Category: growth

Dow 15,700

tomkapostasy1 Comment

Dow 35,000 was a dream in the go-go 1990’s when the new economy had supposedly broken all of the old rules.  Dow 3,500 was a distinct fear in March, 2009 when stocks had fallen by more than half from their peak.  Dow 10,000 is the most visible reference point in the current stock market.

Every investor and business degree holder knows that stock values are fundamentally based on the expected risk-adjusted net present value of future after-tax cash flows.  They are also tempted by the “efficient markets hypothesis” that says that stock valuations incorporate all information about future returns and therefore set the present value in a rational manner.  On the other hand, they understand fluctuations, random walks, animal spirits and the history of under and over valued stock markets.

http://stockcharts.com/charts/historical/djia1900.html

http://www.investorsfriend.com/return_versus_gdp.htm

Individuals who believe that stocks return 7-8% on average in the long-run through 2-4% dividend yields and 4-6% price increases, must conclude that the stock market is inherently irrational.  It has been 30% undervalued or overvalued a majority of the last 100 years.  Overvalued 1922-31.  Undervalued 1932-54, except for 1936-37.  Undervalued 1974-86.  Overvalued 1996-2008. 

Stocks were overvalued by 137% in 1929 before tumbling to -67% undervalued in 1933.  Stocks reached an undervaluated low of -58% in 1942.  Stocks reached a new -50% undervaluation during the depths of the 1982 recession.  In 15 short years, by 1997, they reached a 57% overvaluation.  They rose to 115% overvalued in 2000, before retreating to a mere 38% overvaluation in 2003.  In 2008, stocks were 67% overvalued compared with the long-run trends.

Based on 100 years of history, the Dow Jones Industrial Average at the end of 2010 should be 9,000.  The expected value in 2020 is 15,700, providing a 5% annual valuation return and 2% dividend return.  Investors who bet against long-term average valuations do so at their own risk.

Year  Trend  Actual +/-
1910             50 62 24%
1911             53 60 14%
1912             55 60 9%
1913             58 60 4%
1914             61 58 -5%
1915             64 56 -12%
1916             67 80 19%
1917             70 80 14%
1918             74 70 -5%
1919             78 75 -3%
1920             82 100 23%
1921             86 70 -18%
1922             90 80 -11%
1923             94 90 -5%
1924             99 85 -14%
1925            104 100 -4%
1926            109 130 19%
1927            115 140 22%
1928            121 190 58%
1929            127 300 137%
1930            133 250 88%
1931            139 190 36%
1932            146 80 -45%
1933            154 50 -67%
1934            161 90 -44%
1935            170 90 -47%
1936            178 130 -27%
1937            187 175 -6%
1938            196 100 -49%
1939            206 130 -37%
1940            216 125 -42%
1941            227 125 -45%
1942            239 100 -58%
1943            250 125 -50%
1944            263 130 -51%
1945            276 160 -42%
1946            290 200 -31%
1947            304 170 -44%
1948            320 170 -47%
1949            336 175 -48%
1950            352 200 -43%
1951            370 250 -32%
1952            388 260 -33%
1953            408 260 -36%
1954            428 260 -39%
1955            450 380 -15%
1956            472 500 6%
1957            496 500 1%
1958            521 475 -9%
1959            547 525 -4%
1960            574 600 5%
1961            603 580 -4%
1962            633 700 11%
1963            664 550 -17%
1964            697 750 8%
1965            732 900 23%
1966            769 950 24%
1967            807 850 5%
1968            848 900 6%
1969            890 950 7%
1970            935 800 -14%
1971            981 850 -13%
1972         1,030 900 -13%
1973         1,082 1000 -8%
1974         1,136 850 -25%
1975         1,193 700 -41%
1976         1,252 850 -32%
1977         1,315 1000 -24%
1978         1,381 850 -38%
1979         1,450 850 -41%
1980         1,522 850 -44%
1981         1,614 950 -41%
1982         1,710 850 -50%
1983         1,813 1000 -45%
1984         1,922 1200 -38%
1985         2,037 1200 -41%
1986         2,159 1300 -40%
1987         2,289 1900 -17%
1988         2,426 1900 -22%
1989         2,572 2100 -18%
1990         2,726 2600 -5%
1991         2,890 2500 -13%
1992         3,063 3000 -2%
1993         3,247 3300 2%
1994         3,442 3700 8%
1995         3,648 3800 4%
1996         3,867 5000 29%
1997         4,099 6500 59%
1998         4,345 7800 80%
1999         4,606 9000 95%
2000         4,882 10500 115%
2001         5,175 10000 93%
2002         5,485 10000 82%
2003         5,815 8000 38%
2004         6,163 9500 54%
2005         6,533 10500 61%
2006         6,925 11000 59%
2007         7,341 12000 63%
2008         7,781 13000 67%
2009         8,248 7000 -15%
2010         8,743 10000 14%
2011         9,268    
2012         9,824    
2013       10,413    
2014       11,038    
2015       11,700    
2016       12,402    
2017       13,146    
2018       13,935    
2019       14,771    
2020       15,657    

