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Rasta Gnawi
boston, ma Massachusetts USA
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Econ - Biz - What's The Pulse
12:00:00 AM Sunday May 5, 2002



Everyone is asking about the economy. If you haven't lost your job, perhaps three of your friends have, and it makes everyone nervous, as it should. There is talk of a recession and maybe even a depression. The talk itself is healthy. It conveys a certain degree of concern that people have about their economy. But before one jumps to conclusions about the technical description of the current state of affairs, let us first try to understand our current environment, how we got there, and when we are likely to get out of it.

I will start with the unhealthy remarks; the ones that I think are inaccurate and do nothing but harm the prospects of a quick recovery. Some people are blaming the current economic slump on Sep. 11 events. They claim that the physical loss is enormous, and the psychological damage has thrown the consumer into a spiral of nervousness that will be the inhibitor of any recovery. The argument is logical since the consumer makes up more than two third of the GDP, thus any slowdown in consumer spending will directly impact GDP growth. The premise, however, is not as accurate. The consumer has been nervous for some time way before Sep. 11. Perhaps since the tragedy, some pockets of consumption were disrupted in the New York area more than other areas, but the trend itself was downward at the national level. For the past 12 months, layoffs in the order of thousands were almost a daily occurrence and were largely expected. The Industrial Production index has been trending down since the last quarter of 2000 and that could not have been taking place without damage to the employment pool.

Let's explore this industrial group for a moment. A number of factors contributed to the slump in the manufacturing sector. At the end of last year, Interest rates stood at extremely high levels relative to their nineties' average. Energy prices more than quadrupled for all manufacturing segments of the economy. Oil, which cost only $12 in 1998 and some of 1999, traded above $25 for most of 2000 and stayed over $30 for a record period between 2000 and 2001. Natural gas, which makes up more than ? of US energy, skyrocketed from $1 in 1998-1999 to $12 at the beginning of 2001. Labor expenses experienced similar increases during a very short period (just compare starting salaries from when you graduated to where they are now; I never heard of a signing-bonus back then!) The point here is that all expenses in the economy rose to levels that the manufacturing base could not keep up with given the demand for its products. Hence, it used the tools at its disposal to control expenses.

This brings me to my next point. What happened to demand? If everyone had a job, if people were building and owning homes at record levels, then demand must have been intact. A different type of demand took toll on the economy. You might have heard of the "New Economy;" you know, the one that embraces Internet, wireless, LAN, WAN, and all the good acronyms. The nineties witnessed a race towards "digitalization" seen only during the railroad buildup, and perhaps the industrialization of the USSR (although that might be a stretch.) There was so much belief that the "information revolution" was going to alter the way the world operated that people wanting to profit from the opportunity invested insane amounts of money in this "revolution." Such investments brought us companies like Cisco, EMC, Nortel, Lucent, JDS Uniphase, and a number of other companies that represented the infrastructure upon which the "information super highway" was going to be built. But, you see, there is always such thing as overbuilding. The baker might like the way he bakes bread, but if he bakes too much bread, regardless of how good it is, people will still buy only what they need and a significant amount of bread will find its way to the garbage bins. The same thing happened to the digital group. Too much inventory. Too much stuff. Too little money. Investors who had kept the money flowing into the "digital world" have finally begun to demand some profits. But the companies had none of that to offer. The best they could offer was a promise that by 2005 they would make enough cash to keep themselves alive. Thank you very much; see you in 2005. Investors took their money and ran. While pets.com generated a good buzz among pet owners, investors finally asked the right question: "how do you intend to make money." If you couldn't come up with "the" answer, you were shown the way out. Thank you very much.

Without investor money, the new economy could not sustain its growth rate. Without the growth rate, it could not sustain demand for widgets to build networks and digital services. Without the demand for widgets, inventories rose, prices dropped, and profits vanished. Profits vanished too quickly for any manager to take rational steps. Customers canceled orders of hundreds of billions of dollars at once, and inventory remained like a big lump of unprocessed fat in the new economy's arteries. This, my friends, is the "profit recession;" the one we've been living in the new economy since the first quarter of 2000, and the one that should matter more to people.

There are recessions in other groups of the economy that are emerging. It is not probable, though, that they will be as grave as the new economy profit recession. But I won't get into that now. I will bore with that next time.

If you're not bored yet, check back in the next couple of days for "la suite."

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3:22 pm    August 8, 2005

hudhud message
3
insightful.. thank you rasta for sharing..
now how about 2005? kechma chouft fil crystal ball dialek :) should i keep job hunting or do you recommend a change in occupation :o)

-waiting for "la suite"

·

11:38 am    June 13, 2003
2
lkhabz skhoun alkhabz skhoun ckoun gal alkhabz skhoun
·

4:40 pm    October 9, 2002
suzy
1
I feel hungry now..I missed Moroccan bread specially from "ferane sekhoune"..lol
take care!
·

Rasta Gnawi's notes (63)
 
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