Monday, September 15, 2008

Economy in slow motion

Even as economists agree to disagree on the definition of recession, for America recession is here, or is it?

The problem is there are no broad measures that estimate industrial production. The rate of GDP is the only measure and that’s too broad. Smaller number of industries were responsible for a larger output. Today the economy is much more diversified. Even if some of the industries were performing slower it did not impact the overall economy too much. When the financial services industry is in recession like today, it is generally leads to a multiplier effect and there is an decline overall output. The National Bureau of Economic Research may declare this as a recession with a lag (like it did last time). We do not need two continuous quarters of negative growth to have recession.

In a conversation with Markus Schomer of AIG investments last week, he pointed out something interesting. He said the way recessions manifest themselves has changed. It is hard to see. There are no people crowding at employment exchanges! He had a different point of view for recession catch-words like “job losses” and “credit crisis”.

Excerpts -
In the case of an industry like the auto sector, a slowdown has been going on for years. But processes around this industry has been able to adjust itself to this pace. So does it not stand out. Nobody says it is a dying sector, although there has been sustained job losses over the years.

Manufacturing is laying off people. But today companies are far more nimble in managing inventories than before. For example, companies like Wal-Mart for example monitor the demand and adjust inventories real-time. There is no sudden build-up of inventory, that leads to a decrease production and even job losses. There is a more calibrated approach.
Earlier recessions were really brutal. Companies are now getting better at managing expectations and human resources. There are actually not many companies laying off employees as before. The American economy is largely driven by the services sector, so there is not much scope for laying off people.

On credit crisis -
The test now is how well corporate America does under the current circumstances. There is a problem with access to financing. The companies that are facing difficult financing conditions are dependant on their banking relationships. Default rates are going up. There is finance, but the traditional ways of accessing finance have become difficult. Companies can still manage to get access the public market through bond issuances. And there are been cases where such issuances have been oversubscribed.

Official Unemployment Rate : 6.1%
This rate does not take into account illegal migrants that work in sectors like construction which has been laying off people. This means that the actual unemployment rate can be much higher.

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