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Friday, July 29, 2011

Total Disaster

UPDATE: Technically, due to the revisions we are in a double-dip recession right now. We did not climb back to previous peak before collapsing out again, which means deflation. See the bottom of page 25: Net GNP Q1 2008: 11,573.9. Net GNP Q2 2011: 11,484.1. Brought to you by Bennie. End Update.

It could not have been worse. GDP, I mean. My eyeballs just burst into flames. I am in shock.

Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 3.7 percent, or $136.0 billion, in the second quarter to a level of $15,003.8 billion. In the first quarter, current-dollar GDP increased 3.1 percent, or $112.8 billion.
That there 15 trillion is the number we are looking for, and it means that you can ignore all the chaff and we are in outright deflation. The reason the numbers are moving around is because of the annual revision.

So the US is now at 100% Debt/nominal GDP ratio, including intra-governmental debt. This is not going to help Congress in its debt limit negotiations, is it?

Let's make that three debt downgrades for the US over the next year. Whoa, whoa, whoa, the next election is going to be interesting. Part of the problem stems from the NIPA revisions:
For 2007-2010, real GDP decreased at an average annual rate of 0.3 percent; in the previously published estimates, real GDP had increased at an average annual rate of less than 0.1 percent. From the fourth quarter of 2007 to the first quarter of 2011, real GDP decreased at an average annual rate of 0.2 percent; in the previously published estimates, real GDP had increased at an average annual rate of 0.2 percent.
The red meat in this release is in Table 12 B which starts on page 38.

Q1 was revised down to 0.4%. That's annualized. Q2 is given as 1.3%. Anyone who really believes that GDP in Q2 was better than in Q1 has a very interesting mindset! It wasn't. It was worse. They have real services too high.

If you go to the top of page 25 and look at real GDP, you can see that real GDP in Q2 (advance) was reported lower than real GDP in Q2 of 2008. Real GPDI is reported too high also; inflation was a lot higher than 0.4.

Several years from now these figures are going to be revised to somewhere around Q1 +0.7%; Q2 -0.2%. From here we cycle up and down for a couple of quarters (the "skip") moving around zero, and then tip to some more unambiguous contraction for at least a few quarters. Unless things get worse, because they cannot get better.

What's going on here is that real incomes for most of the population are still declining, and worse yet, the private economy is still cycling down in terms of real incomes. Look at Q1 2008 vs Q2 2011 at the bottom of page 25. That includes a huge input from excess government spending, which (cough) we cannot sustain.

PS: It seems likely that CR will douse his eyeballs long before I do. Bravely, he has updated this graph, which screams "TERROR":

The machinery is grinding to a halt.
The ones that will be hurt are the ones
that can least afford it. Slashing safety nets
to enable banker bonuses and corporate
profits will see to that.
Word of the day: unmitigated
How long until we hear the blast of a steam whistle signifying Commodore Bernanke and the QE3 are putting out to sea? After all, he can push the real interest rate below 0% simply by increasing inflation, and lowering real rates is the only tune our Johnny One-note really likes, anyway.

Firms and investors will keep their capital high, dry, safe until a new William McChesney Martin is installed at the Fed by a new Ronald Reagan in the White House.
acceleration of change due to adaption of technology primarily computer digital software continues to transform what we call the work place yet little attention has been given to its impact on employment,long term growth and economic income distribution other then to generate faster adaption via government tax policies or to hold worn out beliefs that new technology will generate job growth. Many wonder what happened to small business the so called engine of growth, well would you risk your home and assets buying million dollar equipment knowing that in a few years or months it will be worthless due to changing technology?
Ron - those are long term trends you are citing and they have nothing to do with the rapid changes in the last four years.

Those rapid changes have to do with classic credit/boom cycles, which always do end in a classic, and awful, bust.

There is nothing at all mysterious or technological about this cycle.

Demographics add a uniqueness - that is true. But the technology issues are just the parsley at the side of the entree.

My eyeballs just burst into flames. I am in shock.

Seriously, how can you be in shock? As if all of this is an "unexpected" outcome.

