William Dudley, President of the Federal Bank of New York, spoke earlier today at New York University's Stern School of Business, and he gave a measured, somewhat positive prognosis of the US economy. While he said that there are mixed signals coming from the employment data, there is some good news in the data on consumer spending, productivity, and consumer and business confidence.
On the activity side, a wide range of indicators show a broadening and strengthening of demand and production. For example, on the demand side, real personal consumption expenditures rose at a 4.1 percent annual rate during the fourth quarter. This compares with only a 2.2 percent annual rate during the first three quarters of 2010.
Orders and production are following suit. For example, the Institute of
Supply Management index of new orders for manufacturers climbed to 67.8
in January, the highest level since January of 2004.
The revival in activity, in turn, has been accompanied by improving
consumer and business confidence. For example, the University of
Michigan consumer sentiment index rose to 77.5 in February, up from 68.9
six months earlier.
Indeed, the 2.8 percent annualized growth rate of real gross domestic
product (GDP) in the fourth quarter may understate the economy's forward
momentum. That is because real GDP growth in the quarter was held back
by a sharp slowing in the pace of inventory accumulation. The revival in
demand, production and confidence strongly suggests that we may be much
closer to establishing a virtuous circle in which rising demand
generates more rapid income and employment growth, which in turn
bolsters confidence and leads to further increases in spending. The only
major missing piece of the puzzle is the absence of strong payroll
employment growth. We will need to see sustained strong employment
growth in order to be certain that this virtuous circle has become
So, there's the good news. But Dudley was careful to caution against premature optimism. And he while he outlined the dangers of low-interest rates, and the chance they might "foster a buildup of financial excesses or bubbles that might pose a medium-term risk to both full employment and price stability," he also explained that the Fed does have tools to avert crisis:
To summarize the main points, we have a considerable amount of slack, little evidence of discontinuous speed limit effects, and little inflation pass-through from commodities into core inflation when inflation expectations are well-anchored, which is currently the case. This suggests that the biggest risk in terms of higher underlying inflation over the next year or two is that inflation expectations could become unanchored. This might occur, for example, if there were a loss of confidence in the ability and/or willingness of the Federal Reserve to tighten monetary policy in a timely way in order to keep inflation in check.In this regard, the proof of the pudding will be in our actions—talk is cheap. What is key—that the appropriate policy steps are taken in a timely manner.
Read Dudley's Prospects for the Economy and Monetary Policy here.
It is significantly harder to start a business today than it was five years ago. And while, as an economic indicator, that is bad news generally, it may not be an entirely bad result of the Global Economic Crisis and the recession. With fewer available resources, an entrepreneur today has to be more sure of his or her concept before launch. And one might say that an entrepreneur has to earn the right to start a business.
Edward Hess, professor of Business Administration at the University of Virginia's Darden School of Business, is not discouraged. He says there are plenty of opportunities out there for entrepreneurs who are ready to map out a successful strategy. He just believes that the approach should be "conservative, cautious." And he offers some valuable advice on how to get started:
This is an excerpt from a longer interview at Big Think. Watch the full interview here.
The ongoing credit crunch and the Great Recession should have reminded small business owners of the importance of cash. And more specifically, the need to have adequate cash on hand. At Open Forum, Judith Aquino offers up five important pieces of advice for making sure businesses have a well managed cash flow system:
Offer “carrots” for early or pre-payments.
Give bad customers the boot
Tighten credit requirements.
Review your expenses.
Read details for each of these tips here.
We have access to more experts on a daily basis than ever before. Thanks to the proliferation of online information portals, interview programs on television and radio, the common citizen no longer need be limited by the advice of the experts to whom they have a direct connection. English economist Noreena Hertz argues that this may be a problem. She says we have become addicted to experts, and we've shut off the independent decision making parts of our brains. The result, she argues, is that "paradigms take too long to shift." Financial crises are only one of the negative outcomes.
The majority of internet users in the US will be on Facebook soon. eMarketer is projecting that use of Facebook will increase by over 13% this year, bringing the total users to 132.5 million. That represents 57% of internet users, according to eMarketer. And even more opportunities for marketers to connect with valuable consumers through social media. But with the competition also likely to want to take advantage of Facebook's growing community, it is more important than ever to have a consistent approach.
Sean Howard shares a list of five Facebook tips for marketers and brand managers at Marketing Profs:
Tip #1: Use visibly defined rules.
Tip #2: Open up your Wall!
Tip #3: If you moderate, tell the group.Tip #4: Be upfront about deletions.and Tip #5: Obey your own rules.
