Time to Be Thankful
Gazing at our current economic challenges, there appear to be plenty of reasons to cry out like the captain of the ship in Samuel Taylor Coleridge’s 19th century poem, The Rime of the Ancient Mariner. As he looked about his becalmed vessel, all he could see was “Water, water, everywhere, and all the boards did shrink; Water, water, everywhere, nor any drop to drink.”
It’s certainly no secret that our nation, and indeed, the global community, is facing severe disruptions previously unknown in the lives of many. After being on an upward economic trek for so long, it is often difficult to accept or even comprehend the headlines of bailouts, layoffs, stock price declines, and deteriorating economic statistics.
Almost every day, more bad news of one sort or another comes our way. Even with the recent drop in prices of many daily essentials, growing fears of worse times in the future are fostering anxiety and limiting expenditures which, in turn, negatively impacts the economy.
In the midst of these woes, the season when we specifically focus on giving thanks for our blessings and benefits is now upon us. Aside from the considerable joys of family and friends, is there anything in this economy about which we can be thankful? Indeed, there is!!
Although we certainly can’t ignore the immediate circumstances, we can have confidence, based on historic examples, that the economic situation will get better over time. In fact, the proportion of the time that business activity has accelerated out of doldrums of this nature is 100%—and this one will be no exception. For those of us living in Texas, that time may come much sooner than for residents in many other areas. But wherever you call home, the technological forces that are driving us forward have in no way been diminished. Prosperity delayed is not prosperity denied.
I recently released my 2008-2013 economic forecast for the US and Texas. From all indications, the Lone Star State, which has been highly influential in expansion in the nation’s economy, will continue to be a dominant player through the short term.
Over the next five years, the US real gross domestic product is projected to achieve a compound annual growth rate (CAGR) of approximately 3.31%. The per-annum output expansion rate for Texas during that period is anticipated to be about 4.07%. This pace is not quite as great as the past half-decade, but is very encouraging given where we are starting.
The annual growth rate for the number of residents in Texas over the next five years will likely be 1.87%, almost twice the expected yearly population increase for the US as a whole. Real personal income (RPI) for Texans from 2008 to 2013 is predicted to climb at an annual rate of 4.44%, while the national CAGR is projected to hover around 3.53%.
Other matters about which we as Texas residents can be thankful relate to the housing market and employment. The Lone Star State, of course, has not escaped unscathed from the mortgage and credit crises, but most areas of the state have not suffered nearly as much as other parts of the country.
The ongoing turbulence in the US economy has resulted in a temporary, but definitive downward trend in the number of wage and salary workers, and reports are appearing almost weekly detailing how major companies are continuing to reduce the sizes of their workforces. Texas has been blessed in this regard, and indeed, has been a major factor in shoring up the employment totals for the nation. With the increase of 23,000 workers in October despite storms and financial chaos, the overall employment gain across the state in the past 12 months is approximately 230,400.
When looking at the short-term forecast, Texas’ more than 11.8 million workers, the largest labor force in the state’s 172-year history, is projected to grow by over a million by 2013, reflecting a CAGR of 1.75%. The per annum US job growth rate for the next five years is forecast to be about 1.07%.
There are several others matters associated with the Texas economy for which we can be thankful and to which I could devote an entire column, but space allows just a brief mention of them. Since 2002, when we became the nation’s export leader, the shipment of products and services from Texas has increased substantially each year. Reports indicate that 2008 will be another banner year in this regard.
Texas, which has boldly embraced globalization, continues to be a leader in terms of investment and business relocations and expansions. With the state’s friendly business atmosphere, right-to-work opportunities, and low taxes, among other attributes, the future remains bright.
