Michael Mandel, Chief Economist at BusinessWeek gave a sobering and thought provoking presentation on the economy at the MTLC Annual Meeting. He explained the huge expansion of debt and plummeting savings rates in the US over the past 30 years that contributed to the current situation. Mandel also included 10 year snapshots of wage growth and stock market performance which illustrated ZERO real growth. A lost decade. We read the headlines but they don’t sink in until you see the data visually. It is stunning…a story best told by charts and graphs.
This chart shows the S&P 500 adjusted for inflation with 1997 being the base year. The stock market booms of 2000 and a smaller boom in 2007 are clearly visible. At the end of the 10 year period the S&P adjusted for inflation is significantly lower.
Life in the Tech bubble – The stock market performance does not match the explosion of innovation and technical advances we have seen in the same period. The Internet became real and usable for most people in this timeframe. Yahoo, Amazon, eBay, Google, and many other companies led the web ecommerce explosion. Every major company started selling products and services on the web. There was a similar innovation explosion in wireless technology and cell phone applications. Social applications exploded with MySpace, Facebook, YouTube, Flickr, Twitter, lots of blogging technologies, and hundreds of other innovations.
Comparisons to The Great Depression - Yet, all of this innovation in technology and growth of the web produced absolutely nothing in terms of real wage growth or stock market returns. In fact, this period, from a stock market perspective, was worse than The Great Depression of 1929. Again, take a look at this slide from Michael Mandel of BusinessWeek that compares 1997-2009 to 1927-1939. The comparison is stunning…and scary.
How did we get here? This crisis has been building for a long time. Savings rates have been declining for years. Debt has been exploding. GDP growth masked these problems, but when you look closer at GDP growth you see that it was fueled by massive borrowing. Basically, artificial growth. These charts, assembled by Charles Songhurst at Microsoft, tell the story. First, private debt to GDP from 1920 to 2009. Debt is now higher than any other time in history, including The Great Depression of 1929.
This chart shows how Mortgage Equity Withdrawals (borrowing against equity) has fueled GDP growth. If you subtract that debt out of the GDP growth you see a much lower real GDP growth, illustrated below by the red bars. GDP growth was actually negative in 2000 and 2001, and less than 1% most years since then.
Most economists predict that consumer spending will drop further, savings rates will increase, and a massive deleveraging (debt reduction) will take effect over the next few years. The federal government is responding with massive spending in the Stimulus Bill recently passed by congress. Healthcare, Energy, and Education will receive big chunks of the stimulus spending. Interestingly, these are sectors that are labor intensive, so job growth is expected to result. These are also sectors that do well in recessions. Everyone must buy healthcare, energy, and education no matter what the economy is doing.
Information Technology saves money and increases productivity – Innovation will lead us out of this recession. Those technologies that provide immediate cost savings will do best. Businesses are looking for ways to save money first. New technologies that enable entirely new approaches, new value, or new experiences will get businesses and consumers spending again.
The stock market is not likely to reward companies that cut jobs, retrench, and cut dividends. It will be seen as a sign of weakness. Strong companies that take a contrarian view and invest aggressively in new products and technologies will gain consumer confidence and win market share. Smart companies will recognize the opportunities and resist the temptation to retrench like everyone else. As Warren Buffett says “be greedy when others are fearful”.
You can read Michael Mandel’s blog and see his entire presentation at BusinessWeek.