Read Howard's explanations for these tips here.
The Economists Intelligence Unit's annual report on the relative liveability of cities is out, and Vancouver remains at the top of the list. Here's the top ten:
From the report summary:
Vancouver (Canada) remains at the top of the ranking, a position that can only have been cemented by the successful hosting of the 2010 winter Olympics and Paralympics, which provided a boost to the infrastructure and culture and environment categories. Only petty crime presents any difficulties for Vancouver, although this would be a typical shortfall of any such location. Violence is reportedly on an upward trend in the city, but the figures need to be put in context. A murder rate of 2.6 per 100,000 population recorded in 2009 is certainly above the Canadian average of 1.8. However, it remains on a par with the rate in innocuous locations such as New Zealand and Finland, and amounts to one-half of the US average of 5.4 murders, with New York reporting a rate of 6.3 homicides per 100,000 (both figures are for 2008).
These advantages are shared with a number of other cities in the survey, and the variation between surveys is minimal. Just 2.3 percentage points separate the top ten cities, where the only change in the current survey is a slightly lower score for Vienna. As a result, Melbourne rises to become the second highest ranked city.
This list tends to draw some heated conversations, especially in the US where the top ranking city, Pittsburgh, comes in at 29th overall. But it is important to note that what the list is designed to do is help companies better understand living conditions (including costs) for their workers in various locations.
The concept of liveability is simple: it assesses which locations around the world provide the best or the worst living conditions. Assessing liveability has a broad range of uses, from benchmarking perceptions of development levels to assigning a hardship allowance as part of expatriate relocation packages. The Economist Intelligence Unit’s liveability rating quantifies the challenges that might be presented to an individual’s lifestyle in any given location, and allows for direct comparison between locations.
You can access a summary of the report here.
The Carnegie Council's Global Ethics Corner raises an interesting (and very, very important) question: "Could the slow job growth rate of the 'Great Recession' be attributed to new technologies replacing human labor and intelligence?"
We can't help but notice that this video was released shortly after IBM's Watson demonstrated the progress in artificial intelligence with a win over top ranked humans on Jeopardy.
Entrepreneurs with the desire to run a small business have two choices: start their own company or buy and run a company. Among the advantages of taking over an existing business: you don't have to birth the company, you just have to make it grow up. But Entrepreneur's Jennifer Wang warns that you better buy a company that is healthy. Citing data from a Northeastern University study, Wang places the failure rate for purchasers hoping to turn around a struggling startup at 85%. Wang shares some valuable advice from a business matchmaker:
Buying a profitable business, on the other hand, is another matter entirely. You've got cash flow from Day One, an established reputation and, if you're lucky, a seller who will help finance the deal, says Ted Leverette, president of "Partner" On-Call, a franchise based in North Palm Beach, Fla., that matches buyers with sellers of small and midsize businesses.Leverette has several baseline requirements for a business purchase. First, no matter how glowing the sales talk, don't buy anything that hasn't been profitable for the last five years--and that includes the Great Recession. "Absolutely don't buy anything that has an annual pretax net cash flow under $100,000," he says. "That's the smallest you want to go."
Read the full article here.
With the rise of the virtual office and with more companies' offices being spread across town, the country, and even the globe, executives are finding it harder to have personal connections with their employees. But Ram Charan argues that the "personal touch" is made even more important by the changing workplace. Charan, Senior Fellow at Wharton and co-author of The Leadership Pipeline: How to Build the Leadership-Powered Company, says that the new workplace places a premium on communication skills--and no, he doesn't think company-wide emails do the trick:
Watch the full interview with Charan at Big Think, here.
In his latest column for CBS Moneywatch, Mark Thoma asks How long will it be until the Fed raises interest rates? And he shares some helpful recent analysis from Glenn Rudebusch, senior vice president and associate director of research at the Federal Reserve Bank of San Francisco. Rudebusch has a collection of graphs that hit on seemingly all of the key variables when it comes to monetary policy decisions.
From the positive trends...
...to the not so positive.
Rudebusch argues that the unemployment rate is key, and that the slow rate of recovery for jobs trumps overall economic recovery when it comes to any move on the target interest rates:
Given the extended nature of the expected recovery to levels of unemployment and inflation consistent with the Fed's mandate for full employment and price stability, the policy rule also suggests little need to raise the funds rate target anytime soon. Of course, this projection of future policy will change as economic forecasts are revised. Such conditionality is consistent with the FOMC's forward-looking policy guidance from its January 26 meeting, that "economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period." In the simple rule, the length of the "extended period" depends on the expected paths for unemployment and core inflation. Therefore, the downward revision over the past few months to the projected path of the unemployment rate translates into a higher path for the funds rate and an earlier liftoff from a zero funds rate. However, according to the simple policy rule of thumb, the positive unemployment news since last October appears to have shortened the duration of the "extended period" of near-zero interest rates by only about three months. Substantial monetary policy accommodation appears warranted for some time.