Greensham, Bernanke and a venal CONgress allowed Wall St. to create trillions and trillions of extractive, counter-productive and outright fraudulent debt. The Gov't then bailed out and further rewarded the fraudsters.

And rather than make meaningful changes, we left the same crooks and wealth extractors in charge of the same credit system.

Anyone expecting a good outcome against that backdrop needs to have their head examined.

Repent M.O.M.!!! You need to let go of all the eCONomic lies that you've been fed. Academia has been corrupted. Politics have been corrupted. The media has been corrupted.

The knowledge of stewardship has been lost.
MOM, yes, tech didn't just happen over the past 4 years but the rate of change over the past 30 years can clearly be seen in our employment and business sector today which is part of the reason that financial solutions such as cutting spending, tax cuts or various stimulus packages are not much more then temp relief.
computer digital software

This reminded me of my favorite newspaper headline:


Many New Contrivances Just As Cheap, Dependable As Chinese

- The Onion, May 29, 1905
Ron, I don't know what you're going on about. Tech is great. It's continually increasing productivity. Yes it's disruptive -- but that's one of the things I like about it. For people who are afraid of change or don't want to keep up (or can't), yeah - they're not going to like tech quite so much. Oh well.

Your rant about tech hurting small business is nonsense. Tech has brought cheap productivity to small business just as it has to large. I know a guy with his own one-man shop that runs several industrial robots (in the ball park of $50K each) in his garage to manufacture goods for all kinds of customers -- with the whole thing mostly computer controlled so robots will move parts from one machine to the next. A number of other people I know are also leveraging tech for their own businesses, one just made an automated assembly system for some other company, one is working on some portable electronic gadget.

Robots are cheap and getting cheaper. So are computers. You can get custom circuit boards made very cheap if you find that circuit-design is your thing. You can design all kinds of things and for zero start-up cost have them printed in 3D for your customers until you make enough money to buy your own equipment. You can write software and sell it any number of ways (including direct sales on your own web site) with almost no start-up costs...
...Even when small businesses are technically shut-out in one narrow piece of the market due to real-world issues (e.g., no small business is going run their own chip-fab because modern ones cost $billions to construct), small businesses can still thrive. Like ARM, you can design chips and then license out the design or order them from open chip foundries. Or you can use FPGAs such as those made by Xilinx.

And even the education required for all of the above can be had at practically zero cost. Really -- this stuff is all out on the web. All you have to do is read it, practice it, get good at it. A university education is absolutely *NOT* needed (and for many people is probably not even useful -- just a waste of time and money for a piece of paper that smart interviewers such as myself give *zero* weight to, though unfortunately the dumb corporation I am currently in does adjust pay based on education level -- but that just means that this dumb corporation is asking to get its lunch eaten by some other company or private business that isn't so retarded).

Do you know what doesn't work? Sitting back and expecting "the system" to just give you a living. Expecting it to just give you a job that is easy enough to do that you don't have to think too hard, or learn too much, or work too hard. When politicians talk about "creating jobs" they are lying -- government can't create jobs, at least not real jobs that are a productive member of the real economy. The only (positive) thing they can really do is get government the hell out of the way and let those of us who are ready and willing to seize the day do so.

And really, what are you going to do? Throw your sobots into the machinery? You can't stop the tech wave -- you have to just get good at riding it.

(It's too bad blogspot's tech keeps eating my posts though -- this is my fourth attempt to make this thing stick.)
"Your rant about tech hurting small business is nonsense. Tech has brought cheap productivity to small business just as it has to large."

In the past most small manufacturing start ups were skilled labor that left their employers and started a job shop building their business based on their reputation within the industry to attract clients. They would grow the business by adding other skilled employee's or training selected people and as a result small business became known as an employment driver for the economy.
Today small business is very much as you describe someone working alone using computers or other technology rather then hiring employee's. One big reason is the cost to provide the necessary equipment automation, server farms, distribution outlets,sales staff necessary in today's business world so small business has become very small. If they do want to grow the business either they have the capital themselves or dilute and seek investors.
I don't fear tech but I am a retired small business owner who started and owned several companies from 1976 thru 2003. My own experience with technology is mixed in that I was able to reduce floor labor cost but needed to built a large IT staff and sales staff along with running 24/7 to make payroll. It was also very difficult to keep margins up as technology driven competitors could now enter my market space which in the past had been driven by skilled craftsmen. My new competitors had better capital resources and would cut prices to gain market share.

