The folks at Merriam-Webster ranked the word “Austerity” the word of the year because so many people had looked up its meaning in 2010. But as you know from my last blog, instead of getting me down -- the more negativity I hear about in the economy the more optimistic I become.
Contrary to popular belief, my optimism is not because I am a contrarian (although I am). My optimism comes from the fact that I love to get my hands dirty with economic and business data. And the data tells me that 2011 will be a stellar year for the US economy.
Most importantly for the IT sector, the big news that the US economy will be growing is not the real headline. The real headline here is the how and why the next decade will be second only to the economic prosperity of the nineties. Before I get to the how and why, let’s have some fun with the economic data.
The economic models that I have built and use are based on:
• Paul Samuelson’s Multiplier Accelerator Interaction theory of the business cycle
• Quarterly economic data, using 15 years of data from the National Income and Product Accounts (NIPA), updated each quarter
The Nobel-Prize winning economist Paul Samuelson posited that there are certain predictable factors in the US economy that trigger a business cycle’s top and bottom. One of the earliest signals that trigger economic growth is corporate investment in new equipment and technology. As businesses’ plant and equipment wears out and technology becomes obsolete, businesses increase their spending on equipment and technology.
As illustrated in the following graph, Real Investment in Business Equipment and Software is up over 20%, just under pre-recession levels. This type of dramatic movement in Business Investment is always the first step in an economic recovery. And since businesses use consulting services in the implementation and reengineering of technology and equipment, the consulting sector is always a leading economic indicator.
Following increases in Business Investment comes increases in:
• Employment: Businesses hire consultants and employees to help implement their equipment and IT investments.
• Consumer Spending: These new hires increase consumer spending.
• Corporate Profits: This increase in consumer spending increases corporate profits.
• Personal Disposable Income: These profits go to increase disposable income.
• Repeat: This entire mini virtuous cycle continues to repeat until there are appreciable increases in overall economic output.
Then on the downside, comes increases in:
• Inflation: Increased overall economic demand means that there are increases in inflation. But these increases are negligible until aggregate demand nears the “potential aggregate demand”. Meaning until the economy nears full employment.
• Interest Rates: As inflation worries are near, the US and foreign governments begin to increase interest rates, either directly or indirectly.
All of this linked together is illustrated below in terms of the overall US economy, in terms of GDP.
There are two things in particular to note in the graph above. First, notice that the dramatic swings in Business Investment in Equipment and Software leads to modest, but accelerating increases in GDP. Second, notice that the red dashed line above is the model’s historical simulation AND the forecast for the next five years. The model indicates that over the next two years, the economy will continue to pull out of the recession. In addition to the overall economic structure characteristics of the model discussed above, there are three primary assumptions behind this forecast:
1. The continuation of the Federal Reserve’s Quantitative Easing policy, known as QE2
2. The recently passed continuation of the income tax cuts, combined with the other stimulus measures of the bill
3. And thirdly, the continued resiliency of the American Spirit.
The first two assumptions above have been prolifically discussed in the press and I’ll leave the links above to detail these. But the third assumption probably needs some explanation. Put simply
• Who could have predicted the specifics of the record, economic peacetime expansion of the nineties, including the
• Who could have predicted the specifics of the record, economic peacetime expansion of the eighties, including the …….
So this leaves the final obvious question, what is in store for the next decade? And what areas does it make sense to be involved to take advantage of this leading edge technology. To answer these questions, if future blogs I will explore a series of topics including:
• Smart sensor technology
• Large-scale analytics
• Healthcare Technology