Commentary & Analysis
Special Economic Roundup, Fed up with the Fed?, and Maintaining Profitability
By Dr. Joe Webb
Published: May 21, 2004
It's nice to be back after two weeks, and there's a lot to write about. Let's dig in!
Leading economic indicators were up +0.1, supporting expectations of growth in the economy. It would have been higher had housing data, already at record levels, been better, and a slight decrease in the housing sector should not be unexpected.
The U.S. unemployment rate is now at 5.6% Initial jobless claims were up 12,000 in yesterday's report, but the four-week moving average has declined to its lowest level in almost four years, and is now at 333,500. New jobs in March were revised upward from 308,000 to 337,000, and April alone offered 288,000 new jobs.
Most important to me as a sign of business vitality, April net new businesses were up by +270,000, more than double April 2003, now totaling 784,000 for the last 12 months. The 12 month-moving average for new businesses is now at 65,330 new businesses formed per month for the last year.
The economy is strong, so much so that the Congressional Budget Office says that tax revenues are $30-40 billion higher than expected. By law, the CBO has to assume that a tax cut does not stimulate revenues, so they are always wrong when it comes to forecasting the stimulative effects of rate reductions (they were also wrong when Clinton lowered the capital gains rate at the urging of former Treasury Secretary Rubin, and the explosion in capital gains revenues was a prime reason for the surpluses of the late 1990s). They also assume that rate increases do not discourage certain activities, and that every tax increase will yield an exact, predictable amount to the Treasury. This is like telling Wal-Mart that if they sold at full list price, they'd make more money, or that if Wal-Mart sold at low prices they would be guaranteed to lose money. This kind of static budgeting process assumes that prices (or tax rates in this case) have no effect on decisions and behaviors of the people paying them. This is a discussion for another time, but tax revenues are increasing from both payrolls and corporate taxes because of the stimulation (and accommodative monetary policy), kicking in sooner than the usual 12-18 month lag time.
Unfortunately, March printing shipments were down -$205 million compared to March 2003. Shipments for the first quarter are down -2.9% compared to last year, a decline of -$686 million. The factory orders and shipments numbers, on the other hand, were very strong, with non-defense factory orders up 4.6%, their biggest increase in twelve years.
On the Web: M3 Release
As an industry, we are exporting more, up 6.1% to almost $1.1 billion in the first quarter, and imports were up 7.4% to just over $900 million. Overall, we shipped $61 million more than last year, and imported $63 million more. Our trade surplus in books and printed matter was $160 million, or 17.6% higher than our imports.
Both Institute for Supply Management reports, manufacturing and non-manufacturing, stymied the experts and were more upbeat than expected.
The Federal Reserve left the federal funds rate at 1%, and said that policy accommodation can be removed at a pace that is likely to be measured. In other words, they are going to start dripping rate increases soon rather than making aggressive moves. They are convinced that there is lots of slack left in the economy, which implies that they are looking at the payroll employment and capacity surveys, both of which mean to me that there is a good chance that they will get trapped next year into having to fight some strong inflationary forces.
The Fed is always behind the curveusually on purpose. The bond market moves first, and then Fed action soon confirms it. The murder of the Iraqi president of the interim governing council caused bond rates to go down again, which shows how crazy this can get, and why the Fed's job isn't easy. Earlier, the bond markets were very disappointed in the lack of Fed action and fears of inflation due to possible Fed neglect weighed on stock prices. We do need a Fed rate increase at least to 1.5%probably 2%and we're not going to get it now. Look for the Fed to raise rates at the end of June by a measly quarter point.
The Fed's lack of decisive movement can most likely be attributed to the great disparities between the data that the Fed uses and what other independent data show. The Fed is still looking at payroll survey data and not the household data for their employment trends, so they are waiting longer than they should to act on growing employment (and business creation). They are also looking at Federal Reserve industrial capacity data comprised of trade association data, anecdotal data, and other sources that do not have statistical rigor rather than the ISM data which is more real-time and collected consistently. The latter shows price pressures in commodities are starting to break through to final prices. Yes, we might be at the end the era of productivity increases covering commodities price increases. Yet the Fed still doesn't see it. In many ways, this is a not invented here syndrome: they have the data they're used to using, and that's what they're sticking by.
The risk, as I see it, is similar to that played out in 1999 and 2000. The Fed was very aggressive in 1999 in making sure that the money supply would grow enough to prevent and absorb problems related to Y2K issues (there were none: computer investments for the five years prior were very strong, and prevented the problems from ever happening; Y2K's prevention is an underreported success). In 2000, after concerns about Y2K passed, the Fed unwittingly aided a collapse of equity markets by tightening so aggressively that the economy slowed at the end of the year and through early 2001. Remember, the NASDAQ peaked in March 2000, and the Dow Jones Industrials just months later, and they still have not recovered fully (the NASDAQ would still need to go up by 2.5x to do so). Only reaction to 9/11 caused them to loosen aggressively to prevent an economic collapse. Had 9/11 not occurred, the Fed would still have us in a near-recession or sluggish growth. Now the Fed may be lulling itself to sleep by dismissing important data. They have said that they will move gradually in raising rates, exactly the wrong medicine, and they will find themselves needing to catch-up with a rapid series of moves, overreacting just like they did in 2000, needlessly creating another downturn.
But executives need to be prepared. Dealing with these problems and any market uncertainty is why executives get paid what they do. Complaining about them is not useful; things are the way they are, and we have to navigate through what we are given while still moving our long-term agendas forward.
I'm always looking for ways to describe the differences between profitable and unprofitable businesses, and this may be one. Do you make things that are profitable? Or do you make things you are familiar with, profitably? Those are two entirely different things. The latter is a manufacturing business that focuses on its operations and finds ways to use its capabilities. The former is a marketing organization that looks for products or services that solve problems and uses market requirements as its guide. Both are noble pursuits, both can be lucrative, and both are always in creative tension.
This subject came up in a recent discussion about how some of the most profitable printers and trade shops went out of business when although the market for their services changed, they kept trying to sell the same things. But there is a simpler example.
This story came to me from a reader of my column who is familiar with a printer that derived the bulk of its sales from a Fortune 2000 client. The owner lost the shop's biggest account because he would not put up a Web page for the client that allowed their employees to enter their own orders for business cards directly. The company is now sending its business card work elsewhere. As expected, more work from that client went to the other printer as well.
Huh? The owner let that happen?
Yes, this kind of thing goes on every day. Print business owners and executives who don't use the Internet or other technologies themselves have difficulty understanding what the clients are asking for (or how easy it can be to supply what they are asking for). Personally using the Internet, in this case, would have been the equivalent of a competitive intelligence program and investing in R&D at the same time. It would have been easier for them to integrate these techniques into their businesses had they been e-savvy themselves. This example was not a question of redefining the business. It was far simpler than that. It wasn't even a strategic issue. It should have been a no-brainer.
A word of advice: Always studyand sometimes invest inwhat can put you out of business.
The printer probably would have justified his behavior by saying that he is sticking with what he knows and doesn't want to be diverted into areas he doesn't understand. This is the worst application of stick to your knitting that one can imagine; the concept certainly doesn't mean you should be close-minded in the face of an obvious threat or opportunity.