The numbers for the third quarter look nice, or what passes for nice these days. GDP rose smartly, pretty much confirming the general view that the recession is over (more on that below).
The details surprised me a bit, even though the total growth was in the ballpark of my forecast (4.2 percent, compared to 3.5 percent growth actual). Consumer spending was stronger than I had expected, even with Cash for Clunkers. That may not be sustained. However, inventories contracted much more than I had expected. We are definitely going to get an inventory turnaround soon, and that will add quite a bit of strength to the economy.
I'll update my forecast and share it with you tomorrow.
Now about the end of the recession. We economists define the recession as the period when the economy is going downhill. That period is over. However, we have not recovered all the ground that we lost. Think of it this way: we fell down a 10-foot hole, we hit bottom and took one step upward. We are out of recession, but we're still nine feet down a ten-foot hole.
The Economist magazine has a nice video graphic about international migration and remittances. One interesting observation: the countries that people are leaving in the greatest numbers are not the poorest countries. It turns out that moving from one country to another is expensive. So as a country's economy improves, out-migration increases (more people can afford to move). This is beneficial to the home country, as remittances flow in, and also to the destination country, which now has the benefit of less expensive labor. The Economist is silent, however, on the economic impact on the home country of bright, ambitious people leaving.
Betty tried to place an order with her long-standing vendor, but got bad news: the vendor could not deliver within her timeline. She had a firm commitment to her customers, so she had to scramble to find another supplier. (Let's pause to praise that first vendor for honesty. Too many companies would take the order and then deliver late. By refusing to accept a commitment he cannot honor, he has raised his credibility as someone who will honor the commitments he does make.)
So Betty (not her real name, but definitely a real person) got on the phone and got -- sticker shock! Her preferred vendor had been giving her a very good deal, probably out of loyalty for long-term business, and also because the vendor was trying to stay busy in a tough market. Unless Betty gets lucky, she'll either break her budget or use a less desirable component. Ouch.
Here are the lessons from Betty's experience:
Know if you are getting a good deal from your current vendors. Do a little shopping around, even if you are very loyal.
If you are getting a good deal, reserve time on the vendor's production schedule as early as you possibly can, to ensure that you are able to continue using him.
Bid your jobs using cost estimates at the market price, not at the good deal you are getting. If you need to go to another vendor, you'll want money in the budget to pay his higher price.
If you are getting a good deal, be very, very good to that vendor. Pay very promptly. Express your appreciation for his product or service. Spend some time getting to know him.
Be very careful about being locked into one vendor. I like to throw all of my printing business to one guy, so that he treats us as a good, loyal customer. But I know that there are a dozen good alternatives in my city. If I only knew of one printer, I'd work hard to get to know another one.
As the economic recovery continues, getting good performance from your vendors will become an increasing challenge. Get started right now.
My blog post with an explanation of securitization has been very popular for over a year now. The website ProPublica has the same concept with a different slant (hat tip to the Big Picture). Their chart includes notes on why the senior CMO holders have different interests regarding foreclosure or modification than do the junior holders. Here's the chart:
I try not rant in this blog. I really try. But here's the Wall Street Journal headline: "Housing Starts Rise, but Remain Subdued." On the other hand, CNBC says, "
Producer Prices, Housing Starts Post Surprise Drops."
Huh? Did housing starts rise, or did they drop? Turns out, they effectively did neither. Oh, there was a tiny change from last month to this month, but really, really tiny, so much that they were effectively flat. Look at the chart and see if you don't agree.
The moral of the story: the newspaper headlines tell you approximately nothing.
"Technical debt" does NOT mean, "Technically, we're in debt." Technical debt is what happens when a business puts up an application that isn't perfect, then has to clean up bugs and scale issues in the future. I heard the phrase for the first time in a great discussion on TWiST (This Week in Startups) in which Mike Jones and Peter Hirschberg were interviewed. (Mike, the new COO of MySpace, is an adviser to my startup, abcInvesting.com, and an incredibly insightful guy.)
Technical debt most often arises in the high-tech new product arena. Somebody gets an idea for Twitter, and throws it up not having a clue whether it will appeal to 1 thousand users or 1 million users. Oh, turns out it's 10 million--so far. With that many users, there are scaling issues that weren't solved in the first version, because that first version was about getting something up and seeing if it attracted users. Now there's a technical debt to be paid to bring the system up to current traffic levels.
Large corporations also incur technical debt, but they may be less aware of it. They carefully plan a new feature, which may be relatively mundane, as an electric company enabling its customers to pay bills online. The systems are built at scale and with substantial usability tests ahead of time. The debt arises because it's impossible to anticipate everything. Here's a person who wants to pay a portion of his bill from his bank account and a portion from his credit card, and he's already on our bad-debt list because he walked out of his last apartment leaving an unpaid bill, but he's eligible for a government subsidy. Does the system work for him? I don't know if that particular set of circumstances is a problem, but I've been on plenty of websites that just couldn't accommodate what I wanted to do. That's technical debt.
What do you do if your business has technical debt? Fortunately, you don't have to show it on your balance sheet, but you should recognize it. If your startup is growing rapidly, you almost certainly should budget for major technical costs to fix all the bugs that a large user base identifies. If your corporation is budgeting for a major systems convesion, include some contingency costs that may be very far into the future.
Although technology is great, and the cost of technology is falling, don't underestimate just how much it will cost you to get everything running right. You don't have to pay the bills today, but understand you've got an invoice headed your way.
Before getting to the outlook, note some of the dynamics. The mildest cycle was for agricultural raw materials, followed by beverages (coffee, tea) and food. These are generally materials with rapid supply response to rising price. You want more coffee? Plant more bushes. Metals has a a much longer response time, as you prospect for ore, build or expand mines, increase refining capacity, and perhaps wait for ore-carrying ships to be built. Oil has the longest response time.
The outlook? We've had quite a bounceback, and stronger global economic activity should be positive for prices. But don't forget that we'll continue to have new production capacity coming on line for energy and metals. Those long time lags of supply response mean that we'll have greater supply in 2010 because of the high prices in 2007. As a result, I forecast only moderate growth of commodity prices.
Free Monthly Newsletter The Businomics(TM) Newsletter keeps you up to date in a simple graphical format. We'll email you two or three pages of charts once a month, with Bill's comments. Skim the newsletter for two minutes and you're up to date. View a sample and then sign up.