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IBM National Chief Economist Explains Signs of Recovery.

Thursday, September 3, 2009   (0 Comments)
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IBM National Chief Economist Explains Signs of Recovery. 

On Tuesday September 1st, Dr. Phil Swan, the National Economist of IBM, spoke to a room filled with technology and business professionals.  The following is an excerpt from Dr. Swan’s comments during the program. 

When looking at economics and the economy, it’s important to know where we are and how did we get here in order to forecast or predict the future turns of the market. 

With the fears of the great depression in the minds of most Americans, it’s settling to know two major differences between the Great Depression and this "Great Recession.”  The first is that during the time of the Great Depression, inflation played a large role in the hard times and slow recovery.  However, this time around, inflation has been controlled from the monetary authorities like the Federal Reserve. 

In addition, the Great Depression can be seen as a complete collapse of the economy and the fiscal system.  The "Great Recession” can be seen more as a cease rather than a collapse.  As we all know, the housing market lent on shaky terms and in amounts that consumers could not afford, especially from as Dr. Swan explained "mortgages based on no income, no job, no problem.”  The housing downturn catapulted the economic downturn fueled by credit default swaps, a financial freeze, and a myriad of other issues.  Bank then did not receive the payments and could not afford to pay their investors, and as we know, needed a bail out to not go under.   Since then, the banks strictly tightened lending to the private sector – consumers and business - and consumers constricted their spending, both part in fear of the Great Depression, but the system never collapsed.  Another factor playing in to the cause was unemployment.  Just as consumers feared the "Great Depression,” and had lending avenues tightened, so did the private business sector.  As their fear grew and debt funds shrunk, they pulled back on projects and let go of talent.  The fiscal system has still been in tact, but people and business have chosen to cease transactions and slow the use of the system. 

So, are we on the way up?  How can we tell?  When will it be over?

  • One economic ratio that is a good indicator is the Manufacturing/Sales Ratio.  Tightly related to spending is inventory. 
    • When spending slows, inventory raises and manufacturing slows (and in turn employment drops because companies are not producing at the same level). 
    • So, when spending increases again, inventory decreases and companies begin producing (and hiring) again. 
    • The good news, the ratio is on the rise; In June of ‘09 it was roughly 1.4 and in December of ’08 it was 1.2.  Also to note, the term "manufacturing” does not mean assembling line, factory workers.  Technology and technology services lead this ratio. 
  • Another sign is the Baltic Dry Index, which is the cost of shipping overseas.  This specific index is a great indicator of global production and manufacturing. 
    • As more and more countries are producing and exporting, the costs of shipping overseas lowers. 
    • In Q2 of ’08 this index was 9439, and in Q2 of 09 it was 2614, indicating a positive trend for the economy.  
  • Of course the most well know indicator of a recovering economy is unemployment.  According to Dr. Swan, 6.2 million jobs have been lost, and 20% of those were due to fear of the uncertainty. 
    • The unemployment rate tends to lag behind other indicators, so we have not seen a decrease yet. But, as mentioned above, many factors affecting unemployment are on the up swing. 

In closing, things are turning up, but it will be a slow and steady road to recovery.  It will probably be 2011 before we "feel” like we are out of the recession and mid 2010 before unemployment shows it. 

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