The global economy is a rather complicated creature. Or complex. Instead of trying to use science to simplify it, why not embrace the complexity? That is what Brian Arthur has been trying to get economists to do for years now. He offers up a brief explanation of the field of Complexity Economics in this World Economic Forum video:
Want to dive in deeper? Here is a paper Arthur put out at the Santa Fe Institute that is 13 years old, but as relevant as ever.
In case you wonder why we call the recession of 2008 the Great Recession, Dallas Fed senior economist Thomas Siems reminds us of how distinct it is. From Siems's new Financial Insights essay:
Compared with recessions since the early 1950s and examining
real GDP, the 1991 recession was fairly typical, whereas the 2001 downturn was
arguably not a recession at all. But the 2008 recession hit new depths and
lasted nearly twice as long as an average economic contraction. Chart 1 also
shows that the recovery following the 2008 recession has been longer and slower
than usual. From the trough, it has taken nine quarters for economic output to
return to the prerecession level. Typically, recessions return to their
prerecession peak after just two quarters; the longest previous post-WWII
recoveries, following the 1974-75 and 1991 recessions, took three quarters to
return to peak output.
Moreover, the pace of growth following the 2008 recession
has been slower than any recovery since the Great Depression. The annualized
rate of growth over the nine quarters since the economy hit bottom in June 2009
has been 2.4 percent. For post-WWII recoveries, annualized growth averaged 5.2
percent over the subsequent nine quarters; for the three previous recoveries,
annualized growth averaged 4.0 percent over the same period.
Siems goes on to show how the pace of recovery, especially as it pertains to jobs, also stands out historically--again, not in a good way. Read Branding the Great Recession here.
In her commencement address at Harvard's Kennedy School of Government, IMF Managing Director Christine Lagarde spoke about the state of modern business, the prescience of John F. Kennedy, and she shared her own personal journey to one of the foremost economic policy leaders in the world. But she mainly implored the newly minted graduates to consider themselves global citizens and global leaders. And she outlined the extent to which the world has become interconnected over the graduates' lifetimes:
People are meeting each other in the global marketplace of goods and ideas more than at any point in history.
Since 1980, the volume of world trade has quintupled. People are flowing more freely across borders. About 900 million tourists traveled between countries in 2010, up from a mere 25 million in 1950. The world has over 200 million migrant workers, up from 78 million in 1965.
Highly-skilled professionals—like yourselves—are even more mobile. Foreigners make up between a fifth and a quarter of the professional workforce in countries like Australia, Canada, and Switzerland.
Look at modern business. There is no greater symbol of American industrial pride than the roaring automobile industry in Detroit. And in 2010, for the first time in its history, General Motors sold more cars in China than at home.
Global companies like Nokia, Nestle and Philips earn only 1-2 percent of total sales from their home countries. Indian information technology companies regularly generate up to 95 percent of their sales in Europe and the United States. One world, open for business.
Here is Lagarde's full address (her speech starts at 6:00):
Home prices reached new post-crisis lows in the first quarter of 2012, according to the latest S&P/Case-Shiller Home Price Indices release. The national composite index dropped 2% over the first three months of the year, and was 1.9% below where it was at the end of the first quarter of 2011. The monthly changes were not so striking. In fact, the 10-city and 20-city indices stayed at roughly the same level they were at the end of February (the 10-city index did drop 0.1%). Five metro areas saw prices hit new post-crisis lows: Atlanta, Chicago, Las Vegas, New York and Portland. Here's a look at the long term trend:
From the release:
"While there has been improvement in some regions,
housing prices have
not turned," says David M. Blitzer, Chairman of the Index Committee at
S&P Indices. "This month's report saw all three compositesand five cities
hit new lows. However, with last month's
report nine cities hit new lows. Further, about half as many cities, seven,
experienced falling prices this month compared to 16 last time.
"The National Composite fell by 2.0% in the first quarter
alone, and is down 35.1% from its 2ndquarter 2006 peak, in addition to
recording a new record low. The 10- and
20-City Composite mimic these results; also down about 35% from their relative
peaks and hit new lows.
"There are some better numbers: Only three cities - Atlanta,
Chicago and Detroit - saw annual rates of change worsen in March. The other 17
cities and both composites saw improvement in this statistic, even though most
are still showing a negative trend.
