Economically speaking it would be hard to characterize last week as great, and yet it was better than expected and certainly better than many had feared. The critical number, the 3Q GDP, came in above last quarter’s level, and that pretty much laid the double-dip recession theory to rest. Far from showing wild swings of volatility, the stock market was remarkably stable, varying only about 250 points on the Dow between lowest and highest levels and closing only about 70 points lower.
This week, of course, the elections in the US will likely drown out any economic data released. The campaign has been among the most bitter in memory, with negative ads souring virtually all of the voters polled. Democrats hold a significant edge in voter registration, so it’s very likely that were turnout to be high they’d hold on to most if not all seats. The challenge for them is that the party who wins a Presidential election in the US nearly always loses seats in Congress in the mid-terms. The question is how many, whether it would be enough to give Republicans a chance at putting forward their own agenda, or whether Democrats would work with Republicans to support at least some sort of legislative progress.
Republican priorities, such as they’ve been hinted, seem to be focused on show. Repeal of the financial reforms or health care is next-to-impossible lacking veto-proof majorities in both House and Senate, and nobody is predicting that level of Republican win. Democrats really haven’t articulated any substantive agenda either, in my view; likely they don’t think they’ll be in a position to promote one. Thus, we can’t expect much but reactive politics no matter who wins.
For the economy in general, and for tech in particular, that might not be bad. We need better financial reform than we got; hedge funds that only millionaires can invest in manipulate the markets and their “bets against the market” are really bets against the average investor—and we know who’s been losing. We needed better healthcare reform too. We have the most expensive healthcare system of any industrial nation, and yet we aren’t anywhere close to the healthiest or longest-lived among them. But neither of these areas are going to be fixed further, and so having at least a stable framework is better than being in a constant state of flux. The economy will now likely slowly recover, but we do believe that restoration of “normal” employment levels may take five years—if it ever comes. The US is shifting away from being a producer economy because productivity gains aren’t keeping more expensive US labor competitive with emerging economies. As we’ve noted before, spending on IT since 2001 to enhance productivity has not kept pace with past history. That has to change to increase jobs here.
An article (http://www.businessinsider.com/m2-velocity-suggests-a-stronger-q4-gdp-2010-10) has correctly noted that the M2 money supply trends can be correlated reasonably with economic conditions. M2 is a broad measure of money supply, and when it sinks sharply it’s an indication of money being hoarded. It did shrink during the downturn, and it’s now expanding again, which is a good sign.
We must point out, though, that our own chart on the downturn, which was published in our special report in the fall of 2008, illustrates that “wealth growth” in the broadest economic sense tends to create bubbles if it’s not accompanied by GDP growth. We also note that neither wealth nor GDP growth correlates well with how consumers feel. Yes, a big downturn will create a corresponding dive in sentiment, but often upturns in sentiment come during or after downturns in wealth/GDP. The mindset of the consumer is more complicated than simple charts can show, and it’s going to be the consumer that gets us out of this eventually.
Tech, of course, is both directly and indirectly linked to an economic recovery. Most companies will spend more when they make more, and that’s also true with households. More succinctly, belief in future progress tends to fuel current spending. We hope that the M2 upswing is an indication of feel-good behavior, and the fact that the 3Q GDP growth was fueled largely by consumer spending is a good sign.