2010 Graduates: Live a Great Life

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Graduates, I encourage each of you to “Live a Great Life”.  This is your right, your choice and your destiny. 

We each live in three worlds: the world of commerce, the world of choice and the world of community.  I believe that “a great life” comes from balancing these three worlds.  In eighth grade, our industrial arts teacher, Mr. Laurie, told us that our first project would be a foot stool and that it would have three legs.  One student spoke up, “Mr. Laurie, I think it would be better with 4 legs”.  Mr. Laurie calmly responded, “Tom, I have found that 3 legs provide the proper balance for a successful footstool.  If you tried 4 legs, it would take you the whole semester to make them the same length and the final stool would be 3 inches tall”.  As I learned in this school, balancing the three legs of commerce, choice and community is essential to “living a great life”.

World of Commerce

The world of commerce is important as we emerge from the Great Recession.  Completing high school is a great accomplishment.  But it’s not the end of learning.  You will continue to build your problem solving and communications skills and you’ll pursue new degrees and certifications.  Lifelong learning is now required for everyone.

Our guidance counselor, Mr. McGinnis, urged us to be serious about our careers.  He said “choose something which interests you, build skills in that field and focus on one industry”.  In spite of the many options and uncertainties in life, pick that one path and treat it like it’s the only one. 

Securing employment is difficult today.  You can improve your odds by thinking about jobs from the employer’s point of view.  Employers want clear “yes” answers to three simple questions: “Can you do the job?  Are you self-motivated?  Are you manageable?”  Focus on these and you will always be an attractive job candidate.

Be confident about your economic future.  Don’t listen to the nightly news.  The sky is not falling.  The U.S. economy grows by 3% per year on average.  That doesn’t sound like much, but since the Diamond Alkali factory in Fairport closed 30 years ago, the US economy has grown by 160%, from $5 trillion to $13 trillion dollars.  There will be recessions, but you will succeed.

Education, career skills and positive attitudes will make you succeed in the world of commerce.  Always invest in yourself first.  Save the first 10% of every paycheck.  Invest it for your retirement.  When you are 53, you will thank me.

World of Choice

We also live in a “world of choice”.  In 1974, we were emerging from a “world of tradition” and sought a “world of choice” where we could “express ourselves”.  Our parents cautioned us to “be careful what you wish for”.  The number of choices and options today can be overwhelming.  You now have great responsibility for your own future. 

First, you must accept and love yourself as you are.   Believe that you were created just as you are for a purpose.  My classmate, Jim Kulma, shared a book with us in 1972. It was titled “I’m OK, You’re OK”.  It sold 15 million copies because its advice was very sound.

This is not an invitation to be self-centered.  We all need to become more self-aware.  Discover your talents and your non-talents.  Listen to others.  Seek feedback and advice. 