Moreover, there are now seven cities - Charlotte, Dallas, Denver,
Detroit, Miami, Minneapolis and Phoenix - where the annual rates of change are
positive. This is what we need for a
sustained recovery; monthly increases coupled with improving annual rates of
change. Once we see this on a broader
level we will be able to say the market has turned around.
"The regions showed mixed results for March. Twelve of the cities saw average home prices
rise in March over February, seven saw prices fall and one - Las Vegas
- was flat. The Composites were
largely unchanged with the 10-City down only 0.1% and the 20-City
unchanged. After close to six
consecutive months of price declines across most cities, this is relatively
good news. We just need to see it happen
in more of the cities and for many months in a row. Since we are entering a seasonal buying
period, it becomes very important to look at both monthly and annual rates of
change in home prices in order to understand the broader trend going forward."
Read the full release here.
We are looking forward to reading Tom Doctoroff's new book, What Chinese Want, an exploration of what drives the growing (though already enormous) consumer class in China. The book is , of course, written from a Western perspective. But not that of just any Westerner. Doctoroff is China CEO for the marketing giant J. Walter Thompson. The Atlantic has an excerpt from the book, in which Doctoroff writes of the similarities and differences between U.S. and Chinese consumers. While Chinese consumers may covet the same brands as American consumers, the impulse to purchase may be very different:
Material similarities between Chinese and Americans mask fundamentally different emotional impulses, which are rooted in radically different social structures. China's admiration of the American can-do spirit springs, ironically, from its Confucian heritage. The Chinese value system is a quixotic combination of regimentation and ambition. The clan, not the individual, is considered the basic building block of productivity, and human rights are either a theoretical abstraction or, even in good times, luxuries to be sacrificed to pragmatism. But Confucianism has always espoused social mobility. By mastering convention, Chinese have been able to, at least hypothetically, climb the hierarchy, the shape and structure of which are socially mandated.
Confucian egos are substantial, so American-style self-expression is all the rage. Brands that celebrate "me" -- from Nike's "Just Do It" spirit to Apple's "Think Different" rallying cry -- are embraced, particularly by the young urban elite. American universities have huge appeal. T-shirts sporting the latest hip hop slang are all the rage, and pop cultural divas who bow to no one -- Lady Gaga, Beyonce, Madonna, and, in perpetuity, Michael Jackson -- are revered. Sports figures such as NBA stars Kobe Bryant and LeBron James are idolized infinitely more than their Chinese brethren. Indeed, Yao Ming, still revered for his on-court exploits, is now referred to as "Boss Yao," a respectful but somewhat emotionally disengaged acknowledgment that the star-***-businessman has been folded back into the system.
Read Buying a Piece of America: Why Chinese Shoppers Love U.S. Brands here.
With uncertainty on the continent, European companies are looking westward for financial support. The Wall Street Journal's Dana Cimilluca reports that European businesses are turning to U.S. banks for loans--leveraged loans in particular. Cimilluca discusses this "unprecedented" rate of U.S. banks loaning to Europe with Nick Hastings:
The Heldrich Center for Workforce Development at Rutgers University has a terrific report out on Americans' views on work: what they want from a job and workplace. The report offers a great deal of insight into the attitudes of Millenials and new/recent graduates and how much their desire to make an impact through work affects their job decisions. The report points to several key generational differences in desired job characteristics, but workers of all ages agree on some core needs:
With regard to basic values of what makes a job good, there
is substantial agreement among workers, regardless of generation. In an
essential finding, it is comfort and fit that make a job most rewarding in
2012; finding a comfortable balance between work life and non-work life is now
a societal, consensual value. Working in a positive or supportive
organizational culture is a close twin. These two items are followed very
closely by the basic economic elements of salary and job security. The last
item in this defining cluster is having interesting work to do. These "core"
five are the only items classified as essential by at least one-third of
Next, as was true of university students, come items that
workers would like to have, but their absence might not be enough of a problem
to prevent them from taking a job. Items nestled here include having autonomy
and independence, the ability to grow and learn new skills, a company that will
value their opinion, and working for an organization with similar values to
their own. Quite close are the items are "the potential to contribute to
society," and "a job that will make the world a better place." Of lesser importance
are opportunities for rapid advancement, working for a prestigious company,
working for company that practices social/environmental responsibility, and
working for a company that is innovative.