It is not unusual for the economic fortunes of our nation and state to slip and slide during difficult times such as those we are currently enduring. Still, based on Americans’ traditional pattern of resilience and rebound and continuing dominance of the emerging sectors of the future (with more than 90% of worldwide patents in nanoscience, for example), we can anticipate with absolute confidence that better times are ahead. Happy Thanksgiving!!!
posted @ 07:45 AM CST [link]
Friday, November 20, 2008
What’s Up About the Ups and Downs
Just a few weeks ago, the prices of oil and gasoline were major subjects of conversation practically everywhere. Today, the topics still remain hot, but the tenor of discussion has moved in a different direction. Instead of “How high?,” the question now is “How low?”
Back in the summer when oil prices were at record levels and motorists across the country were filling their tanks with fuel approaching $4.00 per gallon, there was a lot of finger pointing as to the cause. Some people blamed big oil executives in search of historic profits while others believed the culprit was OPEC for the same reason. Growing global demand, government taxes, lack of refineries, general economic uncertainty, unrest in key producing regions, and hurricane trauma, as well as speculators who were keeping prices elevated were also mentioned as contributors to the pain at the pump.
Now, however, with oil dropping to around $55 per barrel (62% decline from the July high of $147) and the amount of money it takes to fill our vehicles being so much less (national average price of gasoline approaching $2 per gallon, the lowest since March 2005), are the same players to be given credit?
Clearly, if big oil had a perfect handle on gasoline prices, they would not be as volatile as they have been. Such swings make management very challenging. So, what’s up about the ups and downs of fuel costs?
As with most recipes, a variety of ingredients are involved and each plays a particular role. Of course, some are more dominant than others. Cost determination for both oil and gasoline follow that time-tested pattern.
About the same time prices of petroleum products went sky high in the early summer, the US and much of the world were already feeling the pangs of an economic slowdown. Because the high fuel costs caused an elevation in the prices of so many products, and because pocketbooks were already stretched so thin, most consumers refrained from purchasing anything other than necessities. The result was a gradual dip in the use for petroleum-related energy. With the drop in demand, oil and gasoline prices soon followed suit.
It’s much more complicated than that, of course, but you get the gist. It will take another column to give all the ins and outs on the ups and downs of oil and gas prices by describing the role each entity has played in the process, but for now, let’s focus on the role of speculators. Just how important are they in price determination?
Not everyone agrees with all the particulars, but, in general, most everyone acknowledges that speculators wield a lot of influence. This past spring, after crude oil prices shot up almost $70 per barrel since the same time in 2007, various energy experts calculated that around 30%-40% of that run-up was due to the speculation in the future markets. Relative to a “true” equilibrium based on supply and demand, the percentage was even larger, but there is a level of “permanent” speculation that is due to the sheer volatility of the commodity and the places it is produced.
There are two kinds of speculators at play here. Some of them (such as airlines) are using futures to protect themselves from future price changes, and they actually take possession of the commodities. On the other hand are those who are simply betting on the direction prices will move. Just eight years ago, speculators accounted for approximately 37% of crude oil trading. Now, it’s about 70%. In other words, a tanker leaves the Middle East and, while the piece of paper signifying ownership of the crude it is carrying may change hands dozens of times, the boat never changes course.
During the summer, Congress looked into this matter amidst clamoring to pin the blame of higher prices on speculators. Legislation was even considered by some lawmakers that would substantially restrict speculation activities and opportunities.
While buying a futures contract does not directly change the supply, it can indirectly impact prices by encouraging producers and others in the industry to limit the amount of oil available for use. Unregulated markets are responsible for approximately two-thirds of oil trading, and rampant swings in this process have the potential to affect the regular exchanges that account for the rest of oil trading.
Thus, since speculators seem to travel together on the same route with group mentality, over time they have accumulated the ability to set prices artificially—either high as in the past or low as we are experiencing today. However, they are not alone in this process because there must be a willing buyer and a willing seller in every transaction. Moreover, the futures markets inflict their own punishment. Consider those who speculated that oil would stay at $147 per barrel, for example. They have faced heavy losses as prices dropped.
The fundamental determinant of oil and gas price swings is simply supply and demand and the perception of how they may change. Fears that there won’t be enough petroleum can cause speculators to jump in and bid up the price. Speculators are also the first to reduce their positions if supplies appear to be excessive. In this way, they may in fact introduce an extra degree of volatility into the market. However, they also serve an important function by reinforcing the market’s natural responses to price changes.