Because we have so many choices, engagement in life is critical.  Many adults, in their roles as workers, family and friends, choose to not fully engage in life.  They try to avoid responsibility for themselves and their choices because they are afraid of making mistakes.  Unfortunately, “there is no place to hide”.  Others will hold you accountable anyway.  Embrace responsibility and make it a habit. 

Engage in life; explore and experiment.  When you are older, you will not regret these adventures, but you might regret the things you missed.  Have the confidence to “take the road less traveled”.  As we learned playing “Milk League” baseball, “you can’t get a hit, if you don’t step up to the plate.”

View life as an exciting journey.  Don’t make it a death march in pursuit of a single goal, like career success.  Don’t think “If I only had a better job, a winning team, a better spouse, a bigger house or a full head of hair, things would be different”.  Joy comes from living life, not from dreaming about or even from reaching goals.

Accept that “life is not easy”.  Life remains a challenge.  Use the “in spite of” strategy.  In spite of the challenges, risks, hurts and pains, I will choose to do X.  If the challenges become too great, get help.  Family, friends and counselors are ready to help.  They all want you to succeed.

World of Community

We all need to earn a living and make wise choices.  But, to be happy, we must also live in the world of community.  We live in a world that glorifies material success and the individual.  However, history, science and common sense tell us that happiness does NOT come from wealth and introspection.  Happiness comes from relationships.  Every wisdom tradition, including psychology, has found that people are truly happy ONLY when they live for something outside of themselves.

In our everyday lives, family matters most.  Family life is difficult.  But, we were created to live with others.  We give and we get even more in return.  On my wife’s nightstand, there is a picture of two identical dogs sitting on a beach, much like the Fairport beach, at twilight, with the quote: “Love does not consist in gazing at each other, but in looking outward in the same direction”.  Invest in a high quality family life.  It will provide the greatest rewards.

Fun social groups matter.  Make time for bowling leagues, youth sports, church groups, boy scouts, girl scouts and playing cards with friends.  These low-cost activities create a high quality life.

Your local community matters.  There is great value in the familiarity, pride, loyalty and common interests of the local community.  Village residents already know this.  Your big city neighbors yearn to find this sense of place, security and belonging. 

Our national community and government also matter.  In a society with 300 million members, it is tempting to be a “free rider”.   We have found that democracy is the best form of government.  It allows the hopes and values of the people to be translated into laws to guide society.  Society needs your active involvement in the political process.  Our future depends upon it.

Finally, spiritual belief matters.  We all have a deep need to matter and to be significant.  This is fulfilled by connecting to something larger than ourselves.  We all ask the same questions: “what is the meaning of life?”, “where did the world come from?”, “why was I created?”, and “what happens in the long-run?”  These religious questions are part of our deepest nature.  Finding your relationship with eternity, mankind, truth and god is a vital part of your journey.

We live in these three worlds of commerce, choice and community.  Your generation inherits a world that is more complex, fast-paced and demanding than those of the past.  Some scholars wonder if we are “in over our heads”, with the demands of life exceeding our capabilities.  I believe that we are blessed to be able to lead even richer lives today.  I agree with the author Harold Kushner who says that God always provides each of us with the strength and capacity to make our journeys with confidence. 

On behalf of the “class of 1974” and the Fairport community, I wish each of you success on your journey.  I am confident that you are very well-prepared for the exciting worlds which lie ahead.

Indiana 2050

tomkapostasy4 Comments

It will take some time for the official 2010 Indiana census to be complete.  The 2009 estimates and 1950-2000 census data can be used today to create a reasonably accurate picture of Indiana in 2050, 40 years from now.

Indiana grew by 24% from 1970 to 2009 and is likely to grow by 25% from 2009 to 2050.  The population will increase from 5.2 to 6.4 to 8.0 million residents.

In 1970, Indiana had only 4 counties with populations of 200,000 or more: Marion (Indy) at 794,000, Lake (Gary) with 546,000, Allen (Ft. Wayne) with 280,000 and St. Joseph (South Bend) with 245,000.  These four counties contained 1.9M people, or 36% of the 1970 population.  They grew to 2.0M in 2009 and an estimated 2.2M in 2050. 