Read the full report here.
(H/t Catharine Rampall)
For those of us waiting for small businesses to make hires and help cut into unemployment numbers, Scott Shane reminds us of some basic economic rules. Small businesses will hire when small businesses are bringing in more revenue. And that means they need to sell more. Shane shares this illustration of the "share of Small Businesses with rising revenue and employment" at Small Business Trends:
Read Small Businesses Hire When Their Revenues Rise here.
David Kelley is one of the most creative of the wise men in American business. His work at IDEO showed the value in developing a design process that was based on considering the user, the consumer, at the center of each stage of product development. In the process, he put a premium on creative solutions to problems.
In this TedTalk, Kelley makes the case for developing creative people and creative processes in the workplace:
At McKinsey Quarterly, Yuval Atsmon, Michael Kloss, and Sven Smit lay out the case for multinational companies to "start thinking more like emerging-market companies." There is significant growth potential, they point out, in the emerging middle classes in the BRIC nations and elsewhere. At the moment, that is allowing companies based in emerging markets like Brazil and China to grow at twice the rate of competitors based in developed economies. And they are better equipped to serve rising consumer classes in emerging economies beyond their own, as Atsmon, Kloss, and Smit write:
Emerging-market companies generally serve the needs of fast-growing emerging middle classes around the world with lower-cost products. Developed-economy companies tend to rely more on brand recognition while targeting higher-margin segments, which are relatively smaller and thus less likely to move the needle on the companies’ overall growth rates. We found that across a number of product segments—such as soft drinks, telecoms services, and mobile phones—emerging-market companies’ price points were 10 to 60 percent below those of developed-market counterparts. Even in business segments such as construction equipment, emerging-market players offered more products at lower prices.
Consistent with that growth model has been the focus of many emerging-market players on R&D investments aimed at lower-cost products that fit developing-market conditions (and sometimes fuel “reverse innovation,” which can make a dent in developed markets). That’s still the case, and in aggregate, emerging-market companies still file significantly fewer patents than their developed-market counterparts. But they are starting to catch up (Exhibit 3), and a few innovation leaders are emerging, such as Chinese manufacturer Huawei, which was among the world’s top five companies in terms of international patents filed from 2008 to 2010. Huawei had 51,000 R&D employees in 2010, representing a stunning 46 percent of its total headcount, and placed them in 20 research institutes in countries such as Germany, India, Russia, Sweden, and the United States. Efforts such as these could boost the intensity of global competition.
Before you make the mistake we initially did, and assume that the faster growth rate of companies headquartered in emerging in economies was due to those companies being smaller and having more room to grow, read Parsing the growth advantage of emerging-market companies here.
Whatever the results of this week's historic elections in Egypt, economic growth will be key to that nation's new democracy to work. Masood Ahmed, Director, Middle East and Central Asia Department at the IMF, explains how recent political changes are affecting Egypt's economy, and what needs to happen in order for Egyptians to get jobs and see real improvement in their lives:
We also recommend Why the Arab World Needs an Economic Spring, by the IMF's Nemat Shafik.
There is little doubt at this point that an extended recession in Europe would impair economic growth in the U.S., but Silvio Contessi and Li Li of the Federal Reserve Bank of St. Louis argue that the impact of European struggles on U.S. exports may not be as bad as some predict. Yes, the EU is a key purchaser of U.S. goods. But other nations are becoming more critical to U.S. export growth:
Li and Contessi:
The EU is the largest individual importer of U.S. goods and services, but only about 26 percent of total U.S. exports in 2011 were to the EU. Total U.S. exports represent a 13 percent share of U.S. GDP, but exports to the EU represented only 3.49 percent of that total and 0.4 percent of U.S. GDP growth in 2011. What’s more, none of the euro area countries that are currently burdened with sovereign debt crises are major importers of U.S. goods and services. Thus, a potential slowdown in U.S. exports to these countries would have little impact overall. So, which trading partners are fueling the strong U.S. export growth? Luckily, trade openness between the United States and emerging countries is paying off: Fast-growing emerging markets (e.g., China and Brazil) are buying more and more U.S. goods and services. The volume of U.S. exports of goods and services to China was $130 billion in 2011; its share of total U.S. exports, 7.32 percent, was four times larger than in 2000. Notably, the United States runs a trade surplus in services that helps counterbalance the trade deficit in goods.
