Businomics Blog

What Do Local Business Leaders Need to Know About the National and Global Economy?

Everywhere I go to speak, local business leaders tell me they are not interested in GDP or the European debt crisis—they just want to know about business in their own town. Whether they sell insurance, cars or burgers, they serve local people. They want to know what’s going to happen in their home community.

However, everywhere I go I see communities tied to the national and global economy. It can be Des Moines, Nashville or Phoenix, but the story is the same: local business is driven by the big, huge issues that drive the national and global economy.

Drop me into a community at random and offer me one fact that will help me understand the local economy. In most cases, I’ll want to know how the national economy is going. The recent recession clobbered towns and cities all across America. We did not have a coincidence of thousands of local recession. We had one huge national recession that impacted most places.

However, there are some communities that don’t follow the national business cycle, at least not always. For example, North Dakota had a small dip in the recession, but then increased employment dramatically while the national economy languished. However, don’t think that the state was immune to bigger forces. North Dakota gained from two large trends: increased global energy prices spurred exploration in the western part of the state, and high worldwide grain prices helped the state’s farmers.

The trick to understanding local business is knowing the drivers of the local economy and the risks facing the local economy. Those drivers and risks are usually external.

Every local economy has a concentration. That is, its local industries are more concentrated on a few sectors than is the national economy. Look around at the local businesses, and you may see somewhat more of one type of business. It may be an auto parts factory, a sawmill, or a bank call center. The smaller the city, the more impact a single plant will have on the economy. For a large diversified economy, such as Dallas, there may not be one or two industries on which to focus. For other communities, though, the concentration is obvious: Detroit and cars, Seattle and airplanes, Houston and oil. Smaller, rural communities may see a dependence on agriculture, forestry, or resorts.

The local business owner in a community with a high dependence on one or two sectors should understand what drives those sectors, and what risks the sectors face. The local business manager does not need to be an economist studying the local industries in detail, but he or she should know how national and global forces are impacting the local industries, and should especially understand the risks that the key local industries face. Those external forces will drive local business sales.

There is no community that is isolated from the outside economy, aside from some hunter-gathers in the Amazon rain forest and Andaman Islands. The key to understanding local business is to understand which aspects of the world economy are driving local activity.

Economic Causes of the Decline of Rome

Will Durant sums it up well:

"The economic causes of Rome's decline have already been stated as prerequisite to the understanding of Diocletioan's reforms; they need only a reminding summary here. The precarious dependence upon provincial grains, the collapse of the slave supply and the latifundia; the deterioration of transport and the perils of trade; the loss of provincial markets to provincial competition; the inability of Italian industry to export the equivalent of Italian imports, and the consequent drain of precious metals to the East; the destructive war between rich and poor; the rising cost of armies, doles, public works, an expanding bureaucracy, and a parasitic court; the depreciation of the currency; the discouragement of ability, and the absorption of investment capital, by confiscatory taxation; the emigration of capital and labor, the strait jacket of serfdom placed upon agriculture, and the caste forced upon industry: all these conspired to sap the material bases of Italian life, until at last the power of Rome was a political ghost surviving its economic death."

Durant is an historian, not an economist, and occasionally his lack of theoretical economic framework hampers his analysis. Generally, though, his conclusions are consistent with the evidence and very convincing.

 

After the discussion of economic causes of the decline, he addresses the political:

"The political causes of decay were rooted in one fact--that increasing despotism destroyed the citizen's civic sense and dried up statesmanship at its source. Powerless to express his political will except by violence, the Roman lost interest in government and became absorbed in his business, his amusements, his legion or his individual salvation."

He notes Gibbon's conclusion that the Christian religion was a cause of the decline of Rome, but responds, "... the growth of Christianity was more an effect than a cause of Rome's decay." He elaborates, but I'll spare you the details.

The careful reader of this blog will note the long periods between my comments based on Durant (Economic Lesson from Ancient Rome in video, Italian Financial Crisis: A.D. 33, and What's Wrong with Egypt's Economy) The book is full of great information, but it's not exactly a page-turner. (And don't ask me how Gibbon is coming.)

