Mark P. McDonaldWith all the talk about ‘green shoots’ of economic recovery its time to ask if these shoots are real or just the immediate result of significant stimulus. The buzz is postive, particulary as companies start to report changes based on YO-YO metrics that show improvement ‘year over year’.
The point of this entry arose from the Page 1 WSJ headline story on Friday August 14th – “Europe recovers as U.S. Lags.” The article discusses that Germany and France in particular are returning to growth thanks to government stimulus efforts. Those efforts, like similar ones in the U.S. such as the ‘cash for clunkers’ program, stimulate the economy by incenting people to act now rather than latter.
This creates the potential that the economy is not really growing, its just responding to the incentives and moving future sales forward. This happened in the fall of 2001 when automakers offered 0% financing to stave off a recession. That worked, but one thing it did was bunch up sales in that quarter and created the trough that contributed to pulling the industry down to its knees.
The WSJ’s Mark Gongloff stated as much in his Ahead of the Tape article on August 13th where he discuses that data on retails sales is being temporarily boosted by actions related stimulus policy.
The relatively slow growth reported by the WSJ in France of +1.4% and Germany +1.3% may not have the strength to maintain momentum beyond the initial stimulus response. There is also the factor that US stimulus of more than $700 billion dollars remains largely AWOL (absent without leave) in the US economy.
I believe the proof that the recovery is real will come in terms of corporate investment and employment not consumer spending which is more sensitive to short-term policy and stimulus activities.
Certainly the companies I have been working with around the world with remain hopeful of economic recovery in 2010 but they continue to see double digit drops in sales and continued operating pressures.
The sentiment is that the economy will recover around the globe, but increasingly people see the recovery not as a return to past levels, but the absence of future revenue declines. This is will lead to an economy that is different than what we had earlier in the decade. We all need to prepare for that.
I hope that I am wrong and that recovery is well on its way. However, its prudent to think about the strength of these green shoots in order to be prepared if economic conditions turn down and the recovery ‘eats shoots and leaves.”
Category: 2010 Economy Personal Observation Tags: Business Leadership, Economic Recovery, Personal Observation
3 responses so far ↓
1 Has stimulus created growth or just moved future sales forward? August 19, 2009 at 7:26 am
[...] Has stimulus created growth or just moved future sales forward? [...]
2 Andrew Meyer August 19, 2009 at 9:40 am
Mark,
I think the situation is worse then it appears. Let my try and briefly explain why I say this. I’ll be interested in what you think.
Essentially, the cult of economics has become so powerful that people believe the great depression was caused monetary mismanagement. That was what Ben Bernanke apologized to Milton Freidman for in 2002. (http://bit.ly/ylRLR)
But what if this was not true. What if the GD was caused by over capacity? After the First World War, scientific management, electricity, Henry Gantt, Fredrick Taylor, Frank Gailbreth, Henry Ford etc. really came into their own and produced tremendous capacity in US factories. At the time, it was believed that over production was the bugbear that led to business cycles. This overcapacity was what Irving Fisher wanted flushed out of the system.
Henry Gantt, in particular, argued that overcapacity was wage issue. His argument was that if wages rise in parallel with earnings, there will never be an over capacity issue because there will be sufficient demand to balance supply. However, in the ’20s, profits increased 400% while wages increased by about 40%. This level of inequality seems hauntingly familiar. (http://bit.ly/Sks4R)
Lacking sufficient value adding business investments, the wealthy invested in the stock market, causing the run up after ’26. What if the market crash was not a cause or a trigger, but rather a symptom of the imbalance between capacity, supply and demand?
That is why your statements about executives seeing double digit drops in sales and Evans-Prichard’s article “There’s no quick fix to the global economy’s excess capacity” (http://bit.ly/bOADP) are so concerning.
Stimulus packages, economic over analysis and market manipulation can result in irrationally and exuberantly expressed results in the stock market. There is a lot of liquidity with few value adding investment options because there is already so much capacity and supply. This leads to what we’re seeing now, the highest P/E ratios ever (http://bit.ly/htSXo). Due mostly to low earnings reports.
I don’t believe in green shoots, but rather remember Wiley E. Coyote. If my memory of the classics serves me correctly, he was college educated, focused, innovative and creative. The more he applied these skills that the business world holds so dear, the more damage he did to himself.
I’m not thinking there’s any green shoots, strong or weak.
“While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.”
– Herbert Hoover, May 1, 1930
3 Rumors of the recession’s immanent demise are probably exaggerated December 11, 2009 at 7:42 am
[...] Has the stimulus moved future sales forward [...]
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