Read all of Rudebusch's analysis here.
Case Western Reserve's Scott Shane is trying to figure out whether small business owners are finding it easier to get credit now than during the recession. And, as he shares at Small Business Trends, he's found conflicting data. On the one hand, there is the trend of more loan officers reporting looser credit standards, as Shane shows here:
And yet, according to a couple of key surveys, small business owners themselves say they have not seen any loosening of standards. Still, Shane finds some cause for optimism amid all the confusion:
Maybe I should look at the bright side. The lack of agreement that small business access to financing got worse in the past year means that the situation is improving. Before the recovery started everyone agreed that small business access to credit had deteriorated.
Read the full post here.
Umair Haque believes capitalism is "at a crossroads." The Global Economic Crisis revealed structural weaknesses and the failure of contemporary capitalism to create net jobs is just one sign, according to Haque, that we must reconsider the nature of capitalism today. To that end he released a new book, The New Capitalist Manifesto: Building a Disruptively Better Business, at the start of the year. He discusses the book with his editor, Harvard Business Review's Sarah Green:
To the victors go the spoils. In the world of high tech business, Amazon has been one of the victors. And the spoils have been smaller companies. In the past year, Amazon has acquired at least six companies, Julianne Pepitone reports for CNN Money. Pepitone tells te story of three startups that became part of Amazon: Exchange.com, AmieStreet.com, and Zappos. Each acquisition had a different ending. Exchange.com was brought inside Amazon headquarters. Zappos has so far continued to operate largely as it always has. And ArnieStreet.com was basically swallowed up after being acquired last year:
In September, immediately after the acquisition, Amazon announced it was shutting down AmieStreet.com and redirecting its users to Amazon.com. Users' downloaded songs were ported over to Amazon, but that was the end of the demand-based pricing -- and the AmieStreet.com business model."There was no understanding or guarantee as far as a go-forward plan," Roman says. "We didn't know what they were going to do, and we didn't have anything to do with the day-to-day anymore."Amie Street, Inc., still exists and Amazon remains an investor and board member of the company. Without its namesake site, Amie Street now focuses on Songza, a music-streaming service the company acquired in 2008.
Read Why I sold to Amazon: 3 startups' stories here.
We have spent a lot of virtual ink on examining the utility of Twitter as a business tool--especially for small business and marketers. But it is impossible not to lose sight of the adoption of Twitter as an overall tool for communication, especially with events across North Africa and the Middle East, where several key social media sites have been vital to pro-democracy protesters' ability to organize mass demonstrations. In an interview with Terry Gross of WHYY and NPR's Fresh Air, Twitter co-founder Biz Stone shares his amazement at how important and widespread the microblogging service has become. He addresses events in Egypt, as well as rumors of Twitter's multi-billion-dollar evaluation and possible purchasers:
At Econbrowser, James Hamilton takes a crack at evaluating the effectiveness of the Fed's latest quantitative easing tactics (and includes some helpful graphs for anyone trying to teach the subject):
The graph below provides our calculations of the average maturity of publicly-held debt both before and after the Fed's operations, updated to include the first 3 months of QE2. The blue line is the average maturity (in weeks) of debt issued by the U.S. Treasury. The green line is the average maturity of publicly held debt, that is, the green line represents the results of subtracting off the Fed's holdings of Treasury debt. Historically the green line was above the blue. This is because the Fed preferred to buy the shorter-term debt, as a result of which the average maturity of the remaining debt held by the public (green) was bigger than that for the debt as originally issued (blue). However, since the start of 2008, that relation has been reversed-- the Fed has been buying a disproportionate share of the longer-maturity debt, and thus has been a factor in reducing the average maturity.But also since 2008, the Treasury has been issuing more long-term debt faster than the Fed has been buying it, so that the green line continues to rise over time. What we find in the latest data is that this trend has continued over the last 3 months, even with QE2. The graphs below highlight details of the last year. The top panel is the average maturity of publicly-held Treasury debt inclusive of all Fed operations, that is, it corresponds to the green line in the preceding figure. Although the average maturity in the second and third months of QE2 (December and January) fell a little below that for the first month (November), the average maturity in every one of these three months was bigger than in every month of the two years prior to QE2. The second panel shows the fraction of publicly-held Treasury debt (again, after netting out the Fed's operations) that is of 10 years or longer maturity. This has gone on to make new highs in both December and January.