If you're looking for an easier explanation of Roman history, try the History of Ancient Rome from the Teaching Company. I'm part way through the audio course, and the lecture is lively and engaging. (And the Teaching Company offers old-fashioned customer service. I called about a cracked CD, they answered the phone on the second ring, and they promptly sent a replacement, at not charge.)

Non-tech businesses are at risk from the technology boom

Non-tech businesses are at risk from the technology boom. Do you run a medical clinic, a retail chain, or a manufacturing company? You are at risk of losing important talent—greater risk than may be obvious. However, strategies to retain your geeks can help you survive.

You may say, “It’s not fair. My business is not booming. Why should I have to compete with LinkedIn, Facebook or Apple?”

Okay, it’s not fair. Didn’t your father tell you life isn’t fair? But it’s the reality.

Even non-tech companies risk losing their IT employees.

You may think that your information technology staff lack the cutting edge skills so valued by Silicon Valley start-ups, but don’t be so sure. For example, a hot area right now is creating apps (short for applications) for cell phones. “Gee, my guys don’t know anything about that,” you think. Wait. Are you sure they are not writing cells phone apps in their spare time? Some of the iPhone apps have made their authors millions of dollars.

iPhone apps are written in a version the C programming language, while Android apps are written in Java. Some of your people are programming in these languages right now. If not, they would probably be comfortable coming up to speed on a new programming language.

Once your people know C or Java, they learn about some tools provided for free by Google or Apple to help people write apps. For simple apps, this is all that’s needed. For more complex apps, the programmer may need to write some code for the app to read and write from a database. There’s a good chance that your company’s programmers write that kind of code every day.

There are certainly some extra tricks that the programmer will have to learn to do a great job writing a smart phone app, but these tricks are learnable.

This is just one example. There are many more possibilities, though some of your staff won’t fit into the new world. A person who mastered COBOL 30 years ago and does not want to learn anything new will be a stable, reliable staff member. Your bright, ambitious people, however, have already started wondering what life would be like elsewhere.

The connection between the tech boom and your company applies even if you only have people with fairly basic skills. Consider:

• Joe works at a large medical clinic. He is competent in Java, experienced with complex databases and optimization.  He takes a job at a glamorous high tech company.

• Sally works at a manufacturing company, writing small programs in the C++ language, mostly focused on making database information more useful to managers. After Joe leaves, the medical clinic decides to hire Sally. She isn’t as qualified as Joe, but she can do the job and she’s anxious to leave her current employer.

• Fred works at a retail chain. He has been taught to run queries on the company’s database. He took one programming course at the local junior college. Although he’s not the manufacturing company’s ideal candidate, they hire him to replace Sally. Nobody better qualified was available.

As we economists sometimes say, everything is connected to everything else. The tech boom is trickling down to workers who are only mildly techie.

What’s driving the tech boom, and will it continue?

The most obvious cause of the tech boom is the rise of social media, such as FaceBook and LinkedIn, but they are actually symptoms of a more general cause: near-universal Internet access enables hugely more valuable improvements. Let’s begin with the obvious: young people who describe themselves as not heavily into Facebook are spending about one hour per day on the site (based on my small sample of friends and family under 30).

LinkedIn’s value to business is not so obvious without an example. My sales rep cold-called a woman in Sacramento. I entered the woman’s name into LinkedIn and found that she had a connection to a client of mine in Seattle. I emailed my Seattle guy, and he said that he knew the Sacramento woman pretty well, her boss even better, and he’d be delighted to recommend me to her. That’s the kind of connection we lost when we moved out of small towns.

As we see more and more good software, we demand more and more features. When I converted my paper address book to a database on my PCjr, back in 1985, I was enthralled that I could print labels for Christmas cards. Now I expect Act!, my contact management software, to not only keep names and addresses, but also history of all my contacts, random notes that I’ve chosen to add about the contacts, as well as my calendar. I synchronize my Act! database with my smart phone, so I have phone book and calendar on my cell phone. Now I wonder why my contact database does not synchronize easily with my accounting program.

In short, I want more and more connectivity, more ease of use, more applications that are easily tailored to my needs and wants.