Read Get by with a Little Help from My…Other Exports here.
With all the concerns about a Greek exit from the euro zone, INSEAD's Antonio Fatas warns us not to follow the conventional wisdom when it comes to labor costs and Southern Europs. Yes, Italy, Spain, and Greece have high labor costs. The costs look very high compared to Germany, but not so much when compared to other countries in Europe like France and the Netherlands. So, Fatas argues, it is Germany that is the outlier. Fatas:
It is correct that Greece, Spain and Ireland saw higher increases in unit labor costs during the 10 years of the Euro. But the difference is small compared to France or the Netherlands. For example, comparing Spain and the Netherlands the difference is about 5 percentage points over a decade. This is not a large number given how volatile exchange rates are.
Estimates of unit labor costs are very imprecise and maybe they are not capturing the true loss in competitiveness of these economies. So why don’t we look at the outcome? What about the current account balance? Countries like Spain or Greece run large current account deficits during these years. Isn’t this a proof that they had lost competitiveness? Possibly, but there are other potential explanations for a current account deficit, such as an increase in spending fueled by a real estate bubble. It is not clear how to tell the two stories apart but here is a piece of evidence that I find useful. What happened to exports in Spain during all these years? If the story of lack of competitiveness is true one might expect that exports did not behave well during this decade as unit labor costs grew too fast. But the data reveals the opposite pattern. Compared to France or the UK (just to pick an outsider), Spanish exports grew faster during the last 10 years.
Read Competitiveness and the European Crisis here.
(H/t Mark Thoma)
Confidence in the U.S. economy is growing. But declining confidence in Europe remains a drag on overall global growth, according to the Organisation for Economic Cooperation and Development's latest economic outlook. Here is a snapshot of the OECD's latest growth projections for the U.S. compared to Europe and Japan.
Trade appears to be a major factor in the global economy picking up steam. The concern is that if Europe slides too far it will set back all the momentum in global trade and growth will slow down again. Read the full OECD report here. And watch this summary:
Tis the season of graduations, and Robert Shiller has some thoughts to share with newly minted graduates looking to work in the field of finance. One key theme: Shiller wants new entrants into the fields of banking, economics, and finance to consider themselves as fiscal stewards and not simply people out to make money for money's sake. From Project Syndicate:
Those of you deciding to pursue careers as economists and finance scholars need to develop a better understanding of asset bubbles – and better ways to communicate this understanding to the finance profession and to the public. As much as Wall Street had a hand in the current crisis, it began as a broadly held belief that housing prices could not fall – a belief that fueled a full-blown social contagion. Learning how to spot such bubbles and deal with them before they infect entire economies will be a major challenge for the next generation of finance scholars.
Equipped with sophisticated financial ideas ranging from the capital asset pricing model to intricate options-pricing formulas, you are certainly and justifiably interested in building materially rewarding careers. There is no shame in this, and your financial success will reflect to a large degree your effectiveness in producing strong results for the firms that employ you. But, however imperceptibly, the rewards for success on Wall Street, and in finance more generally, are changing, just as the definition of finance must change if is to reclaim its stature in society and the trust of citizens and leaders.
Finance, at its best, does not merely manage risk, but also acts as the steward of society’s assets and an advocate of its deepest goals. Beyond compensation, the next generation of finance professionals will be paid its truest rewards in the satisfaction that comes with the gains made in democratizing finance – extending its benefits into corners of society where they are most needed. This is a new challenge for a new generation, and will require all of the imagination and skill that you can bring to bear.
Read the full speech here.
A new Wall Street Journal survey of executive pay shows that CEO pay for the last year was tied to company performance much more than in recent year. Scott Thurm warns us to be careful not to draw too many conclusions for this, as some CEOs are still seeing pay increases even when their companies do not improve in performance. But the difference from 2010, when there was no apparent correlation between CEO pay and performance, to 2011. Read Thurm's article here (registration required), and watch Thurm discuss the findings below:
Social enterprise may be growing in the U.S. and globally, but the future of responsible businesses depends on their proving themselves as sustainable. FedEx and Good.is put together a graphic to help explain what it takes for social enterprise to succeed:
The week begins with a lot of dire talk of the future of Greece, the EU, and the Euro. CNN International's Richard Quest likens a Greek exit from the euro to the Lehman Brothers collapse of 2008, only worse. The Guardian's Larry Elliott echoes that sentiment. Elliott writes today that, despite assurances to the contrary, Europe's leaders are not equipped to protect the euro. And he argues that "monetary union" is an outdated model.