So my rant about tech hurting small business is related to the costs associated with growing a small business in today's world were competitors use their financial resources to limit your market share,run you out of town so to speak so what we call small business today is mostly insurance agents,RE agents, and skilled loners that are able to find niche markets for themselves but their business generally doesn't require additional employee's and as a result small business is not the employment driver it was in the past.
Real GDP per Civilian Employed

What's the problem? Things look great! *sarcasm*

Word verification: medicali

Scariest word verification ever in my opinion.
"One big reason is the cost to provide the necessary equipment automation, server farms, distribution outlets,sales staff necessary in today's business world so small business has become very small."

There are considerable variations from industry to industry, of course, but in general it seems to me the trends are just the opposite. You don't need capex for a server farm when you can outsource it to a hosting provider. Internet-based sales provide an alternative (in some case) or a supplement (in most other cases) to a traditional field sales organization; also, telesales (talking about biz-biz telesales here, not sleazy telemarketing) has become more accepted than it was in the past.
"a large IT staff"

That right there should raise a giant red flag. Small businesses should generally not have large IT staffs -- it likely indicates you were doing something wrong.

"and sales staff"

Each sales person should either be pulling in profit or cut loose.

"technology driven competitors could now enter my market space"

Yes, like I said, tech is disruptive. You have to move with it. You can't stand still. Standing still is death. (What do you think would happen to Intel if they were still trying to sell 386's as their flagship product?)

"which in the past had been driven by skilled craftsmen"

Skilled craftsmen are absolutely still required and an important (if not THE most important) driver (though not necessarily the only driver). It's just that what they have to be skilled at has changed.

"My new competitors had better capital resources and would cut prices to gain market share."

If they are selling at a loss to force you out, that has little to do with tech.

"but their business generally doesn't require additional employee's"

A lot of people are very happy working alone and that's a choice for them. Even though I work at an absolutely giant corporation now, I pretty much work alone -- it was a rule I laid down before I would work for them. (They tried to revoke that rule last year and I told them I quit -- they caved and asked me to stay.)

I've worked at a smallish place in the past (around 100 employees). Even though they had lots of employees that could work on a given customer project, they typically only used a few designers on each project (and just did lots of projects concurrently). Throwing more people at a single project would just run right up against the well-known "mythical man-month" problems, and management there wasn't stupid so they didn't fall for that. What made them really shine (and I assume still does even though I'm not there anymore to see) as a small business (as opposed to say a 3-man shop) was that they developed and continually improved a solid library of design elements that they reuse heavily (and to very good effect) in nearly every job they take on. (So that right there is one reason for a small business to grow -- to leverage their in-house IP.)
foo says..."Each sales person should either be pulling in profit or cut loose"

This is true, of course, but when you're building a new sales force from scratch it is going to take a while to get to break-even. Not only do people have to get hired and develop a pipeline, but if your product is at all conceptually new, you and they are going to have to do some experimenting to figure out what approaches work best.

Sonosite offers an interesting case study in sales channel development.
foo, no disrespect, I fully realize you are smarter than us all, so can you go back to hanging out on Slashdot or something? The lecturing is getting unbearable. Really.
Foo, in my experience Ron is describing a structural barrier that really does exist.

When small businesses expand, it is usually because they are hooked into a business structure that has a pre-existing sales/intermediary network which is efficient, disseminated and can essentially market the new business' product/service at a very low cost.

It's sort of like finding the nexus for the industry/target is task 1.

Mind you, I am speaking of business-to-business sales now.
Thank you!
MOM, I understand that trying to build a base of customers has costs and difficulties. What I am not understanding is how advancing technology makes that problem worse. In many areas I think technology has made it better.