The ability to make better software drives demand for better software. If I see a good feature in one program, then I want that feature in other programs.

The economics of programming further stimulates demand. I want a cool feature, like my calendar should remind to book air travel four weeks before a meeting scheduled more than 150 miles from home. A programmer works on the feature, giving it some flexibility to suit other users with similar but slightly different needs. Once the programming is done, all users can use it without any further resources allocated to the project. Once and done. If I’m the only person who wants a feature, then the feature will be pretty expensive. If, however, my need is typical of thousands of other users, then the cost per user is pretty small.

What does the future hold for tech demand?

Have all the programs been written already? I heard that said by a business professor advising a student not to major in computer science. The professor said that we had payroll programs, accounts receivable programs, etc. We had all business functions covered, so all that programmers would be doing in the future is mundane, boring adjustments to the existing programs. I heard that advice (I was an economics professor overhearing the conversation) back in 1978. Wow! What a spectacularly bad forecast, though one with a certain logic behind it.

I’m still not able to do everything I would like to be able to do on a computer smoothly, effortlessly, and without risk. Certainly there will be further demand for programming skills in the future.

What about the supply of programmers? Here the news is bad. Many students shun classes that require math. A report by Dice, a computer job website, quotes Joe Omansky, who is in the venture capital world, “There’s a definite lack of supply of high-level talent.”

What about talent that not so high level? Professor Tim Lindquist at Arizona State says “I can’t tell you the last time I had a student, even some of our poorer students, tell me they had trouble finding a job…. We have weekly requests, very consistent, looking for people.”

How to retain your IT staff

The first step is to recognize that your programmers, like all other employees, want recognition for their work. If the boss isn’t giving out pats on the back for good work, either re-train the boss or fire him.

The second thing that programmers want is to do good work, to earn those pats on the back. They want good tools and support. There are details of the programmer’s world that won’t make sense to non-tech executives (such as source control and daily builds), but if you ask your staff members what you can do to help them be more productive, they’ll help you learn.

Programmers want challenges. They are generally people who love programming, with relatively few people who hate the work but take the job because it pays better than Starbucks. Throw some hard problems at them, and then celebrate their success.

Help them build their skills. The programming world is not so much about credentials as about ability. Good programmers are looking to upgrade their skills. In fact, some choose jobs not so much on the money they’ll be paid as on the learning environment.

Techies want to work with peers who are technically good and highly motivated. It may be easier to retain two great programmers than to retain just one. Facilitate interaction and cooperation. If one of your key people leaves, be especially careful not to lose that person’s friends.

Pay them a competitive wage. Notice that this one comes last. Adding more pay won’t help you retain workers subjected to a bad boss.  People will tolerate being underpaid when they like their job, their co-workers, the challenges and the environment. However, at some point lower pay starts to rankle and irritate. If the boss is having a bad day just after a programmer looked at the salaries other people are getting, there may be a “take this job and shove it” moment.

Keeping tech salaries competitive can be difficult when the company as a whole is struggling. There may be a pay freeze in place, or at least a very “careful” attitude about raises. In a sector of the economy that is not doing well, caution regarding salaries makes sense. However, it won’t help the company to lose its technology talent. You lose some folks because you wouldn’t pay them ten percent more, and you may learn that their replacements needs 20 percent more. It’s vital that human resource personnel stay in touch with tech salaries, which recently have been rising far faster than most other types of jobs.

The tech boom is real, and its threat to non-tech businesses must be addressed. Like so many business problems, it’s not so much about technology as about old-fashioned management. Good management finds a way to keep talented people. More important, they know when they have to make an extra effort to do so.

Economic Malaise: What Does It Mean for Banks?

The economy is growing very sloooooowly. It’s growing for sure, but at a pace that frustrates pretty much everyone. The Federal Reserve has just announced that it notched down its internal forecasts, which private sector forecasters have also done. What does slower economic growth mean for banks? There are implications for asset quality, loan growth and equity valuations.

Bank Asset Quality and Lower Economic Growth

Banks are gradually working through their problem loans. In some cases they are writing off loans, foreclosing on properties, selling their REOs. In other cases their clients are slowly able to work their way into better condition. All of this would go faster with better economic growth. The workout process will continue even with slower growth, but the timelines will be longer. The destination is the same, but the speed at which we approach the destination has been lowered.