By 2009, there were 6 counties above 200,000 populations, with Elkhart and Hamilton counties joining the list.  By 2050, it is likely that 10 counties will be above the 200,000 mark, adding Porter, Hendricks, Johnson and Tippecanoe counties to the list.

Between 2009 and 2050, Indiana is expected to grow by 1.6M people, or 25%.  Ten of the 92 counties will experience two-thirds of the growth across the next four decades.  Based on recent trends, Hamilton County will add 300,000 residents.  Suburban Hendricks and Johnson counties will grow by 100,000 residents (89%).  Marion and Allen counties will add 80,000 residents at 10-20% growth.  Tippecanoe, Hancock, Elkhart, Porter and Boone counties will each grow by 60-80,000 residents.

Five Indianapolis area counties will experience 70% or higher growth.  Hancock, Hamilton and Boone Counties will grow by 100%, with Johnson and Hendricks Counties close behind.  The nine counties in the Indianapolis area grew by 46%, from 1.25M to 1.8M people, in the last 40 years and are expected to grow by a further 43% in the next four decades, reaching a population of 2.6M.  This 790,000 person growth accounts for half of the state’s total growth from 2009 to 2050.  The Indianapolis area will grow from 28% to 33% of the total state population.

Eleven counties will change population ranks by three or more places.  Boone and Hancock Counties will climb 9-10 places.  Shelby, Clark and Hendricks Counties will rise 3-4 places.  Delaware, Wayne, Henry, Grant and Vanderburgh Counties will decline by 3-4 places.  Howard County may drop 7 places.

Indiana’s population will continue its 0.5% annual growth rate and reach 8 million by 2050.  Growth will be highly concentrated in a small number of urban counties.  The top ten counties, each with 200,000 or more people, will account for 50% of the state population.  The next 11 counties, each with 100,000 or more people, will account for another 19% of the state population.  These 21 counties will capture 80% of all growth,

averaging increases of 60,000 people.  The remaining 71 counties will experience growth of 4,000 people each on average.

       Pop   Pop   Est   2009-50     2009   2050   Chg 
SMSA County City  1970   2009   2050   Growth  Pct  Rank   Rank   Rank 
                     
Vincennes Knox Vincennes       42       38         38           –   0%       37 37       –  
Terre Haute Vigo Terre Haute      115     106       106           –   0%       17 19       (2)
South Bend Elkhart Goshen      127     201       273           72 36%        6 6       –  
South Bend Kosciusko Kosciusko       48       76       104           28 37%       19 20       (1)
South Bend LaPorte LaPorte      105     111       120             9 8%       15 16       (1)
South Bend Marshall Plymouth       35       47         59           12 26%       31 31       –  
South Bend St. Joseph South Bend      245     268       289           21 8%        5 5       –  
Richmond Henry Newcastle       53       48         48           –   0%       30 34       (4)
Richmond Wayne Richmond       79       68         68           –   0%       25 29       (4)
Muncie Delaware Muncie      129     115       115           –   0%       14 17       (3)
Louisville Clark Jeffersonville       76     108       148           40 37%       16 13        3
Louisville Floyd New Albany       56       74         94           20 27%       21 23       (2)
Lafayette Tippecanoe Lafayette      109     168       248           80 48%        8 8       –  
Kokomo Cass Logansport       40       39         39           –   0%       36 36       –  
Kokomo Grant Marion       84       69         69           –   0%       23 27       (4)
Kokomo Howard Kokomo       83       83         83           –   0%       18 25       (7)
Indianapolis Boone Lebanon       31       56       114           58 104%       27 18        9
Indianapolis Hamilton Noblesville       55     279       579         300 108%        4 2        2
Indianapolis Hancock Greenfield       35       68       144           76 112%       24 14      10
Indianapolis Hendricks Danville       54     141       261         120 85%       11 7        4
Indianapolis Johnson Franklin       61     142       242         100 70%       10 9        1
Indianapolis Madison Anderson      139     131       141           10 8%       13 15       (2)
Indianapolis Marion Indianapolis      794     891       971           80 9%        1 1       –  
Indianapolis Morgan Martinsville       44       71       101           30 42%       22 21        1
Indianapolis Shelby Shelbyville       38       45         61           16 36%       33 30        3
Ft. Wayne Allen Ft Wayne      280     354       434           80 23%        3 4       (1)
Ft. Wayne De Kalb Auburn       31       42         54           12 29%       34 32        2
Ft. Wayne Noble Albion       31       48         68           20 42%       29 28        1
Evansville Vanderburgh Evansville      169     175       189           14 8%        7 11       (4)
Evansville Warrick Booneville       28       59         84           25 42%       26 24        2
Columbus Bartholomew Columbus       57       76         96           20 26%       20 22       (2)
Columbus Jackson Brownstown       33       42         45             3 8%       35 35       –  
Cincinnati Dearborn Lawrenceburg       29       51         71           20 39%       28 26        2
Chicago Lake Gary      546     494       534           40 8%        2 3       (1)
Chicago Porter Valparaiso       87     164       232           68 41%        9 10       (1)
Bloomington Lawrence Bedford       38       46         50             4 8%       32 33       (1)
Bloomington Monroe Bloomington       85     131       171           40 31%       12 12       –  
  Subtotal 37 counties   4,091  5,125    6,543      1,418 12%      
                     
