State of the Economy – December 2009

Again it has been a while since I’ve written my thoughts on the status of the economy. My honest answer to that is quite simply that I’ve been busy. Reflecting back I personally cruised into 2009 with 2008 steam. It was in early January 2009 that I got that classic road runner feeling of running off a cliff. You’re still moving forward, but you are starting to anticipate the inevitable fall. Luckily I was able to maintain a decent billing rate throughout the spring and even grow in the fall.  In my line of business we serve both the very small and the very big. In prospecting for 2010 during the past six months I have seem quite clearly the pain that most small companies are going through. They are starting to smell the end to the recession, but are still too scared to invest of running on steam and unable to invest. The traditional end of year slippage is even more accentuated this year. Larger companies shed excess weight in 2008 and first half of 2009. Most enterprises are now lean and mean, if they did their house cleaning in an orderly manner. With the changing tide I see bullish demand for growth supporting services from the very large enterprises.

The DOW has grown steadily and probably will continue to grow into the 11,000 range without much proof of stability in growth. The weakness of the dollar is a blessing for many US headquartered multinationals. Also Mercedes announced that they will increase production in the US to reduce manufacturing costs… imagine, the US is now a market where it is again cheaper to manufacture. I believe based on what I see and hear today that we will not have a second dip and that the economy will grow at a 3% rate steadily out of this recession.

The national debt, after hundreds of billions in stimulus, the cost of waging multiple wars across the world and a potential $850b healthcare overhaul, is a scary thing. However, if managed properly the stimulus will pay itself back over time through tax revenues and bailout payments. The President is grudgingly going with the Bush era surge strategy in Afghanistan, with what I would guess to be a heavy clandestine effort in Pakistan, in order to reduce the length of the overall commitment to the region and the potential cost of a dragged out war effort. When troops pull back from Afghanistan in 2011… if no new fronts are opened… we should see the effect in reduced military spending. A war tax in the mean time is inevitable in order not to further increase national debt. The healthcare overhaul should ultimately lead to a higher degree of prevention, which should overtime reflect on the overall cost of healthcare. The big question is if the administration can rain in the insurance industry and drug manufacturers, preventing inflation in the cost of healthcare. The time of half measures in battling special interest groups is over.

The big issue is and will continue to be unemployment. The job market is currently saturated and with 3% growth will remain saturated for years. With economies of scale we can theorize that if companies can make due today with the work force they have, then in 2010 with a 3% increase in production they should probably only need to increase headcount by 1%-2%. At that rate it will take almost a half a decade to reach ‘normal’ unemployment levels. But then again, as Warren Buffet has stated: What we have learned from history is that we do not learn from history. We will grow in excess of what we can sustain creating another bubble within the next 5 years. In this scenario unemployment might be cut in less time, until the next reset.

It breaks my heart reading stories about families that have been out of work for more than two years. Families that have exceeded all federal aid periods and are living on vapor. Good people that have lost everything and been marginalized in society. I still think the government should have invested more stimuli into huge national infrastructure projects that we will serve growth for generations to come. Where are the bullet trains that zoom from San Diego to Seattle, tunnels that drill through the Rockies or the 100 new nuclear power plants?


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