Despite this monetary chaos, there are still some in
Brussels or Frankfurt who argue that the euro has been a success and will go
from strength to strength. They sound suspiciously like the members of the
politburo who in the 1980s said the Soviet Union was working and would last for
ever. The undoubted political commitment to the euro means that there are now
calls for a fast-track approach to full political union, but this means
repeating the top-down approach used for monetary union and - at a time when
the markets are talking about a Greek exit within weeks or months - would take
years to finesse.
Instead, the realistic options for the euro are
that it breaks up or staggers on in a zombie-like condition, with low growth,
high unemployment, growing public disenchantment and widely divergent views in
Europe's capitals about what needs to be done. As a company, the euro would
have gone bust by now. It had a duff business plan, which has been poorly
executed. The experiment survived in the benign conditions of the early 2000s
but only the core business, Germany, has been able to cope with the much
tougher climate of the past five years. There is boardroom squabbling, the
workforce is in open revolt and there are no new product lines.
The euro, in short, is ripe for what Joseph
Schumpeter called creative destruction. Capitalism, according to Schumpeter,
was the story of constant, normally gut-wrenching change, in which innovation
put established firms out of business and made whole sectors obsolete. Anybody
working in the music industry, publishing or newspapers in the past decade
understands what Schumpeter was talking about.
Read The euro is ripe for creative destruction here.
There has been a great deal of excitement, and spending, in Silicon Valley in advance of Facebook launching its IPO tomorrow. NPR's Steve Henn and Lam Thuy Vo remind us that Facebook has some work to do to live up to its valuation. They have to grow their revenue, and that means a big increase in users and revenue per user. From Planet Money:
Lam Thu Vo provides more detail here.
The customer is always right. We get that. But it appears Starbucks has found a way to make the customer right where the company wants them, when the company wants them. In this Harvard Business Review video, Anne Morriss of the Concire Leadership Institute explains how Starbucks has trained its customers, almost as if they were employees.
Philip Strahan--professor of finance at Boston College's Carroll School of Management, and a visiting scholar at the Federal Reserve Bank of San Francisco--has an Economic Letter on liquidity risks at banks during and following the 2007-2008 financial crisis. Strahan highlights the importance of traditional deposits to mitigating risk:
Banks finance their balance sheets with more than just deposits and equity capital. Other liabilities include uninsured wholesale deposits, repurchase agreements, and other short-term unsecured debt instruments. These sources became scarce during the crisis. For example, repurchase agreements, known as repos, were often used to finance risky assets such as private-label mortgage-backed securities. Gorton and Metrick (2011) show that, in the middle of 2007, mortgage-backed securities could be almost completely financed with short-term borrowed funds in the repo market. However, by the fourth quarter of 2008, only about 55% of each dollar invested in such securities could be financed this way. Banks that used repos to finance purchases of mortgage-backed securities faced an unpleasant choice. They could sell their securities holdings into a falling market and take a big loss. Or they could find new, and presumably expensive, sources of credit.
In the case of nonbank brokerage firms, the collapse of the repo market was a calamity. However, it was less of a disaster for commercial banks because they could use increases in deposits to bridge the financing gap.
Figure 1 shows how these sources of liquidity risk affected overall bank credit during the crisis. Off-balance-sheet loan commitments rose steadily from 1990 to 2007. Overall bank credit production, including both on- and off-balance-sheet credit commitments, started to fall in the middle of 2007. The decline accelerated sharply in the last quarter of 2008. By contrast, loans held on bank balance sheets continued to rise until the end of 2008. That rise in on-balance-sheet loans during the crisis was due to borrowers drawing down preexisting credit lines. Banks began cutting back new lending in the middle of 2007. This illustrates how bank obligations to existing borrowers crowded out new borrowers.
Read Liquidity Risk and Credit in the Financial Crisis here.