  All Others 55 counties   1,104  1,298    1,459         161 12%      
  (Pct of State)   21.3% 20.2% 18.2% 10.2%        
                     
  Indiana     5,195  6,423    8,002      1,579 25%      
        24% 25%          
                     
Indianapolis       1,251  1,824    2,614         790 43%      
(Pct of State)     24.1% 28.4% 32.7% 50.0%        

Infinite Progress

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At the start of 2010, I put a positive spin on the nascent economic and psychological recovery with blogs on “The Sky Has Stopped Falling”, “Good Riddance to Utopian Views of 2000” and “Self-Improving Systems”.  Today, I want to promote the broader subject of “Infinite Progress”.

Economics has earned its label as “the dismal science”.  It has been serious, analytical, realistic, short-term and marginal.  Imitating calculus and physics, it has sought to optimize production functions and maximize results subject to multiple linear constraints.  Like other academic disciplines, economics has been shaped by the dominant culture.  Economics has progressed through the Physiocrats, Marxists and Marginalists who in turn proclaimed that land, labor and capital each held the key to economic value.  Even Paul Samuelson’s neoclassical synthesis focused on these three “factors of production”, while mentioning that there was some remaining role for “technology” and “entrepreneurship”.

The “law” of diminishing marginal returns emphasizes that in the short-run, with given technology, additional inputs eventually yield lower incremental results.  This is certainly true, but development and growth economists focusing on the international and business sectors have demonstrated that this fourth factor (technology/entrepreneurship) is the primary driver of progress.  In fact, rather than being subject to diminishing returns, knowledge is the one factor that is subject to increasing returns through time!

In spite of the slow recovery in the current economic cycle, I believe that we are only 50 years into the greatest productivity expansion in history.  Annual labor or multi-factor productivity growth of 2-4% has become commonplace.  Even in the recession, we experienced 6-8% productivity growth.  Productivity growth will accelerate in the coming years to a minimum of 5% annually, in spite of our various challenges (aging population, protectionism, extremism, political polarization, religious stagnation, terrorism, global warming, limited natural resources, multi-polar international powers).

