Executive Briefings

Earth to Economists: Things Are Tough Down Here

Astrophysicists posit the existence of parallel universes that never meet. I can cite an example right here on earth: the world of economists on one hand, and that of average citizens on the other.

How else to explain all those "experts" who predicted that there would be no recession in 2008? Then insisted that it would be brief, no more than a quarter or two? Then forecast a "soft landing," with little structural damage to the economy? Then scoffed at the notion of a "double dip"? Who even now are suggesting that we are on a clear path out of the woods?

To put it another way, when unemployment continues to hover above 9 percent, personal income only creeps upward, mortgage foreclosures continue apace and consumer spending remains questionable, how relevant is the traditional definition of a "recession"?

Or to ask an even more naive question, how can economists differ so sharply about what's going on?

A prime example of this polarity could be witnessed at the recent Executive Summit North America of the Supply Chain Council in Palm Springs, Calif. Let's start with the happier outlook.

Jared Sullivan is an economist with CBRE Econometric Advisors. He didn't start out sounding particularly sunny. "We're quite a ways from getting back to previous levels of employment," he acknowledged. "Nothing in recent history compares." What's more, he said, the current slowdown "cuts across all industries." The country essentially added no jobs in August of this year, and precious few since then.

Still, Sullivan said cheerily, "I don't think we're actually going to be heading into a recession." The odds of a double-dip "are not very high without an external shock." (That's never happened before, has it?) Granted, consumer spending on durables had dropped for three straight quarters - an ominous sign, given that 70 percent of the U.S. economy is driven by consumer consumption. On the bright side, Sullivan said, "business spending is still pretty healthy."

Sullivan was further heartened by U.S. export activity, which he called "a continued source of profit growth worth more with the decrease in the U.S. dollar." He doesn't believe the European Union's economic crisis will have that much of an impact on the U.S. economy. "Europe," he said, "isn't a major source of our export growth."

I don't mean to overstate Sullivan's optimism; his speech to the Supply Chain Council was full of caveats. But compare it with the view of Rosalyn Wilson, senior business analyst with Delcan Corp.. (Readers of SupplyChainBrain will recognize Wilson as the author of the annual State of Logistics Report, sponsored by the Council of Supply Chain Management Professionals.) "I don't think the appropriate question is whether there's going to be a double-dip recession," she said. "The question is, did we ever come out of the recession? Most American businesses really don't feel that way."

In the first half of this year, she noted, U.S. gross domestic product expanded by a "paltry" .9 percent. And don't expect growth of much higher than 1.5 percent over the next couple of years. The catch: you need a rate of at least 3 percent to make a serious dent in unemployment. The current situation, said Wilson, "is as close to negative or no growth as you can possibly get."

Sullivan argued that "businesses are really healthy again. [They're making] higher after-tax profits than in the last decade." But Wilson sees a glass that's much less than half full. Bankruptcies, she noted, "are at an all-time high." Shopping malls are rife with empty storefronts. Seasonal items such as school supplies are almost instantly discounted, just to drive traffic into the stores. Such a tendency, says Wilson, "does not bode well for the economy."

You can see the crisis reflected in the transportation and logistics industry, where carriers are being forced to slash rates, defer maintenance on equipment and carry excess capacity during what is supposed to be a lucrative period for business. Trans-Pacific ocean carriers are having trouble making their traditional "peak season surcharge" stick because - well, there just isn't much of a peak.

For those businesses that are doing relatively well and spending money, it's not going toward the hiring of additional people. They're mostly investing in technology to make their operations even more productive. (When they're not building up war chests for future acquisitions.) Sullivan mentioned the 1.82 million square-foot distribution center being built for footwear manufacturer Skechers USA, Inc. in California's Inland Empire. The facility will rely heavily on robots to minimize the number of warm-blooded bodies needed to run it. "Maybe this is the real problem behind our slow employment growth," mused Sullivan. You think?

Whom to believe? Take your pick. But Wilson's message clearly bears the more bitter taste. So much so, in fact, that one member of the audience arose just to criticize her negativity. But Wilson wasn't all doom and gloom. "We will recover," she said, "but you have to change your mindset." Companies need to do a better job of managing the risk that's inherent in supply chains during tough economic times. They should be working closely with major suppliers to ensure a steady supply of raw materials, parts and finished goods, while developing alternative sources in case those suppliers should fail. "We are not out of this storm," she warned. "It's still going to be tough."

Of course, one can always take comfort in the inevitability of change - a point that Sullivan made inadvertently during his PowerPoint presentation. "This slide is a little old," he said apologetically. "I made it last week."

