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|Dr. Joe Webb - For Premium Access Members|
Fridays with Dr. Joe:
Last Friday, the advance report for Q4-2005 GDP was released, showing +1.1% growth. This was a bad report. It’s not that the report says that things are bad, it's just that I think the number will be revised up as it goes through its preliminary and final revisions over the next couple of months. Back in September's economic webinar, I felt that it would be in the +2% range. I later revised that in December to +3.25% or so. The +2% number is probably more like it.
Why will it be revised up? Employment data are strong, but since they are a lagging indicator, we can’t put too much emphasis on them. The ISM reports have shown great resilience through the fourth quarter, as did the leading economic indicators. Holiday shopping was good from a revenue standpoint (but retailers cut prices so much they did not make money). If there is a reason for a dour report, it will be auto sales that depress the final data. We're still on a 3% to 3.5% track for the year, with the caution that the Fed should stop raising rates soon. Otherwise we'll be in the 2.5% range.
For the year, real GDP was up +3.5%. If your company judges itself against GDP growth and does not adjust for inflation, current dollar GDP was up +6.4%. For your company to keep up with the economy and inflation, your sales (and other categories perhaps) should have increased by +6.4%, and not +3.5%. It's amazing how many executives compare their companies with real GDP and are not aware that they should be comparing their performance on a current dollar basis.
Consumer confidence data were up, and are now above the pre-Katrina/Rita levels of August. I have never understood the interest in this data series since it is so bad at predicting things. I'd much prefer looking at things like credit use (I'll discuss this more next week). I saw the recently-reported negative savings rate as good news, unlike most business commentators, because it shows that people are aware of the scope of their wealth. There are things not measured by the savings rate data, such as real estate and existing savings and pension plans, which have been increasing in value faster than inflation. The savings rate only counts new money, not an increase in overall wealth.
Alan Greenspan left on a high note, so to speak, raising rates by a quarter point as he turned off his office lights for the last time. The Wall Street Journal has a feature that parses the Fed's statements, and concludes that they may be close to being finished. I don't think they are; they should be, but they're not.
The BLS issued its productivity report, which declined in the fourth quarter. This was not a surprise considering the GDP figure. This, too, should be increased in the next revision. Unreported in the news was the fact that that productivity in durable goods manufacturing was up a very healthy +8.9%! Once you read past the third paragraph, this was not as discouraging a report as the media would make it out to be.
Initial jobless claims for unemployment insurance were down by 11,000, and the four-week moving average fell to 284,250. This is the lowest since June 10, 2000, near the peak of the Dow Jones and NASDAQ indices. Employment data are a lagging indicator, so this figure is yet another indication that the fourth quarter GDP was not as dour as the advance report indicated.
The ISM Manufacturing Index dropped slightly in January, moving from 55.6 to 54.8, indicating good but not robust growth. The index has been positive for manufacturing for 32 consecutive months and positive for the overall economy for 51. An encouraging part of the report was that backlogs, which had contracted in December, are now growing again.
This week started with journalistic handwringing about Exxon's “record” profits. I thought the reaction was predictably entertaining, for want of a better word. In the ranked profit margins of the Dow Jones Industrials stocks, Exxon is 18th. The fact that Exxon is big—driven by government regulation and other factors that create (often at the urging of business) barriers to new firms entering the industry—seemed to escape a lot of the business press. View the Dow Jones Industrial profit margins.
Interestingly, some industry suppliers, especially those whose products have created much of our upheaval, make what some people would consider—using the Exxon standard—“obscene” profits. How about Adobe, with a 30.6% margin, and its Photoshop product, used by more than 90% of the industry? Where is the outcry against that (and the thousands of prepress workers “thrown out of work”)? Intel and Microsoft are in the list above already. Apple is only at 9.8%. But what about Pixar, Steve Jobs’ part-time job? Try 59.8%. Why isn't Steve skewered for taking all that money from those helpless, unemployed, uneducated kids who yearn to see Pixar's movies (manipulated by advertising on children's television shows, of course)? And computer-generated images in Pixar's movies? Why, that puts actors and stage production workers out of work! Why hasn't his exploitation of children and anti-union activities resulted in his being hauled in before Congress to testify?
Of course, these are silly reactions, much like those the press had to Exxon's report. What's more amazing is that Exxon didn't make more money than it did and that the company is in the bottom half of the Dow Jones Industrials based on profit margins. If I were a stockholder, I might actually be pretty miffed at their mediocre performance! And at the average corporate tax rate for the petroleum industry, the U.S. Treasury will be getting $4 billion from Exxon.
Peter Drucker frequently stated that the only thing business can reliably count on is costs, nothing else. Revenues can be elusive, and by the time profits are realized, they are already committed to something else. In a Wall Street Journal article nearly 30 years ago, he wrote “[B]usinessmen owe it to themselves and owe it to society to hammer home that there is no such thing as 'profit.' There are only 'costs': costs of doing business and costs of staying in business; costs of labor and raw materials, and costs of capital; costs of today's jobs and costs of tomorrow's jobs and tomorrow's pensions.”
There was yet another article in the National Journal (1/27/06 edition) about how business and other writers in the publishing industry are looking at the economy and their industry from the perspective of their personal job security. Real GDP of +3.5%, weekly jobless claims under 300,000 (when under 400,000 indicates growth), increases in consumer confidence and leading indicators, increases in real wages, highest household wealth in history, strong new business formations, home ownership at record levels, and numerous other economic data are summarily dismissed. The National Journal article is a good discussion of the turmoil and changes in the publishing industry, with a very good paragraph toward the end that summarizes its tone chiding the industry to shut up and get back to work:
For one thing, if we really are entering a brave new world of niche media, it’s important to remember that magazines got there long ago. Each magazine is a kind of club that you join, a tribe defined by interests, taste, sensibility, design, and countless other factors. And getting the latest dispatch from that club in your mailbox, something you can hold in your hands, is a more intense, personal experience—more niche-y, if you will—than surfing to it on the same flat screen where all other media live. In an era of specialized media, the hard-copy magazine in some ways out-specializes them all.
(I got some cynical yucks upon reading the first paragraph of the article: Going out to walk the dog a few days ago, I grabbed one of those plastic newspaper-delivery sacks that make such a fine canine-cleanup tool, and had a sad thought: If newspapers ever disappear, I’ll sure miss these bags.)
As a manager, it’s often important to hold your business at arm's length and look at it as an outsider. It's hard to be objective in the daily grind of the shop floor and the office. A couple of years ago, I took some ribbing when I recommend taking a “news holiday” once a week, to make sure you’re not in touch with things, and to do something totally different than your daily routine on that day. And I’ve always been amused by companies that “expect” staff to be in the office on Saturday mornings and other times; psychologically it only increases the thickness of the blinders that those workers have to the outside world, and those blinders fit more snugly when they return to work Monday morning.
Some publishers still don’t “get it,” as illustrated by this article in the Financial Times.
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