In no particular order, knowledge and practice has expanded and will continue to expand in all of these fields:

  1. Trade.  Lessons were learned in the Great Depression.  Tariffs have continued to fall.  Multilateral treaties have stalled, but bilateral trade agreements are accelerating.  English is becoming the global language, followed by Mandarin Chinese and Spanish.  A majority of the global population produces at a near-subsistence level.  They will all generate modern western levels of output within 40 years, providing added value globally.
  2. Physics/Engineering.  Basic physics, mechanical and civil engineering continue to advance.  Modern materials, energy, devices and structures will advance and be refined in light of breakthrough understandings (supercollider).
  3. Chemistry.  “The Graduate” whispered “plastics” as the key to the 20th century.  Plastics has delivered, but has not exhausted its secrets.
  4. Biology.  Biotechnology and modern medicine is on the verge of major breakthroughs in individualized medicine, medical information, preventive medicine, devices, new drugs and nano-technology based solutions.  Mental health care is leveraging improved understanding of the mind, behavior and chemistry.
  5. Energy.  Delayed by politics and prices, energy exploration and solutions are emerging.  Wind, solar, nuclear, clean-coal, tidal and other answers are now real.  Break-through shale, gas and deep-sea extraction technologies are imminent.  Major investment in alternative transportation options is producing results.
  6. Natural Resources.  The food, fiber and natural resources sector continues its 200 year track record of innovation, with genetically modified organisms, drip irrigation, weather forecasting, satellite guided farming and fish markets adding value.
  7. Transportation. New highways, hiking, biking, high-speed trains, point to point aircraft, larger container ships and usage tolls suggesting continued progress.
  8. Electronics.  Songs, movies, video, instruments, observation, robots, entertainment, games, virtual reality, and the list goes on and on.
  9. Computer Power.  Moore’s Law. ‘Nuff said.
  10. Telecommunications.  Cell phones, internet, computer integration, GPS, much faster speeds.
  11. Integration.  Electronics, telecommunications, media, entertainment in one place, on demand.
  12. Community.  Tribes, cities, nations, world.  Clubs, games, blogs, social media, Face book, LinkedIn, Twitter, no limit.
  13. Specialization.  Professions, suppliers, outsourcing, matrix organizations, consultants, global suppliers, increasing economies of scale, niche markets
  14. Process Improvement.  Process, quality, cost of quality, value added, variability, bottleneck, ISO, TQM, benchmarking, process re-engineering, quantum leap, lean manufacturing, lean, six sigma, kaizen, self-improving systems.
  15. Computer Systems.  Automation, systematization, mainframes, minicomputers, personal computers, applications, man-machine, GUI, windows, mouse, ERP, cloud computing as a utility.
  16. Library Science.  Dewey decimal, multimedia, informatics, knowledge management, Wikipedia, Amazon.com, tripadvisor.com, Angieslist.
  17. Economics.  Markets, global trade, auctions, information, behavioral economics, EDI, e-commerce, capitalism embraced everywhere in one form or another.
  18. Finance.  Stocks, bonds, pork-bellies, futures, puts, calls, mutual funds, checkable deposits, insurance, hedges, securitized debt.
  19. Management/leadership.  Strategic planning.  Product innovation. Growth/margin. Core competencies.  Discipline of Market Leaders.  First or second. Operational excellence.  Situational leadership.  Theory X, Y, Z.  Motivators and de-motivators.  Covey’s 7 habits, urgent and important.  Meyers-Briggs, personality styles and Gallup talents.  Change management.  Engaged/disengaged.  Creativity and thinking hats.  Accountability/Oz Principle.  Good to Great, Both/And. 

 

Knowledge will continue to increase in every discipline.  Market pressures will ensure rapid adoption, expansion and innovation.  The work world in 2010 could not be seen in 1980.  The work world in 2040 will exhibit the same degree of discontinuous change from a much higher base.

Screening for Leadership Experience

tomkapostasy2 Comments

As firms return to a normal economy where success is determined by the ability to set and implement a distinctive strategy, develop new products, processes and customers, and align functional resources in a project based matrix structure, it is time one again to screen for leadership in the hiring process. For the last 2 years, with an abundance of candidates and a preference for risk aversion, hiring managers, human resources and recruiters have laser focused on finding the very best match between a candidate’s industry, functional and positional experience for an open position, without regard to long-term considerations. Hiring managers should insert more behavioral interview questions about leadership into the process and they should screen for evidence of leadership success in the resume review and screening interview process.