Our conclusion is that if QE2 made a positive contribution to the improving economic indicators since the program began, it could not have been through the mechanism of shortening the maturity of publicly-held Treasury debt.
There are, to be sure, other places where the Fed's QE policies could have made some sort of impact, and Hamilton notes this in his post. Read Progress report on QE2 here.
Susan Payton, founder and president of Egg Marketing and Public Relations, says startups are like
babies. They require a lot of nurturing and you best know what you are in
for before deciding to have one. Writing at Small Business Trends, Payton
lays out four reasons to not launch a startup:
1. Money Burns Like Kindling
2. The Learning Curve Is Tough
3. You May Kill Your Co-Founder
4. The Competition Beats You to It
Daunting enough? For those who recognize the dangers but still feel
they have what it takes to weather the early days of a startup, Payton does
provide some helpful tips. For example:
How to Keep Your Friend and Make Money: At the outset of your startup,
determine what each of you will do. What are each of your strengths? What will
you each be responsible for? It’s a good idea if one of you takes the CEO role
and can make executive business decisions. Make it clear who has what
authority. Stay in constant contact, and don’t let aggression build up. Go out
for beers together every once in a while.
Read the full post here.
Harvard economist Edward Glaeser has a new book out, Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier and Happier. In the book, he challenges some of our conventional wisdom about cities. Or at least it challenges the political and media narratives about cities Healthier? Greener? Glaeser made the case for cities on The Daily Show. Note how he argues that cities are the "economic heartland America" (at 4:15):
Hat tip to Greg Mankiw.
While the early adopters of tablets seem to want advertisers to be creative and utilize tools like 360-degree photos and interactivity. But smartphone users prefer ads that are more simple, according to eMarketer. Here is the breakdown of preferred ad types for smartphone users:
The Nielsen Company found in August 2010 that 40% of iPhone users were more likely to look at ads with an interesting video, significantly higher than the 15% in the Pontiflex survey. But Nielsen also found iPad owners were 9 percentage points more likely to say the same, and about 20 percentage points more likely to enjoy ads with interactive features or click on ads with multimedia events.Smartphone users also like ads to keep things simple by leaving them within the app where the ad appeared. Pontiflex found 71% of all adult app users preferred this behavior, vs. ads that pulled them out to a web browser.
Meanwhile, iPad users love video marketing. But we'll be curious to find out whether that love will last or if it is because the tablet experience is still relatively new and fresh. Read The Differences Between Mobile and Tablet Advertising here.
As Facebook grows up, or simply just grows, its Silicon Valley neighbors are starting to wonder just how friendly they should be with the social media giant. On the one hand, Facebook provides companies with a path to users and data. On the other, as Facebook grows, the company is pulling advertising dollars and talent away from older companies like Yahoo, according to Wall Street Journal reporter Geoffrey Fowler:
Read Fowler's article, Facebook's Web of Frenemies, here.
Take a look at this graph charting professional estimates of the natural rate of unemployment since 1996:
This is from the latest Economic Letter of the Federal Reserve Bank of San Francisco, in which Justin Weidner and John C. Williams analyze what the "new normal" unemployment rate is. With some economists arguing that the high rate of unemployment can be at least partially explained by a shifting normal rate of joblessness, this work seems timely.
Economists have cited a number of possible reasons why the natural rate of unemployment may have risen in recent years. In early 2009, eligibility for unemployment benefits was extended from 26 weeks to as much as 99 weeks. Extended benefits reduce the hardship on unemployed workers and their families during this severe downturn. However, they may also reduce the incentive of the unemployed to seek and accept less desirable jobs, which in turn may raise the measured unemployment rate. Indeed, some European countries may have higher natural rates of unemployment because they offer more generous unemployment benefits than the United States.A second explanation is that the degree of mismatch between job seekers and potential employers has increased. The construction, finance, and real estate sectors have shrunk after the bursting of the housing bubble and the subsequent financial crisis. The skills of workers who used to be employed in those sectors may not be easily transferable to growing sectors such as education and health care (see Rissman 2009 and Barnichon et al. 2010). Similarly, the housing bust has left millions of homeowners underwater on their mortgages, which locks them into their homes and may make it more difficult for them to move to higher growth areas. These sectoral and geographic mismatches between workers and job openings may be making it harder for employers to fill vacancies.A third explanation involves the sizable increase in long-term unemployment over the past few years. Workers out of jobs for extended periods may experience higher rates of unemployment owing to deterioration of skills and weakening labor market attachment. The previously discussed mismatch between skills and available jobs is likely to intensify this problem.
