China Manufacturing Expands a Fourth Month
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China’s economy may keep improving in the third and fourth quarters, enabling the nation to meet its 8 percent economic growth target for this year, central bank Governor Zhou Xiaochuan said this week.
Given the still quite uncertain global economy this is a pretty strong performance. And it is one of the positive indications that we may be recovering from the credit crisis. There continues to be fairly good news in many areas. However we are far from certain to make a decently global recovery even in 2010.
Related: Manufacturing Contracting Globally – Rodgers on the US and Chinese Economies – Manufacturing Cars in the USA – Leading Manufacturing Countries in 2007 – USA Unemployment Rate Jumps to 9.4% – The Economy is in Serious Trouble
Surging U.S. Savings Rate Reduces Dependence on China
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Nouriel Roubini, an economics professor at New York University and chairman of RGE Monitor, forecasts that the savings rate will ultimately reach 10 percent to 11 percent. What’s critical, he said in a Bloomberg Television interview on June 24, is how quickly it increases.
A rapid rise in the next year because of a collapse in consumption would push the economy, already in its deepest contraction in 50 years, further into recession, he said. If it occurs over a few years, the economy may grow.
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From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, government figures show. Americans got out of the habit in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and then soaring home values, Gramley said.
That process has now gone into reverse. U.S. household wealth fell by $1.3 trillion in the first quarter of this year, with net worth for households and nonprofit groups reaching the lowest level since 2004, according to a Fed report. Wealth plunged by a record $4.9 trillion in the last quarter of 2008.
Edmund Phelps, winner of the Nobel Prize in economics in 2006 and a professor at Columbia University in New York, said it may take as long as 15 years for households to rebuild what they lost in the recession.
As I have been saying the living beyond our means must stop. Those that think health of an economy is only the GDP forget that if the GDP is high due to spending tomorrows earnings today that is not healthy. Roubini correctly indicates the speed at which savings increases could easily determine the time we crawl out of the recession. I hope the savings rate does increase to over 10 percent.
If we do that over 3 years that would be wonderful. But it is more important we save more. If that means a longer recession to pay off the excessive spending over the last few decades so be it. And it is going to take a lot longer than a few years to pay off those debts. It is just how quickly we really start to make a dent in paying them off that is in question now (or whether we continue to live beyond our means, which I think it still very possible – and unhealthy).
Related: Will Americans Actually Save and Worsen the Recession? – Can I Afford That? – $2,540,000,000,000 in USA Consumer Debt (April 2008) – Paying for Over-spending
The IMF 2009 country report on Canada discusses there current economic condition. As part of that they explore the success Canada had in regulating their banking sector (which stands in stark contract to the catastrophic regulatory failures in the USA and Europe). And also provide ample evidence of that wise regulation did indeed prevent the financial crisis.
- Sound supervision and regulation: The 2008 FSSA Update found that the regulatory and supervisory framework meets best practice in many dimensions, including with regard to
the revised Basel Core Principles for banking supervision. - Stringent capital requirements: Solvency standards apply to banks’ consolidated commercial and securities operations. Tier 1 capital generally significantly exceeds the required 7 percent target (which in turn exceeds the Basel Accord minimum of 4 percent). The leverage ratio is limited to 5 percent of total capital.
- Low risk tolerance and conservative balance sheet structures: Banks have a profitable and stable domestic retail market, and (like their customers) exhibit low risk tolerance. Banks had smaller exposures to “toxic” structured assets and relied less on volatile wholesale funding than many international peers.
- Conservative residential mortgage markets: Only 5 percent of mortgages are non- prime and only 25 percent are securitized (compared with 25 percent and 60 percent, respectively, in the United States). Almost half of residential loans are guaranteed, while the remaining have a loan-to-value ratio (LTV) below 80 percent—mortgages with LTV above this threshold must be insured for the full loan amount (rather than the portion above 80 percent LTV, as in the United States). Also mortgage interest is nondeductible, encouraging borrowers to repay quickly.
- Regulation reviews: To keep pace with financial innovation, federal authorities review financial sector legislation every five years (Ontario has a similar process for securities market legislation).
- Effective coordination between supervisory agencies: Officials meet regularly in the context of the Financial Institutions Supervisory Committee (FISC) and other fora to discuss issues and exchange information on financial stability matters.
- Proactive response to financial strains: The authorities have expanded liquidity facilities, provided liability guarantees, and purchased mortgage-backed securities. In addition, several provinces now provide unlimited deposit insurance for provincially-regulated credit unions. The 2009 Budget further expands support to credit markets, while providing authority for public capital injections and other transactions to support financial stability.