Ask ten experts to define “leadership” and you’ll get ten different answers and lists of competencies, but they’ll cluster into a few areas such as building teams, being self-aware, growing personally and professionally, displaying trust and integrity, communicating effectively, motivating/influencing/persuading, helping others to succeed, setting and sharing a strategic vision, taking risks, innovating, being responsible, making tough decisions, showing tenacity and taking a long-run view of what is best for the organization as a whole. A simple leadership checklist can be used to identify candidates who have the leadership experience needed to succeed.

Leadership Screening Checklist

1. Positional responsibility, staff count, manager count, functional variety.

2. Cross-team member, positional leadership, selection by others, larger projects.

3. Non-work leadership roles, professional and civic groups.

4. Progressively responsible roles and promotions across career.

5. Professional mastery/certification and CPE in one or more areas.

6. Five year tenure at most employers.

7. Variety of recommendations available/given in 360 degree fashion.

8. Internal or external teaching, training and documentation experience.

9. Projects/assignments in new, challenging or unpopular business areas.

10. Projects/assignments in high value, visibility or risk business areas.

11. Matrix experience in product development, IT, M&A, national account management.

12. Formal mentoring, association or accountability partner experience.

13. Strategic, product, marketing, financial or operational planning leadership role.

14. Top-level responsibility for a function or business unit of any size.

15. Variety of headquarters/field, line/staff and domestic/international experience.

16. Variety of industry, function and organization size experience.

17. Change management experience through start-ups, rapid growth, turnarounds, recessions, acquisitions or reorganization.

18. Implementation of new professional methods and technologies.

19. Human resources recruiting, retention, promotions, transfers and morale.

20. Responsibility for new products, sales, suppliers and negotiations.

Organizational success today requires leaders who are experienced and confident in challenging and ambiguous environments. Screening for this broader experience and capacity may be more important than hiring someone who has done exactly the required role at the closest competitor for the last five years.

10% Labor Force Growth, 1998-2007

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 US Employment by Industry         
         
   1998   2007   Change   Pct 
 Extraction/Utilities       2.3      2.5          0.2 9%
 Construction       6.2      7.6          1.4 23%
 Manufacturing      17.2    13.7         (3.5) -20%
 Wholesale/Retail Trade      18.1    19.8          1.7 9%
 Transport/Warehouse       3.9      4.3          0.4 10%
 Information       3.1      2.9         (0.2) -6%
 Finance/Insurance       5.4      6.0          0.6 11%
 Real Estate       1.7      2.0          0.3 18%
 Profl, Bus, Adm Services      21.2    25.0          3.8 18%
 Education       2.0      2.7          0.7 35%
 Health Care      11.2    14.3          3.1 28%
 Arts, Entertainment, Recreation       1.4      1.7          0.3 21%
 Accommodations/Food       8.1      9.4          1.3 16%
 Other Services       5.3      6.0          0.7 13%
 Government      18.7    20.2          1.5 8%
    125.8   138.1        12.3 10%

Where Have All the Dollars Gone?

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Economists enjoy the sense of security provided by the “National Income Accounts” where Gross Domestic Product, the value of all goods and services produced domestically, is always equal, by definition, to Consumption plus Investments plus Government plus Net Exports.  Reviewing the changes in the share of economic activity in the components of C+I+G+NX goes a long way towards explaining our current and future economic predicament.  The economy has changed dramatically since 1960. which will serve as a baseline for the post-war era.

During the bright days of Camelot, Consumption was 63%, Investment 15%, Government 21% and Net Exports +1%.  In 2008, Consumption was 70%, Investment 15%, Government 20% and Net Exports -5%.  In simplest terms, we are consuming 7% more thanks to the generosity of other exporting nations! 