Read What Is the New Normal Unemployment Rate? here.
Most readers associate Michael Lewis with his best-selling books Liar's Poker, The Big Short, Moneyball, and The Blind Side. But he has written some amazing pieces on economies in danger. His long form Vanity Fair article on Iceland's collapse two years ago remains one of the best pieces of journalism on the global economic crisis. Now he's written another compelling Vanity Fair article--this time the subject is Ireland, Here's a very brief excerpt:
Ireland’s financial disaster shared some things with Iceland’s. It was created by the sort of men who ignore their wives’ suggestions that maybe they should stop and ask for directions, for instance. But while Icelandic males used foreign money to conquer foreign places—trophy companies in Britain, chunks of Scandinavia—the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was to buy Ireland. From one another. An Irish economist named Morgan Kelly, whose estimates of Irish bank losses have been the most prescient, made a back-of-the-envelope calculation that puts the losses of all Irish banks at roughly 106 billion euros. (Think $10 trillion.) At the rate money currently flows into the Irish treasury, Irish bank losses alone would absorb every penny of Irish taxes for at least the next three years.In recognition of the spectacular losses, the entire Irish economy has almost dutifully collapsed. When you fly into Dublin you are traveling, for the first time in 15 years, against the traffic. The Irish are once again leaving Ireland, along with hordes of migrant workers. In late 2006, the unemployment rate stood at a bit more than 4 percent; now it’s 14 percent and climbing toward rates not experienced since the mid-1980s. Just a few years ago, Ireland was able to borrow money more cheaply than Germany; now, if it can borrow at all, it will be charged interest rates nearly 6 percent higher than Germany, another echo of a distant past. The Irish budget deficit—which three years ago was a surplus—is now 32 percent of its G.D.P., the highest by far in the history of the Eurozone. One credit-analysis firm has judged Ireland the third-most-likely country to default. Not quite as risky for the global investor as Venezuela, but riskier than Iraq. Distinctly Third World, in any case.
Read When Irish Eyes Are Crying here.
Given Lewis's valuable skill at making sense of complicated financial stories, we were surprised to learn that he has very little interest in money. At least that's what he claims in an interview with Planet Money. Take a listen:
In handling the Troubled Assets Relief Program, the Treasury Department established a new position--the Special Master for Executive Compensation. The Special Master was tasked with setting executive pay for some of the companies that received bailout funds. Kenneth Feinberg, appointed Special Master in June 2009, was to limit the pay for executives at the big recipients of taxpayer aid--AIG, Bank of America, Chrysler, Chrysler Financial, Citigroup, General Motors, and GMAC/Ally Financial--and in doing so, some hoped, the Special Master would help bring down salaries for executives of Wall Street firms.
In their February report, members of the Congressional Oversight Panel examine the effectiveness of the Special Master's actions. And they find that he "achieved some significant changes." According to the report, compensation for executives at the companies the Special Master had explicit say over dropped 55%. But the COP members seem disappointed that these changes have not yet trickled out to other firms. Here is COP chair Ted Kaufman introducing the report:
Read the February report here.
In case there was any doubt small businesses have suffered from a lack of access to credit during the recession, CNN Money's Catherine Clifford shares some data from the Small Business Administration.
The total value of outstanding loans to small businesses plunged by $43 billion, or 6.2%, between June 2009 and June 2010, according to a report released this week by the Small Business Administration. That's a drop of $59 billion, or 8.3%, from June 2008.
Measuring lending to small businesses is like trying to nail Jell-O to a wall, because every institution and government agency has its own definition of what constitutes a small business. For this week's study, the SBA drew on data reported to the Federal Deposit Insurance Corp., which tracks lending by the banks it regulates. Both the SBA and FDIC assume that all commercial loans of $1 million or less went to a small business.
Yoram Bauman remains the favorite stand-up economist for readers of The Watch. To be honest, we don't know who is competition is.
Bauman has updated his classic sendup of Greg Mankiw's Principles of Economics. So here is his 10th anniversary edition:
Here's a new chart from Jeff Rice, research analyst at Marketing Sherpa. It shows how much businesses plan to change their email marketing budgets for 2011:
Email marketing spending might very well be an interesting, and under-appreciated economic indicator. If so, Rice's findings suggest some increased optimism about business and consumer spending this year.
Read Rice's analysis here.