Businomics Blog

New Economic Forecast for 2010 and 2011

With the GDP revision today I touched up my economic forecast for 2010 and 2011.  Not much has changed, but it's worth emphasizing the uncertainty that inventories play in the outlook.  First, here's the picture of the new forecast:

The dark blue columns are historic data points.  The light blue is my forecast.  The red line is the average performance of the economy since World War II coming out of recessions.  Note that this charts shows growth rates, so that the first quarter of 2011 is a quarter of growth, though not very strong.

The change in inventories is the greatest uncertainty regarding the timing of the recovery.  Right now inventories are well below trend:

 
I think we'll reverse that downtick in the circle.  Note that the downtick looks small when we chart all the time since 1947, but it had a HUGE impact on GDP.  The question is whether we'll reverse it quickly or gradually.  I looked at the impact on GDP of a rapid adjustment, and then a very gradual adjustment:

That red line is obviously the rapid readjustment.  When the inventory rebound is over, production is cut back and GDP actually declines.  Sounds absurd?  It is, but I think it has happened in the past.  The green line is just too stable to be believable.

Two key points about the inventory swing:

1. When it occurs, the economy gets a shot in the arm
2. When it's over, there's a contractionary force on the economy.

Business Planning for the Economy:  If you are planning over a four-quarter time period, it shouldn't make too big a difference.  However, if you are focusing on a shorter time horizon, there's a lot of uncertainty.

As I was snooping through some dusty books for insight, I came across one from the late Otto Eckstein, Harvard Professor and founder of Data Resources, Inc.  He noted that companies are uncertain about future sales, and thus about their desired inventories.  In a strong economy, they err on the upside, because they are most worried about lost sales, and a little extra inventory won't hang around too long.  In a weak economy, they err on the downside, because cash is precious, and extra inventories may stick to the company's ribs.  We have clearly seen companies erring on the downside.  Once their attitudes change, look for a surge of erring on the upside.

The Rap on John Maynard Keynes, Animal Spirits, and the Stimulus Package

The News Hour has outdone itself with a fascinating interview, punctuated by a rap video.  Primary subject of the interview is Lord Robert Skidelsky of the University of Warwick, a biographer of John Maynard Keynes.  Also interviewed is stimulus skeptic Russ Roberts of George Mason University.  Off and on we hear a very clever rap song about Keynesian economics. The segment really gets to the heart of Keynes and his critics.

Economic Recovery Planning: Issues for Contractors

I was quoted extensively in an article for Construction Dimensions, the magazine for the wall and ceiling industry.  This article applies my thinking about business planning for the recovery to the construction industry.

Where's the Stimulus? Federal Spending Data Don't Show Much

Everyone knows that we have this huge fiscal stimulus.  I went looking for it.  I didn't look everywhere, though.  We've had some tax cuts and increases in transfer payments.  The raw data on these subjects reflect not only policy, but the circumstances of citizens.  Taxable income goes down in a recession, and unemployment goes up, so tax revenue and transfer payments adjust automatically.

We can look at federal expenditures, which include garden variety government plus public works spending.  Here's the data, expressed as seasonally adjusted percent changes at annual rates:

Sorry, but I don't see the stimulus as large.  The last two quarterly figures were 6.1 percent and 6.9 percent, which are certainly larger than long-run GDP growth, so I'd call that stimulus.  However, I had expected to see a large surge.  Perhaps this reflects that the Obama stimulus is phased in, with more coming.  Or perhaps the stimulus just isn't as big as the headlines make it out to be.

(I also don't understand why the path of government spending is so jerky.  Does it really jump around that much, or is that a relic of archaic data collection procedures?  If you know the answer, please say so in the comments.)

Two Approaches to Employee Productivity

This week I read about two very distinct approaches to employee productivity.  First, from an article in the Wall Street Journal:

The office cubicle is shrinking, along with workers' sense of privacy.

Many employers are trimming the space allotted for each worker. The trend has accelerated during the recession as employers seek to cut costs and boost productivity.

...

He says new workstations designed by HOK average 48 square feet, down from 64 square feet about five years ago. Partitions between cubicles also are shrinking, to 4 feet high or less, from 5 feet high.

Now, here's another approach, from the About Us page of Fog Creek Software:

To recruit the best programmers, we’ve invested in the nicest work environment we can get.  In 2003, we moved into a new office that was custom-designed by a top architect to be the ideal programming workspace, with private offices, windows everywhere, a lounge with a big plasma TV, and every feature a programmer could ever want. We even have twenty power outlets at each desk, at desk height, four with UPS power. That’s how fanatical we are about catering to programmers. Oh, and really comfortable chairs. We never hesitate to buy the tools we need to get our work done (standard issue: two large LCD monitors, one 30”, the other 21”).

This is a little apples-to-oranges, with Fog Creek employing programmers and the general office worker significantly lower paid.  But look at the office workers.  Average total compensation runs $21.99 an hour nationally, or $45,739 per year.  What does the old cubicle space, 64 square feet, cost?  It depends a lot on location, but the median office rental rate is in the neighborhood of $25 per square foot.  So the old, "big" cube costs $1,600 a year.    Going to the new, small cube saves $400 on rent, plus some more for hallways and furniture.  That is about one percent of the labor cost.

Is there a chance that the office environment can affect employee productivity by more than one percent?  If so, then slow down your cube downsizing.  Instead, ask yourself, what environment would lead to the greatest productivity of your workers?  Whatever that environment might be, the office space cost is trivial compared to the labor cost.

Why do otherwise smart business leaders make stupid decisions?  They are probably not measuring productivity, so they don't know how badly they are messing up.  Also, the managers rewarded for cutting occupancy expense may not be the managers responsible for getting the work done.