- Robert J. Bowman, SupplyChainBrain

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Astrophysicists posit the existence of parallel universes that never meet. I can cite an example right here on earth: the world of economists on one hand, and that of average citizens on the other.

How else to explain all those "experts" who predicted that there would be no recession in 2008? Then insisted that it would be brief, no more than a quarter or two? Then forecast a "soft landing," with little structural damage to the economy? Then scoffed at the notion of a "double dip"? Who even now are suggesting that we are on a clear path out of the woods?

To put it another way, when unemployment continues to hover above 9 percent, personal income only creeps upward, mortgage foreclosures continue apace and consumer spending remains questionable, how relevant is the traditional definition of a "recession"?

Or to ask an even more naive question, how can economists differ so sharply about what's going on?

A prime example of this polarity could be witnessed at the recent Executive Summit North America of the Supply Chain Council in Palm Springs, Calif. Let's start with the happier outlook.

Jared Sullivan is an economist with CBRE Econometric Advisors. He didn't start out sounding particularly sunny. "We're quite a ways from getting back to previous levels of employment," he acknowledged. "Nothing in recent history compares." What's more, he said, the current slowdown "cuts across all industries." The country essentially added no jobs in August of this year, and precious few since then.

Still, Sullivan said cheerily, "I don't think we're actually going to be heading into a recession." The odds of a double-dip "are not very high without an external shock." (That's never happened before, has it?) Granted, consumer spending on durables had dropped for three straight quarters - an ominous sign, given that 70 percent of the U.S. economy is driven by consumer consumption. On the bright side, Sullivan said, "business spending is still pretty healthy."

Sullivan was further heartened by U.S. export activity, which he called "a continued source of profit growth worth more with the decrease in the U.S. dollar." He doesn't believe the European Union's economic crisis will have that much of an impact on the U.S. economy. "Europe," he said, "isn't a major source of our export growth."

I don't mean to overstate Sullivan's optimism; his speech to the Supply Chain Council was full of caveats. But compare it with the view of Rosalyn Wilson, senior business analyst with Delcan Corp.. (Readers of SupplyChainBrain will recognize Wilson as the author of the annual State of Logistics Report, sponsored by the Council of Supply Chain Management Professionals.) "I don't think the appropriate question is whether there's going to be a double-dip recession," she said. "The question is, did we ever come out of the recession? Most American businesses really don't feel that way."

In the first half of this year, she noted, U.S. gross domestic product expanded by a "paltry" .9 percent. And don't expect growth of much higher than 1.5 percent over the next couple of years. The catch: you need a rate of at least 3 percent to make a serious dent in unemployment. The current situation, said Wilson, "is as close to negative or no growth as you can possibly get."

Sullivan argued that "businesses are really healthy again. [They're making] higher after-tax profits than in the last decade." But Wilson sees a glass that's much less than half full. Bankruptcies, she noted, "are at an all-time high." Shopping malls are rife with empty storefronts. Seasonal items such as school supplies are almost instantly discounted, just to drive traffic into the stores. Such a tendency, says Wilson, "does not bode well for the economy."

You can see the crisis reflected in the transportation and logistics industry, where carriers are being forced to slash rates, defer maintenance on equipment and carry excess capacity during what is supposed to be a lucrative period for business. Trans-Pacific ocean carriers are having trouble making their traditional "peak season surcharge" stick because - well, there just isn't much of a peak.

For those businesses that are doing relatively well and spending money, it's not going toward the hiring of additional people. They're mostly investing in technology to make their operations even more productive. (When they're not building up war chests for future acquisitions.) Sullivan mentioned the 1.82 million square-foot distribution center being built for footwear manufacturer Skechers USA, Inc. in California's Inland Empire. The facility will rely heavily on robots to minimize the number of warm-blooded bodies needed to run it. "Maybe this is the real problem behind our slow employment growth," mused Sullivan. You think?

Whom to believe? Take your pick. But Wilson's message clearly bears the more bitter taste. So much so, in fact, that one member of the audience arose just to criticize her negativity. But Wilson wasn't all doom and gloom. "We will recover," she said, "but you have to change your mindset." Companies need to do a better job of managing the risk that's inherent in supply chains during tough economic times. They should be working closely with major suppliers to ensure a steady supply of raw materials, parts and finished goods, while developing alternative sources in case those suppliers should fail. "We are not out of this storm," she warned. "It's still going to be tough."

Of course, one can always take comfort in the inevitability of change - a point that Sullivan made inadvertently during his PowerPoint presentation. "This slide is a little old," he said apologetically. "I made it last week."

- Robert J. Bowman, SupplyChainBrain

Comment on This Article