Related: Failure to Regulate Financial Markets Leads to Predictable Consequences – Sound Canadian Banking System – 2nd Largest Bank Failure in USA History – Easiest Countries for Doing Business 2008
Kiva is one of my favorite charities, as I have mentioned several times. They provide a platform that connects those with funds to lend to entrepreneurs. This week they added the ability to lend money to entrepreneurs in the USA. And they also added short webcasts to some of the entrepreneur profiles.
One of my goals for this blog is to increase the number of readers participating in Kiva – see current Curious Cat Kivans. I have also created a curious cat lending team on Kiva. If you lend through Kiva, add a comment with a link to your Kiva page and I will add you to our list of Curious Cat Kivans.
Related: My 100th Entrepreneur Loan Through Kiva – Using Capitalism to Make a Better World
The economic clout of the USA has been huge since the end of World War II. The relative position has been decreasing recently with the rise of not only Europe and Japan but Korea, China, India, Brazil and many more. This means the risks to the USA of failing to deal with perennial problems (the most costly but not most effective health care system, spending beyond our means, weak diplomacy, excessive legal costs, poor management practices…) is higher today than it has been.
Fareed Zakaria’s Post American World is a good explanation of some of the current global economic forces in play. He comes to the same conclusion I do that the USA is still in the strongest position today. But the world is changing and the relative position of the United States is declining. The new world requires working with others and the USA needs to adjust to this reality. Too many think the USA can continue to act as though the rest of the world must comply with the wishes of the USA.
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The litigation system is now routinely referred to as a huge cost of doing business, but no one dares propose any reform of it. Our mortgage deduction for housing costs a staggering $80 billion a year, and we are told it is crucial to support home ownership. Except that Margaret Thatcher eliminated it in Britain, and yet that country has the same rate of home ownership as the United States. We rarely look around and notice other options and alternatives, convinced that “we’re number one.”
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America has become a nation consumed by anxiety, worried about terrorist and rouge nations, Muslims and Mexicans, foreign companies and free trade, immigrants and international organizations. The strongest nation in the history of the world now sees itself as besieged by forces beyond its control.
The book focuses quite a bit on the USA, China and India and provides good overviews of the economic strength and weaknesses of those countries. The USA is in a leadership position but the future requires an understanding that others deserve to be treated as partners not allies to be dictated to. If not they will just partially disengage with the USA and create stronger relationships with others. That would not be in the interests of the USA.
Related: Best Research University Rankings (2008) – Dr. Deming’s 7 Deadly Diseases of Western Management – Science leadership and economic growth – Easiest Countries for Doing Business (2008) – Top 12 Manufacturing Countries in 2007 – Why America Needs an Economic Strategy – Country H-index Rank for Science Publications – USA Spent $2.2 Trillion, 16.2% of GDP, on Health Care in 2007
Four Lessons from Y-Combinator’s Fresh Approach to Innovation
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Tight windows enable “good enough” design. Most Y Combinator–funded companies are expected to release a version of their idea in less than 3 months. That tight time frame forces entrepreneurs to introduce “good enough” software packages that can then iterate in market. This approach contrasts to efforts by many companies to endlessly perfect ideas in a laboratory, only to fail the real test of being exposed to real market conditions.
Business plans are nice, not necessary. Y Combinator doesn’t obsess over whether entrepreneurs have detailed business plans. Again, the focus is getting something out in the market to drive iteration and learning. After all, if you are trying to create a market, most of the material in a business plan is assumption-based anyway.
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Y-combinator is very interesting. I have posted about them several times: Find Joy and Success in Business, Build Your Business Slowly and Without Huge Cash Requirements. Investors can learn a great deal about how to grow businesses from their model. Brains, effort, customer focus, the ability to learn and business savvy can do huge things with little cash in information technology. The opportunities are available today. Y-combinator’s support of the businesses with knowledgeable resources and education (startup school) are far more important than the money they provide.
Related: Small Business Profit and Cash Flow – Innovation Strategy – Some Good IT Business Ideas – Google and Paul Graham’s Latest Essay – MIT Launches Initiatives in Innovation and India
One factor you must understand when evaluating economic data is that the data is far from straight forward. Even theoretically it is often confusing what something like “savings rate” should represent. And even if that were completely clear the ability to get data that accurately measures what is desired is often difficult if not impossible. Therefore most often there is plenty of question about economic conditions even when examining the best available data. Learning about these realities is important if you wish to be financially literate.
Bigger U.S. Savings Than Official Stats Suggest
A closer look, however, shows that Americans have tightened their belts more sharply than the numbers report. The reason? Official figures for personal spending include a lot of categories, such as Medicare outlays, that are not under the control of households. They also include items, such as education spending, that should be treated as investment in the future rather than current consumption.