JP Morgan executives are meeting with shareholders this morning and will try to explain how the bank lost $2 billion through risky derivative trades. It is easy to get overwhelmed by the size of the loss, and by the complexity of the trades that caused the loss. Paddy Hirsch takes to the Marketplace Whiteboard to help make sense of these credit default swaps:
Farhad Manjoo is worried that the tech industry has gone Hollywood. Everyone is looking for the next Facebook or iPod, but they seem less willing to wait for the next-big-thing to develop before they lavish hype on it. Writing at Fast Company, Manjoo cautions us against putting stock in a model that doesn't give products time to develop before grading them as successes or failures:
As digital culture has become mainstream
culture--pushed along by, yes, Apple and its now masterfully calibrated launch
events--the iPod's slow start would make it a dud today, the
TouchPad of music players (remember HP's ill-fated tablet? Me neither). Tech
has now become about hits, not unlike Hollywood movies. And the numbers for
what defines a smash are only growing: In 2010, Microsoft's Kinect
motion-gaming add-on sold 8 million units in 60 days, earning it a
Guinness world record. A year later, Apple sold 33 million iPhone 4S's in its
first 78 days. The Instagram photo-sharing app attracted 7 million users in its first nine months; this
spring, the Draw Something app wooed 35 million people in its first six weeks,
prompting Zynga to buy it for a reported $180 million. On the flip side, slow starters
are being kicked to the curb. The recommendation app Oink, backed by a Silicon
Valley Who's Who, didn't pop and shut down after a few months, the John
Carter of the App Store.
These megahits present a danger for the tech
business. The iPod's early years suggest that the industry will lose something
in the rush to kill off products that don't catch fire immediately.
"There's a subsection of people in the Valley who think the only way to be
successful is to create a viral overnight hit," says Dave Morin, CEO of
the social-networking app Path, which attracted nearly a million registered
users in its first year. That's a more modest start than, say, Pinterest, but
Morin points out that Facebook, Flickr, LinkedIn, and Twitter all took years to
gain millions of users.
He's right: New technology isn't like a movie, a
finished product that you either like or you don't. High-quality tech products
take time--after they're released. It's relatively easy to get a lot of people
to check out your new thing: see MySpace, Chatroulette, or any number of Zynga
games. But it takes more determined work, more trial and error, to keep them
using your product. Look at all of Facebook's redesigns, missteps, and
reorganizations on the path to winning big.
Read Why Tech's Hunger For Overnight Hits Is Bad For Business here.
One way to look at the evolution of pop music is as the expansion of a market. While it is easy to recognize the expansionary period in which we are currently living, it might be surprising to learn that the spreading of music into wider and wider markets goes back a couple of centuries. Jose Bowen, Dean of SMU's Meadows School of the Arts, is a musician and teacher who studies the impact of technology on music. And he looks to the early Nineteenth Century as the beginning of the music industry as we have come to know it. In this TedX Talk, Bowen gives us a lot to consider about music as a business, and how it came to be that way:
The IMF's latest economic outlook for Sub-Saharan Africa is relatively strong. IMF economists expect African nations to continue to outpace global economic growth. The region's 5% growth rate for 2011 was down a bit from the 6.5% growth before 2008, but still quite strong.
Most countries participated in this expansion, although
drought slowed growth in many West Africa Economic and Monetary Union (WAEMU)
member countries and post-election civil strife saw GDP decline by close to 5
percent in Côte d'Ivoire. Supportive macroeconomic policies played an important
role in sustaining growth in many countries across the region.
Rising global food and fuel prices contributed to inflationary
pressures in many countries, although food prices across the region were
significantly affected by local supply conditions. Large and sustained jumps in
inflation were mostly concentrated in eastern Africa-eventually inducing sharp monetary
tightening in several affected countries that is expected to cut inflation over
the course of 2012.
For 2012, regional growth is expected to rise slightly,
helped by new resource production in several countries and by recovery from
drought and civil conflict in the WAEMU countries; adjusting for these one-off
factors, the pace of growth would be slightly lower than in 2011. For the
region's two largest economies, growth in South Africa is set to slow (to below
3 percent), held back by weaker exports to advanced country markets, and to
remain broadly unchanged in Nigeria (around 7 percent), notwithstanding some
fiscal consolidation. For most countries in the region, growth rates will
either be unchanged or slightly weaker than in 2011.
Here is a look at the growth trend for the region's different economies:
Read the full report here.