Six Economic Themes for the Decade Ahead

Dr. Michael Cox of SMU (and past Chief Economist of the Federal Reserve) recently presented “Six Economic Themes for the Decade Ahead.”

The 25 year period from 1982 – 2007 represented the longest string of almost uninterrupted growth in U.S. history, in stark contrast to every other measurement period. The 2010 – 2020 period will most probably be different.

Innovation was the first theme, and was key to economic growth from 1982 – 2007. Fueled by the technology explosion, spillover from hardware, software, the Internet, and microchip hugely impacted our economic growth. In fact from 1995 – 2007 the microchip and its usage was the most important contributor to economic growth.

So what’s in store for 2010 and beyond? We are still waiting for that one great idea or innovation. One possible prediction is Pharmacogenomics, which is the ability to use individual genetic information to predict whether a drug will make a patient well or ill.

Globalization. Foreign country growth has added approximately 3 billion new capitalist consumers. 21 of 22 potential customers are now outside of the United States, and accessible in ways never before available.

Credit. From 1982 – 2007 there was an abundance of financial trust and available credit.

Recent large scale financial institution failures (at least in the near term) resulted in even greater government regulation. The years from 2010 – 2020 credit markets will most likely operate under a cloud of suspicion and fear. Unabated, new government rules have the potential to crush small businesses in the opinion of Dr. Cox.

Consumerism. Our attitude has shifted from “too much ain’t enough” over to “saving is chic." Personal savings rate shifted from approximately 9% in 1947 to 1% in 2008. Personal debt had grown to 120% of personal income.

Times have changed. Current savings rate has grown to 4% at the end of 2009 and appears to be rising. Companies need to better understand elasticity of demand relative to income and its impact on changing purchasing habits by businesses and consumers.

Inflation. Most mainstream economists believe a low steady rate of inflation is good. Low (as opposed to zero or negative inflation) is typically believed to reduce the severity of economic downturns

Between 1982 – 2007 inflation averaged between 2% - 3%. In 2009, inflation in the U.S. averaged -.34%. With the National Debt projected to be almost $12 trillion in 2010, controlled positive inflation is critical to help improve the economy. Controlled inflation will help in reducing the federal debt and improve equity values in private real estate ownership.

Government. Between 1982 – 2007 government intervention was considered minimal. The general feeling was “less is better."

However, Dr. Cox feels there will be significantly more government regulation and intervention between 2010 – 2020. This is driven both by the recent problems in the financial markets as well as the current administration’s underlying political philosophy.

This does not bode well according to Dr. Cox, and he foresees serious negative implications to business growth as a result. He also believes the income tax burden to higher earning individuals and businesses will increase.

Further government overreacting with policy fixes and increasing the tax burden will slow the economy even more in Dr. Cox’s opinion.

Conclusion

So was the overall opinion by Dr. Cox one of complete doom and gloom? No. While clearly he is concerned that overreaction by the federal government in terms of policy making could seriously impact the well being of private enterprise, an even greater opportunity lies with the expanding global economy. The challenge for American based companies is to recognize and correctly respond to this global business opportunity.

Posted by Wayne Rampey, Vice President, The InSource Group