Wednesday, September 09, 2009

The Evolution of the US Economy 1980-2010

Back in late July, I wrote this post contrasting the economic punditry and outlooks of several well-known observers, i.e., Alan Blinder, Dick Hoey and Mortimer Zuckerman. My own conclusion was expressed as follows,

"Who's right?

Personally, I'd put my money on Zuckerman. Leaving aside that Dick Hoey was a fixed income manager back in the day, and his BONY/Mellon/Dreyfus bio doesn't exactly laud him as an economic Nobel Laureate, I don't think Hoey is sufficiently observant of the real differences in the effects of the recent recession on the US labor force from those of recessions prior to 1992."

I continued with this observation,

"That so-called 'jobless recovery' may well have marked a turning point for the US economy which has not yet been captured in various models and adequately observed by pundits-cum-economists like Hoey. Or even Alan Blinder.

Prior to the 1991-92 recession and recovery, you are looking back to 1982-83, the early Reagan years, now very nearly thirty years ago. For perspective, was the 1960 economy different from that of 1930? Very much so. And the 1980 economy was so radically different from that of 1950, thanks to electronics and technological advances in communications as to make forecasting the former with models of the latter seem laughable.

I suspect that's what is happening now. Those analysts and economists harking back to the early 1980s and using conventional models with estimates of consumer spending and labor growth have missed some important transformations in the US economy of 2009."

These passages were what I was referring to in this post of last Friday, when I wrote,

"I personally believe, as I've written in a prior post, that many economists are using inappropriate models and assumptions from over 25 years ago. Models and assumptions which are tied to a different type of economy and workforce than we now have. As such, I don't think they are correctly accounting for today's business IT allowing for previously-unimagined control of overheads and inventories.

If economic recovery is based upon expectations of inventory rebuilds, I just think that's overly optimistic for the next few quarters."

Apparently I thought about this topic a great deal more than wrote about it. Thus, this post.

Though not an economist, as a trained marketing professional, I have been involved with quantitative behavioral modeling and analysis for decades. And, thanks to my business degrees, I've had more economics than most business students, in addition to which, I continually stay abreast of economic thought and opinion in the major business media.

Currently, I believe that what macroeconomic modelling still exists, after the approach lost so much credibility in its early applications forty years ago, remains out of step with our modern US economy.

For starters, the SIC codes were, and are, the underpinnings of most sector-based forecasting. These are now hopelessly outdated.

Employment statistics are warped, thanks to the rise of subchapter-S and LLC entities. This has also served to obscure incomes, as business income for many entrepreneurs now appears on 1040s, rather than corporate returns.

Finally, the entire nature of business operations, being now so heavily dependent upon, and benefiting from computer-based management tools, has changed from 30 years ago.

As an observer who understands economics and business, I find myself wondering just how we can accept economists' references to the jobless recovery from the 1991-92 recession, without explanations as to how this phenomenon has been incorporated into current models.

It's important to know whether economists consider the 1991-92 recession an aberration, or a new paradigm.

A reader commented on my post of last Friday, taking a shorter term, more narrow view of individual recent IT spending by companies. What I meant by my comments in that post was that business has been improving operational information availability for nearly 30 years, with the arrival of the personal computer in 1980. When I was with Andersen Consulting in the mid-1990s, client/server projects were booming, and a sort of internal internet, LotusNotes, was being applied at individual firms.

It's safe to say that business communications and information movement has changed more dramatically and functionally from 1980-2010 than from 1930-1960, or from 1960-1990.

Specifically, the recent period has smoothed supply chain management between companies, so that the holy grail of goods-producing companies, inventory management that is as synchronous with retail sales as possible, has come a lot closer to reality.

Now add to this the rise of outsourcing, both onshore and offshore, and you have corporate employment becoming less sensitive to production volumes. Employment at suppliers becomes more volatile, but those jobs tend to be lower-compensated than the ones they replaced at the larger corporations.

Now add to this mix the public consuming business and markets information via free cable networks, such as CNBC or CNN. Today's consumer can view the reaction of institutional investment managers to some obscure report, previously unknown to consumers, such as durable goods orders, or employment reports, in real time.

Thus, consumer spending and confidence are able to be affected nearly immediately by financial market reactions, which affect the wealth of consumers via asset prices in their various investment accounts.

We probably have a tighter-, faster-linked series of economic phenomena which affect each other as inputs and outputs of information, goods and money flow, than ever before. Certainly far more than thirty years ago.

Is it any wonder that you see employment levels less responsive to economic recoveries in recent decades? Or spending and saving rates affected by generally-available unemployment information?

It is simply stunning to me to read yesterday's Wall Street Journal piece wherein a number of financial pundits were opining on how fast and robust the deep "V-shaped" recovery is going to be.

How do they account for the lack of re-employment of so many recently-unemployed? The defaulting and delinquent home loans? The coming commercial mortgage loan delinquencies and defaults?

Yes, any, or even several of these, in moderation, can be accommodated by a vibrant, recovering economy. But this last recession was, is, different. The scale and breadth of its effects have left conventional financing sources weak and unable to profitably lend at current rates.

There is so much about this recent economic recession, in concert with a financial collapse, that is different from anything the US has experienced in the past 30 years that it's simply difficult for me to trust pundits who rely on conventional econometric models to forecast that the 'usual' recovery has begun, and will surprise us all.

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