Institute for Space Studies and climatologist at Columbia University, has come to the conclusion that businesses need to be the driving force behind and push to fight climate change:
Watch the full interview with Hansen here.
Menzie Chinn taught Macro at the University of Wisconsin this past semester. It was the first time he taught the course since the Great Recession. The last time he taught the course, the "key topics were inflation, the possibility of stagflation, and the possibility of containing the ongoing housing slowdown." This time: "the two big concerns were (1) dealing with the Taylor rule, and (2) dealing with the banking sector. A less difficult-to-deal issue is the consumption function."
Over the past ten years, the trend in macro textbooks has been to dispense either partly or fully with the IS-LM construct, where the quantity of money enters into the determination of GDP, and substitute in a monetary reaction function, where the arguments are the output and inflation gaps, i.e., the Taylor rule. This was a useful innovation, but was difficult to apply to Japan (as I stressed in my lectures) and as of late 2008 as the zero interest bound became a reality for American policymakers.
And heading into next semester, Chinn is planning on addressing the long term implications of the recession:
One important macro factor involves the implications of the financial sector turmoil for the capital accumulation, and unemployment and the decline in asset values for labor force participation rates. In my seminar on the Great Recession, I discuss the recent OECD Economic Outlook Chapter 4 on this subject.
You can read his full post at Econbrowser. And if you are teaching macro, let us know how you have changed your course since the global economic crisis hit (click on comments).
In an interview with Big Think, venture capitalist Juan Enriquez, managing director of Excel Venture Management, says he would build a statue of Deng Xiaoping, for waking up China's economy from a 500-year slumber. He also stresses a correlation between communities and countries "getting serious" about math/science education and economic improvement (though he isn't exactly clear on what he means when he says groups of people should "get serious"):
You can watch an extended interview with Enriquez here.
Citing some data from a recent Network Solutions Small Business Success Index, John King--a partner at Emergent Research--urges us to recognize the larger economic impact of "Homepreneurs." At Small Business Trends, King writes that the 6.6 million home based businesses account for more than 10% of the nation's private sector workforce. And he predicts that the number will keep climbing.
King lists 10 homepreneur trends for 2010. Like Analytics:
Sophisticated yet easy-to-use tools are allowing home businesses to move beyond “gut level” decision making to data and information-based management. Online marketing tools in particular allow home businesses to develop sophisticated marketing programs once only available to large corporations. Analytical tools, often available through the Cloud, allow home businesses to successfully compete in a growing range of industries.
And The New Local Movement:
New localism is a trend that has been in place for years. Driven by changing demographics, technology, rising energy prices and concerns about the environment, Americans are increasingly focusing on their families, friends and communities. Home businesses tap into this trend in two ways. Home businesses allow greater community focus for the owner, and benefit from market opportunities created by locally-oriented customers.
Read the full list here.
Yesterday the Federal Reserve's Board of Governors decided in their last policy meeting of the year to keep the target range for federal funds--aka, the benchmark interest rate--between 0 and 1/4 percent. Their reasoning, at least publicly, appears to be based on both good news and bad news. The good news: things are picking up (so Fed action, their reasoning seems to be, has been the right action). The bad news: things aren't picking up very fast (so we need more of the same Fed action). From the Fed Board of Governors' release:
Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
Read the Fed's full release here.
Not much of a surprise in the Fed's decision, but how long before interest rates start to climb? Dennis Berman, the Wall Street Journal's money and investing editor, and Dave Callaway, editor-in-chief at MarketWatch, weigh in on the Fed's statement yesterday and the near future of interest rates at the Journal's News Hub:
On the day that America's highest ranking Great Depression scholar is getting all the attention, we're going to let Bruce Bartlett weigh in on what he sees as the parallels between the current fiscal crisis and the Great Depression. Here's Bartlett--former Treasury official in the Bush 41 administration and author of The New American Economy: The Failure of Reaganomics and a New Way Forward--speaking last month as part of a panel at NY Salon:
Bartlett was. joined for that panel discussion by Justin Fox, James Matthews, Alan Miller, and Robert Samuelson. You can watch the full discussion, billed as The Recession, Obama, and the Future: Where to go from here? at Fora.tv.
Princeton economist Alan Blinder shares two reasons to be optimistic about the U.S. economy in an op-ed at the Wall Street Journal today. The first reason is what he calls the "slingshot effect"--the idea that growth in any component of GDP jump-starts growth in the GDP as a whole. Blinder's second reason to be optimistic has to do with the increased productivity in the U.S. during the last two quarters:
While real GDP was falling 3.7%, payroll employment dropped 5%, devastating many American families. But by definition, that discrepancy means that productivity—output per hour of work—rose substantially during the recession, which is pretty unusual.
The last two quarters were even more extreme: Productivity in the nonfarm business sector grew at a shocking 8.1% annual rate. There are two possible explanations. One: The last two quarters were among the most technologically innovative and entrepreneurial in the history of the United States. Two: Fearful businesses pared payrolls to the bone. If the second is closer to the truth, payrolls are extraordinarily lean right now. Which means that firms will need to hire more workers as their sales and production grow. Which means that employment may start growing sooner than the pessimists think.
