The folks at Merriam-Webster ranked the word “Austerity” the word of the year because so many people had looked up its meaning in 2010. But as you know from my last blog, instead of getting me down – the more negativity I hear about in the economy the more optimistic I become.
Contrary to popular belief, my optimism is not because I am a contrarian (although I am). My optimism comes from the fact that I love to get my hands dirty with financial and economic data. And the data tells me that 2011 will be a stellar year for the US economy.
Most importantly for the IT sector, the big news that the US economy will be growing is not the real headline. The real headline here is the how and why the next decade will be second only to the economic prosperity of the nineties. Before I get to my thoughts on the how and why, let’s have some fun with the data.
Our US economic models that we use in our finance and economics practice are based on:
The Nobel-Prize winning economist Paul Samuelson posited that there are certain predictable factors in the US economy that trigger a business cycle’s top and bottom. One of the earliest signals that trigger economic growth is corporate investment in new equipment and technology. As I discussed in my Washington Watch blog on December 1, 2008, as businesses’ plant and equipment wears out and technology becomes obsolete, businesses increase their spending on equipment and technology.
As illustrated in the following graph, since I wrote that blog, Real Investment in Business Equipment and Software is up over 20%, just under pre-recession levels. This type of dramatic movement in Business Investment is always the first step in an economic recovery. And since businesses use consulting services in the implementation and reengineering of technology and equipment, the consulting sector is always a leading economic indicator.
Following increases in Business Investment comes increases in:
- Employment: Businesses hire consultants and employees to help implement their equipment and IT investments.
- Consumer Spending: These new hires increase consumer spending.
- Corporate Profits: This increase in consumer spending increases corporate profits.
- Personal Disposable Income: These profits go to increase disposable income.
- Repeat: This entire mini virtuous cycle continues to repeat until there are appreciable increases in overall economic output.
Then on the downside, comes increases in:
- Inflation: Increased overall economic demand means that there are increases in inflation. But these increases are negligible until aggregate demand nears the “potential aggregate demand”. Meaning until the economy nears full employment.
- Interest Rates: As inflation worries are near, the US and foreign governments begin to increase interest rates, either directly or indirectly. Although this isn’t completely a negative signal. The increasing of long-term interest rates are a stabilizer of potential inflation and can be seen as a sign of confidence in the recovery.
All of this linked together is illustrated below in terms of our forecast of the overall US economy.
There are two things in particular to note in the graph above. First, notice that the dramatic swings in Business Investment in Equipment and Software (from the first chart) leads to modest, but accelerating increases in GDP in the second chart. Second, notice that the red dashed line in the second chart above is the model’s historical simulation AND the forecast for the next five years. The model indicates that over the next two years, the economy will continue to pull out of the recession. It would be misleading to get caught up in the exact magnitude of the GDP increase. The important part is that business investment accelerates the recovery until it settles on a sustainable, long-term growth rate.
In addition to the overall economic structure characteristics of the model discussed above, there are three primary assumptions behind this forecast:
2. The recently passed continuation of the income tax cuts, combined with the other stimulus measures of the bill
3. And thirdly, the continued innovative resiliency of the American Spirit.
The first two assumptions above have been prolifically discussed in the press and I’ll leave the links for exploration of additional details. But the third assumption probably needs some explanation. Put simply – who could have predicted the specifics of the record, economic peacetime expansion of the nineties, including the dramatic rise in the use of the internet that dramatically change our lives? Coming out of the early nineties it was unclear exactly what was going to fuel the US out of the Savings and Loan Crisis, the record Federal deficits that financed the cold war, and how long it was going to take to lower unemployment to pre-recession levels. Each of these questions resonate in today’s recovery, don’t they?
So this leaves me with the final questions:
- What is in store for the next decade?
- What is your role in innovation going to be?
- What areas is Resolvit investing in to help further our recovery?
To answer these questions, I am working with our senior practitioners to focus on a number of practice areas that we anticipate to be drivers of growth over the next decade. As a result, we are organizing much of our service delivery and research and development efforts around the following areas.
- Smart modal technology
- Business Intelligence and Analytics
- Telecommunications Delivery
- IT Security
- Insurance and Healthcare Technology
If future blogs, our Resolvit team’s senior practitioners will be joining me and stepping in as bloggers to share our ongoing experiences, lessons, and projections on a weekly basis and I am looking forward to sharing these lessons with you.
- Brian Murrow, Partner