The current low-price environment is unlikely to stick around. It won’t be long before recovering economies again push up demand and, in turn, the cost of all petroleum products. Until then, the “price at the pump” will be a bit more pleasant.
posted @ 07:32 AM CST [link]
Friday, November 14, 2008
Ropes
Over the course of the past several weeks, there have been numerous measures aimed at reviving the nation’s struggling economy. Most of these actions are still ongoing, and their success level will not be known for quite some time (although signs of modest progress are around). While several of them have been historic and even unprecedented, at least one has followed the same tack often taken when faced with economic difficulties – lowering interest rates!!
The Federal Reserve (Fed) was created in 1913 primarily to provide liquidity to the economy which was suffering from the results of the Panic of 1907. The central bank gradually morphed into a watchdog with special attention given to both inflation and availability of monies for normal business operations.
The Federal Reserve requires all banks and financial lending institutions to maintain a certain amount of cash (reserve balance) on deposit at their local Fed branch office. The Fed Funds rate is the percentage of interest banks are assessed for overnight loans of these reserve balances to one another. When you hear all of the fretting about the Fed raising or lowering rates, this is the rate being manipulated. This flow of money among banks is essential to the smooth functioning of the economy.
When the Fed raises the interest level, banks are often more hesitant to borrow money to keep their reserves at the required level. In addition, the rates they charge when they do make loans are directly related to the interest level established by the Fed. As rates go higher, loans are usually more costly and difficult to acquire. Therefore, businesses are less inclined to borrow and, thus, such action slows economic expansion. Raising interest rates is a tool to help cool the economy when signs of inflation begin to surface. It is generally pretty effective in that higher rates get people’s attention and can virtually force them to come into line. It is like pulling on a rope; you get some traction.
On the other hand, when the Fed drops rates, the idea is that banks open their coffers wider, businesses expand, and home loans are less expensive. Often during such times, homeowners take out home equity loans, using the money for purchases of goods or services, which in turn generates growth in the economy. This tool, therefore, is used when the goal is to stimulate the economy and speed the pace of economic growth. The problem is that, while this approach is sometimes effective, it can only encourage firms and consumers to borrow and spend: it cannot compel such actions. Lowering interest rates is more like pushing on a rope; it does not have the same clout as going the other way.
When the Fed drops the cost of money, it has the effect of making loans less expensive, but if companies aren’t borrowing or banks aren’t lending, the initial result may be negligible. The Fed can offer the incentive of lower rates, but sometimes it isn’t enough. If folks remain too concerned about the future to take on additional debt, lower interest rates won’t do much good. This situation, which seems to be a part of the current credit financial crisis, is what British economist John Maynard Keynes referred to as a “liquidity trap.”
To make matters worse, there’s also a signal problem. If analysts, who pour over every nuance of the Fed’s monthly announcements and listen to the tone of every speech of every member, believe the rate might fall before long, the market response begins almost immediately – never mind that it sometimes takes more than a year for the impact of the rate change to percolate through the entire economic system. Because of such a hint, there often is also a delay in making purchases in hopes that prices and loans might go lower in a short period.
To combat a possible recession in early 2001, the Fed began lowering interest rates. Three years later, to combat potential inflation, the central bank reversed course. By August 2006, the Fed stopped increasing rates because concerns about inflation were muted and signs of an economic slowdown were on the horizon.
A year or so later, as the credit crisis became more invasive, the Fed began to lower the Fed Funds rate from the high of 5.25% in efforts to increase liquidity to financial markets and improve confidence in the overall economy. Last month amidst the myriad efforts to pull the economy out of its funk and improve the credit markets, the Fed lowered the rate to 1%.