I have been pointing this out for months, but until the last employment report, it was a hypothesis supported by no evidence. Not anymore. While payrolls continued to decline in November, it was by only a scant 11,000 jobs; and the job counts for September and October were revised upward. The data now show a clear trend that suggests that net job creation may be only a month or two away. We'll see.
Lest you think Blinder has his head in rose colored clouds, we should point out that he does see some serious risks:
The investment slingshot and the fiscal stimulus will both peter out in 2010. Consumer finances and confidence are shaky. Banks are still failing and commercial real estate is a mess. We cannot count on exports to pull us out of this slump. All true. And all reasons not to expect the kind of exuberant boom that typically follows a deep recession—such as the 7.7% growth spurt in the six quarters following the 1981-82 slump.
Read The Case for Optimism on the Economy here.
The Federal Reserve enters its second day of the end-of-year policy meeting today with the news that Chairman Ben Bernanke is Time Magazine's Person of the Year for 2009. Something tells us that Bernanke and the members of the Federal Open Market Committee will be able to keep their minds on the business at hand, as most economists and policy analysts expect the Fed to stick to what Reuters calls the current "super loose monetary policy stance."
But as readers wait for a pronouncement later today, Time has a series of articles online about Bernanke and the Fed that are worth reading (and a photo gallery of Bernanke going back to his childhood as "the nerd from Dillon, South Carolina"). And this is not one of those "Person of the Year" selections based on the winner's sheer publicity. Time's editors are clearly crediting Bernanke with preventing the recession from getting worse. As Richard Stengel, Time's managing editor, writes:
One scholar has written that the Great Depression of the 1930s could have been averted if the Federal Reserve at the time hadnt constricted the money supply, let a third of American banks go under and told Americans to tighten their belts. That scholar, Ben Bernanke, just happened to be chairman of the Federal Reserve when the economy this year appeared to be headed for a repeat performance.
We've rarely had such a perfect revision of the cliché that those who do not learn from history are doomed to repeat it. Bernanke didn't just learn from history; he wrote it himself and was damned if he was going to repeat it. Bernanke decided to do the opposite of what the Fed did back in the '30s: he would loosen the money supply as far as it would go, he would save as many banks as he could, and he wasnt going to hector the American public about pulling up their socks.
Read the full tribute to Bernanke here. And also be sure to read the Q&A between Time editors and Bernanke here.
Top demographer William Frey and the Metropolitan Policy Program at Brookings have a new report out on migration in the U.S., and it contains some troubling findings. The headline: in 2007-2008 the migration rate in the U.S. slowed to its lowest level since World War II. If the strength of the U.S. economy is marked by the remarkable mobility of workers here, then the slowed migration rate during the recession could have lasting repercussions. Unless, that is, the areas that have seen the greatest declines in migration develop "diversified, new economy industries." The key areas, according to Frey, are the same areas that saw the greatest in-migration during the housing boom--mainly Sunbelt cities like Orlando and Phoenix:
Here's a look at how the migration rates changed across the country during the recession of 2007-2008:
Read The Great American Migration Slowdown here.
There was a significant shift in inflation between November, 2008 and November, 2009. The Producer Price Index for Finished Goods rose 1.8% last month--a year ago it dropped 2.7%. Here's the 12-month trend for the seasonally-adjusted PPI from the Bureau of Labor Statistics:
Here are the headlines from the BLS report on Finished Goods:
About three-fourths of the November advance in the finished goods index can be traced to higher prices for energy goods, which jumped 6.9 percent. The indexes for finished goods less foods and energy and for finished consumer foods also contributed to the finished goods increase, both rising 0.5 percent.Finished energy: The index for finished energy goods climbed 6.9 percent in November after advancing 1.6 percent a month earlier. About sixty percent of the broad-based November rise can be attributed to a 14.2-percent surge in gasoline prices. Increases in the indexes for liquefied petroleum gas and home heating oil also were major factors in the finished energy goods advance. Finished core: The index for finished goods less foods and energy moved up 0.5 percent in November, its largest increase since a 0.5-percent gain in October 2008. Leading the November advance, the index for light motor trucks jumped 4.2 percent. Higher cigarette prices also contributed to the rise in the finished core index.Finished foods: The index for finished consumer foods advanced 0.5 percent in November, its second consecutive monthly increase. Over sixty percent of the November rise can be traced to higher prices for fresh and dry vegetables, which climbed 8.7 percent.
The percentage change for the price of Intermediate Goods, seasonally adjusted, was 1.4%--that figure had dropped 4.8% in November of last year. Prices for Crude Goods, seasonally adjusted, rose 5.7%, after dropping 13.1% a year ago. Read the full report here.
When considering how the U.S. stepped into a housing bubble just five years after the tech bubble burst, Peter Thiel, founder of PayPal and president of Clarium Capital Management, says he is tempted to say "America's baby boomers were America's dumbest generation ever." But he stops just short of those fighting-words in this Big Think interview:
Watch the full interview here.