For example, say you are a business selling electronic parts. It used to be the only way people would know about your parts is either via a sales rep, a dead-tree catalog, or word of mouth. These days if you use any number of online distributors it makes it much easier for customers who have never heard of you to find your parts. (For example, go check out the parametric search features at Digi-Key. The search is complemented with instant access to each part's data sheet. It gives businesses a product-location tool that makes a system like Amazon's look like nearly worthless junk by comparison. And Digi-Key still has lots of room for improvement.) Call it wishful thinking, but I really believe this kind of producer/consumer matching service will only continue to get better and expand into more domains in the future. (What I would really like to see is a genericized system that producers/consumers can adapt to the products they make or are interested in so we don't have artificial "product islands" and niche sectors that don't get serviced.)

I don't know if anything similar currently exists in Ron's space. But if it doesn't, it seems to me there may be an opportunity there.

I think technology helps in other ways too. For example, online communities bring people working in similar spaces together, vastly improving the effectiveness of word of mouth. (And I have personally witnessed small businesses make very effective use of such channels.) Even the "lowly" google can be used by business customers seeking product (I've done that myself on the job).

The above is not going to completely replace skilled sales reps. But I see the above technology as helping enable small businesses compete in a global market (both on the production and consumption sides) rather than hindering small businesses. In fact, I see it as directly (though not completely) addressing exactly what the second sentence of your last post is talking about.
In general, Internet-based sales work better when your product fits into an existing category than when it defines a new category. If I'm manufacturing an improved Gerbilator, then it's likely that people looking for Gerbilators will find my product on the Internet and quickly realize from the description why it's better than the competitive ones. But if I'm introducing a whole new product category..say, one that combines the features of a Gerbilator and a Cosmotron, the sales & marketing problem is considerably more complex.

Christensen & Raynor, in their book The Innovator's Solution, offer an example involving a product to be sold through hardware & home improvement stores. The problem was that the two categories were handled by separate buyers in the stores, who were themselves evaluated on pretty narrow criteria.
I've worked in IT. From what I have seen, off the shelf software doesn't always work for what a company wants to do. That leads to having a development team. Sometimes, trying to use off the shelf software leads to having a development team to make it all work together. (Company I worked for used software with a Oracle database for part of the work and software using Sybase as the database for another. It wasn't a large development team but very necessary.) Operations in different parts of the country will require network admins. Even if you turn part of it over to a big corporation like HP to handle (and that company did that), you still need your own IT group.

The small company I work for now had to bring in more developers. The trouble ticket system is old and needs more automated processes and verification added. The website definitely needs to be reworked. They are bringing in someone to do networking support for small businesses. So I just don't see that IT costs are a "red flag" that something is wrong. I don't see it as any different than having a maintenance man that keeps the factory machines running.

Yeah, that's a trickier problem than what current automated systems are trying to solve. I can imagine what I think would be workable solutions, and hopefully we will eventually get them. But in the mean time businesses introducing sufficiently different/new product categories do have this added challenge.


To be fair, I wasn't responding to just "IT costs" but to "large IT staff". Perhaps I jumped to the wrong conclusion (and it doesn't help that "small" and "large" are both ambiguous terms), but to me "large IT staff" + "small business" = "very likely a lot of this staff is doing dev work" (simply because the other IT tasks you list generally don't require a large full-time staff unless the small business is very IT-oriented like an ISP or a cloud computing service).

With respect to dev work, perhaps the real flag here is a green one for businesses to provide/sell solutions that contain the features they and many other businesses need in a more easily customizable form? When I see "large IT staff" I get suspicious that there are many other businesses out there developing structurally similar solutions, even if the details differ. I know businesses are competitive by nature which is one reason they usually don't share these solutions with each other, but it's still a bit depressing to think about how much duplication of effort is likely happening -- and on a relative basis that duplication is going to be harder on small businesses than on large ones which can amortize those same fixed costs over more sales. (I see duplication of effort not only as an in-house dev scene issue, but as an issue with software development in general.)
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