There is little doubt that the Fed’s actions help steer the economy’s course, but it is also evident that there’s only so much the Fed can do. While recent drops in interest rates are an important part of the process and will likely help to accelerate the expansion once it begins, they will not be sufficient to jump start business activity nor will they be the most significant facet of the various rescue efforts being implemented. As a result, the more exotic initiatives now being put into place must be a part of the process.
posted @ 08:06 PM CST [link]
Friday, November 7, 2008
Rewriting the Dictionary
Every so often, new English words are coined. Some of them eventually make it into the vernacular and even into authorized dictionaries. Normally, it takes many years for a word to become so common and widely used that it is easily understood by others around the world. On the other hand, the journey from creation to everyday usage can be much shorter.
Such is the case with the word “Google,” the giant Internet search engine company that recently celebrated its 10th anniversary. The word was uniquely recognized by its placement in the Oxford English Dictionary in June 2006—as a verb!
Coined by two Stanford computer science graduate students in 1997, it replaced the original terminology for their search engine brainchild—BackRub—which they ran on Stanford servers for more than a year. Once the program began taking up too much of the university’s bandwidth, the students launched out on their own.
The first step was to develop a new name. After a lengthy period of brainstorming, the term Google was adopted. It was a play on the word “googol,” which is a mathematical term for the number represented by the numeral “1” followed by 100 zeros. The new name was representative of the vision of the two young men who wanted to organize the almost infinite amount of information growing exponentially on the web.
Initially, Google set up workspace in a garage in September 1998 with a staff of three people. It became an instant success and was recognized by PC Magazine as the search engine of choice in the list of Top 100 Web Sites for 1998. A few months later, the operation moved to a larger space with five additional employees. (Today, Google has approximately 19,000 employees worldwide and consistently ranks as one of the best places to work.)
Almost immediately, plans were made to move to even larger quarters. Within two years, 15 language versions of Google.com were released, and it was on its way to worldwide usage. (Currently, Google.com is available in over 30 languages.) By June 2000, Google was the world’s largest search engine.
New concepts emerging from the Google brain trust were put into operation almost monthly. Each of these led to substantial expansion and greater in-depth information sharing opportunities. By the end of 2001, Google had grown to more than 3 billion web documents.
Not content with being the largest in one category, the leadership of Google set out on a fast pace to expand into multiple areas, ranging from e-mail to video to maps to online access to books to numerous business applications to its latest release, an Internet browser named Chrome, which was created to engage with various new web applications.
Google entered the financial realm big-time in August 2004 with its initial public offering. The opening share price of $85 rose almost tenfold over a short period and currently is in the mid-$300s per share.
During its first decade of operation, almost everything Google launched met with success. Even this year, as the national economy has faced historic challenges, Google has continued to move forward. Revenue for the third quarter of 2008 was 31% above the same period in 2007 and a 3% increase over the April-June 2008 timeframe.
Recognizing that its success has been due in great part to ideas emanating from variant sources and as a way to celebrate its 10th anniversary, Google set aside $10 million to encourage and support ideas to improve people’s lives. Regardless of whether the ideas were big or small, technology-driven or basic, the only criteria for receiving financial support to bring the ideas to market was that they have a substantial impact on everyday existence. The top 100 ideas are to be announced in late January, then pared down to 20 by Google users. The five selected for funding will be decided by a panel of judges and announced in early February.
In a brief 10 years, Google has gone from a concept to a nonpareil reality. Its many applications have transformed life to such a degree that we might even wonder how we ever got along without it; information on practically anything is available with a few clicks on a computer keyboard.
Today, a common expression when one is seeking simple information or answers to complicated questions is to “Google it” to get the desired results. So, what’s ahead for Google over the next decade?
Will it continue to take giant leaps through cyberspace or will emerging challengers begin to take bigger and bigger pieces of the pie? As it has grown from kooky little company to Wall Street behemoth, it has managed to keep its essential personality and innovative spirit. Only time will tell how it fares against the next generation of smart kids in garages. Whatever happens, few companies have managed to provide the language with a noun and a verb in a single decade.
posted @ 07:55 AM CST [link]