Economic Trends Impacting 2013 and Beyond

Published January 2013

I started to write my annual economic forecast for 2013. But two things caused me to step back and instead focus on longer term trends.

First, I found myself writing about many of the same issues I did a year ago, except with a greater degree of uncertainty. For example, what will happen within the Euro zone during 2013 is anyone’s guess, surpassed only by the short term result of the “fiscal cliff” negotiations.

Second, trying to predict the future is folly. Investors are constantly advised to take a long term approach rather than try to predict the short term movements of the stock market. That’s sound advice for buy/sell decisions of liquid assets like stocks, and it’s certainly valid for business managers making long-term decisions involving non-liquid assets.

So here are some major economic trends which have been influencing our economy and which I believe will continue to influence it in the foreseeable future. Directly or indirectly, these are trends which will impact your organization and should be considered when making strategic decisions. I’ll organize them by the same categories typically used for summarizing GDP growth, namely foreign trade, government, consumer and business spending.

Overall global growth stabilized during the latter part of 2012 and is slowly picking up. Looking forward, exports should provide a somewhat stronger tailwind with emerging nations playing an ever-larger role.

The big unknown is obviously still Europe. Greece (and I suspect a handful of other southern European countries) simply cannot compete. Just as high schools are separated by enrollment size in athletics to level the playing field, Greece ultimately needs to leave the EEU and requires a unique currency that it can control in order to compete. The $64,000 question is when that will occur and what impact it will have on other euro member nations that struggle to compete.

An even bigger issue moving forward is whether or how our own ballooning federal debt will be managed. The current focus is on avoiding the “cliff”, the predicted recession which will result from the expiration of the Bush tax cuts and implementation of automatic spending cuts.

The “cliff” pales, however, with the consequences to be realized (I believe within the next 10-15 years), of not reigning in the federal deficit. Like any worthwhile achievement, sacrifice will be required, both in terms of revenue generation and spending cuts.

That’s a tall order for a dysfunctional Congress. Let’s hope they’re listening when Mike Mullen, the Chairman of the Joint Chiefs of Staff identifies the national debt as the biggest risk to our national security.

Consumers are also changing, especially the targeted demographic of young adults. Generation Y plays by its own set of values, and they are not consumption driven.

Take the housing industry for example. While housing began pulling itself off the floor during the latter half of 2012, don’t expect a rapid return to “normal” housing starts. Family household formation has basically stalled since the recession. Who can blame young adults for not rushing to form families as colleges consistently turn out more degrees than job openings can support and the average graduate leaves with $27,000 in debt?

But it goes beyond that. According to a September 2012 article in The Atlantic, this is a demographic that values access over ownership. Downloading music and movies instead of purchasing manufactured CDs and DVDs is just the tip of the iceberg.

For example, many Millennials in large cities, armed with smart phone technology that makes new things possible daily, are joining car-sharing clubs in droves. When they do purchase, they tend to buy small, practical vehicles. In short, with the exception of their smart phones and associated apps, this is not a group interested in keeping up with the Joneses. When one considers that the housing and auto industries historically make up 15-20 percent of the GDP, that’s a big deal.

So is it any wonder that companies continue to play it safe? Temporary hires, low risk capital investments, and historically low inventory-to-sales ratios will remain commonplace. Without resolution to debt issues at home and in Europe, managers won’t bet the farm … or even the barn.

Overall, the economic pie will continue to grow over the next decade, but at roughly two-thirds the rate of that experienced during our credit addiction of the past 25-30 years.

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