Bank Loan Growth Will Continue To Be Weak

All bankers have been frustrated by the lack of credit-worthy lending opportunities. Many real estate deals do not pencil out with current vacancy rates, rents and construction costs. A stronger economy will lower vacancy and push rents up, with relatively little impact on construction costs. Slower economic growth will limit net absorption of properties, delaying those occupancy and rent increases. Thus, it will be even longer before new projects pencil out.

Commercial and industrial lending will similarly be slow to rebound. The three usual triggers of C&I lending are capital spending, inventory increases and accounts receivable increases.  All three of these result from stronger sales. Slower economic growth will delay companies’ need for external funds.

Bank Profitability Will Not Improve

Banks are already seeing non-interest income slide, and between regulatory change and fee consciousness on the part of customers, no improvement is in sight.

Deposit growth should continue, and may even improve thanks to the lagged effects of the Federal Reserve’s second round of quantitative easing, dubbed QE2. However, extra deposits don’t help if loan demand if absent. For many banks, the yield they earn parking their deposits at the Fed is lower than the FDIC assessment, so additional deposits actually hurt the bank. Combining these factors with flat loan growth and slower workouts, bank earnings are unlikely to improve significantly.

Bank Equity Valuations Have Already Fallen

The stock market is not waiting for bank earnings to hit that lower trajectory. As it has become obvious that earnings growth will not as strong as expected at the beginning of the year, bank stock prices have fallen. The KBW Bank Index has dropped 12 percent since the first of the year.

Bank Risks Are on Both the Upside and the Downside

There is good news possibly coming, but first let’s remember the potential bad news. The European debt crises are not behind us and could yet trigger a recession on the Continent. If that happens, there is a fairly good chance that the United States would also fall into a recession, albeit a short, mild one. Businesses in all industries should do some contingency planning for this possibility.

However, most of the potential domestic bad news seems to have been priced into bank stocks already. Any positive surprise will help valuations. There is good reason to expect that the current economic malaise will prove temporary.  Part of the manufacturing weakness of recent months was driven by lack of parts, thanks to the Japanese earthquake and tsunami, as well as supply constraints from Chinese vendors working at full capacity. Both of these supply issues are being resolved now.

Some consumer spending was limited by lack of availability of cars. That applies not just to imports, but also to Japanese nameplate cars made in America, and even American-branded cars that use foreign components.

The Fed’s QE2 stimulus is nearing completion as of this writing, but there is a significant time lag between cause and effect. Milton Friedman famously said that the time lags in monetary policy are “long and variable.” A rough rule of thumb is to expect 12 months between Fed action and an impact on the economy. That implies a stronger economy in the fourth quarter of this year and the first quarter of 2012.

Bank Management Trumps Small Changes in the Economy

The economy clobbered most banks in the United States, even many that were very well managed. However, aside from huge economic shifts, management is more important than the economy. The ability of a bank to serve its customers, acquire additional customers, and operate efficiently is more important than the change in the economic outlook under discussion. Be aware of the economy, develop contingency plans for alternative economic scenarios, but keep focused on running a great bank.

Businomics Newsletter June 2011

The best economics newsletter has been posted. Here are the news tidbits that subscribers get with the newsletter. To subscribe, hit the "Subscribe" link on the newsletter site:

What’s New, June 2011

“Time to Plan for the Next Recession:” I’m not forecasting a recession, but back in October 2006 I advised business to do some contingency planning for a possible downturn. Caterpillar did just that (even though not one of my clients) and came out of the recession smelling like a rose. Email me for a copy of my paper on how to do contingency planning for a recession.

“The Coming Mini-Boom in Commercial Real Estate” was published in the Center for Real Estate Quarterly, May 2011

Blog Posts of Interest:

Economic Issues for the Telecom Industry: 2011-2012

Manufacturers Are Hiring—When They Can Find Talent

I’ve also been blogging at www.abcInvesting.com:

Setting Goals Will Help Your Retirement

How Much Should You Save?