After removing these spending categories from the data, let’s call what’s left “pocketbook” spending – the money that consumers actually lay out at retailers and other businesses. By this measure, Americans have cut consumption by $200 billion, or 3.1%, over the past year. This explains why the downturn has hit Main Street hard.
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Finally, for technical reasons the BEA throws in some “spending” categories where no money actually changes hands. The biggest is “rent on owner-occupied housing,” the money that people supposedly pay themselves for living in their own homes. Despite the housing bust, this number rose by 2.6% over the past year, to $1.1 trillion.
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A closer look at BEA numbers shows that Americans reduced spending by 3.1% in the past year, indicating that the savings rate has risen to 6.4%
He raises good issues to consider though I am not sure I agree 100% with his reasoning.
Related: The USA Should Reduce Personal and Government Debt – Financial Markets with Robert Shiller – Save Some of Each Raise – Over 500,000 Jobs Disappeared in November (2008)
Nonfarm payroll employment fell by 345,000 in May, about half the average monthly decline for the prior 6 months, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The unemployment rate continued to rise, increasing from 8.9 to 9.4 percent. Steep job losses continued in manufacturing, while declines moderated in construction and several service-providing industries.
According to the Household Survey Data, the number of unemployed persons increased by 787,000 to 14.5 million in May, and the unemployment rate rose to 9.4 percent. Since the start of the recession in December 2007, the number of unemployed persons has risen by 7.0 million, and the unemployment rate has increased by 450 basis points.
Unemployment rates rose in May for adult men (to 9.8%), adult women (7.5%). Among the unemployed, the number of job losers and persons who completed temporary jobs rose by 732,000 in May to 9.5 million. This group has increased by 5.8 million since the start of the recession.
The number of long-term unemployed (those jobless for 27 weeks or more) increased by 268,000 over the month to 3.9 million and has tripled since the start of the recession.
The civilian labor force at the end of May, 2009 stood at 155,081,000 (at the end of April was 154,731,000) growing by 350,000, employment stood at 140,570,000 down from 141,007,000 the month before. The ranks of unemployed grew to 14,511,000 from 13,724,000.
Related: Unemployment Rate Increased to 8.9% – USA Unemployment Rate Rises to 8.1%, Highest Level Since 1983 – Bad News on Jobs
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A recent Pew poll found that 21% of Americans planned to grow their own vegetables, 16% had held a garage sale or sold things online and 10% had either taken in a friend or relative or moved in with one. Pundits are coining phrases such as “austerity chic” and “luxury shame”. Four-fifths of Americans told the BCG they would defer big purchases that can wait.
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The beneficiaries of the new parsimony are, unsurprisingly, firms that offer low prices. The only two stocks on the Dow Jones Industrial Average that rose in 2008 were Wal-Mart and McDonald’s.
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The hangover from this party will be long and painful. Households’ total outstanding borrowing fell in the fourth quarter of 2008, for the first time since the second world war. The personal-saving rate rose to 4.2% in the first quarter of 2009, from a nadir of minus 0.7% in 2005. “It is easy to see how consumer deleveraging could result in hundreds of billions of dollars-worth of forgone consumption in coming years,” say Martin Baily, Susan Lund and Charles Atkins of the McKinsey Global Institute.
American consumers are burdened by far too much consumer debt. And spending on non-essentials with debt is un-wise and creates personal risks and a weak (fundamentally) economy. It is true the current economic data will look good when people spend money they don’t have. But it just creates a huge burden for the future economy to cope with.
Related: USA Consumers Paying Down Debt – Too Much Personal Debt – $2,540,000,000,000 in USA Consumer Debt
Starting next Monday GM and Citigroup will no longer be in the list of 30 companies making up the Dow Jones Industrial Average. I posted in 2005 that GM should be dropped from the DJIA. GE has lasted in the Dow for more than 100 years. 12 of the 30 stocks have been added since 1997. Cisco and Travelers are the companies that are joining the Dow on June 8th.
The 30 stocks of the Dow Jones Industrial Average, as of June 8th, 2009:
| Stock | Market Capitalization | Year Added |
|---|---|---|
| Exxon (XOM) | $347 Billion | 1928 |
| Walmart (WMT) | 195 | 1997 |
| Microsoft | 189 | 1999 |
| Proctor & Gamble (PG) | 155 | 1932 |
| Johnson & Johnson (JNJ) | 153 | 1997 |
| GE | 147 | 1896 |
| AT&T (T) | 145 | 1999 |
| IBM | 143 | 1979 |
| JPMorgan Chase (JPM) | 141 | 1991 |
| Chevron (CVX) | 138 | 2008 |
| Coca-Cola (KO) | 113 | 1987 |
| Cisco (CSCO) | 112 | 2009 |
| Pfizer (PFE) | 100 | 2004 |
| Intel (INTC) | 91 | 1999 |