Investment averages 16% of GDP: 11% business and 5% residential.  Business investment has reached peaks of 12-13% in 1978-85, 1998-2001 and 2007-08.  It experienced troughs of 9-10% in 1960-64, 1991-93, and 2003-04.  Business investment responds to tax and market opportunities, adding a pro-cyclical boost to the recovery.  Residential real estate follows its own pattern, reaching 5-6% peaks in 1962-64, 1972-73, 1977-79, and 2004-06, alternating with 3-4% troughs in 1966-67, 1975, 1981-82, 1990-93, and 2008.  The 3.3% share in 2008 is the lowest in the period, followed by an even lower share in 2009.  Residential real estate experienced an unprecedented 13 year run without a down cycle.  The over expansion in 2004-2006 means that the usual residential real estate recovery will be delayed for a few years.

Government consumption expenditures, excluding transfer payments, declined from 21% to 20% of GDP across the period.  Direct federal government, non-defense expenditures remained flat and immaterial at 2.5%.  National defense started at a high 10% in 1960 and remained at that level as late as 1968 before declining after the Vietnam conflict wound down.  The peace dividend allowed defense spending to fall to 6% for 1977-80.  Defense spending rose again in the waning years of the Cold War, reaching 7.4% in 1985-87, before sliding to as low as 3.8% from 1998-2001.  The terrorist response has triggered an increase to 5.1% of GDP by 2008.  Delivering the “Great Society” initiatives, state and local government spending grew from 9.5% in 1961-63 to 12.5% in 1974-76.  State and local government declined to 11% in 1983-85, remaining at 11.3% as late as 1998 before growing to 12.2% in 2002-03.  State and local government spending will act as a drag on the economy for at least 2 years.  Defense spending shows no clear trend.  Federal government spending on stimulus measures may be 3-5% of GDP in 2010.  The expected decline in stimulus spending will act as a drag on the economy in 2011.

Across 50 years the United States rejoined the world economy after the unusual post-war period of self-sufficiency and high global demand for U.S. goods.  Exports of services tripled from 1.3% to 3.9% of GDP in this period.  Exports of goods doubled from 4% to 8%, reaching 8.8% in 2008.  Total exports increased from 5% to 13% of GDP.  On the other hand, service imports doubled from 1.4% to 2.9%.  Goods imports increased five-fold, from 3% to 15% of GDP.  This 12% of GDP change has outpaced the growth in exports. 

A 2-3% trade deficit was experienced from 1984-88.  The competitive response reduced the deficit to an average of 1% for the next decade.  The deficit rapidly grew to 4% in 2000 and a high of 5.7% in 2005-06.  As pundits have noted, no nation has ever been able to run a 5% trade deficit for decades.  The unique situation of the US as the world’s currency and safest investment home, plus the growth of China’s economy and its willingness to finance the trade deficit has allowed this to continue.  In the long-run, the US dollar will fall relative to China’s currency and trade will rebalance.  There is no way to predict the timing of this change.  For a decade, the U.S. has consumed 5% more than it produced.  Consumption will fall.

Consumption is the 800 pound gorilla of GDP accounting.  Its rise from 63% to 70% of GDP is the counterbalance to the trade deficit.  Durable goods production held its own, maintaining 9% of GDP through 2003, before falling to 7.6% as the auto recession began in 2008.  Non-durable goods production dropped from 25% to 16% of GDP by 1995 and maintaining that level through 2008.  The 9% decline in non-durable goods production has been replaced by an increase in services from 30% to 47% of the economy. 

The service share was 30% as recently as 1969, so this 17% switch occurred in just 40 years.  The service share reached 45% in 2001 and has inched up slowly since then, reflecting the “jobless recovery” of the 2000’s.  Durable goods production will recover from its low level as autos and equipment age.  The trend in non-durable goods moving to import sources is likely to continue.  Without changes in the health care industry, this part of services is likely to keep growing: a short-term benefit for jobs and GDP.

Government budget, trade and savings deficits need to be repaid.  The retiring Baby Boomers need to be replaced in the labor force at high productivity rates.  Some form of improved health care market, incentives or rationing is required to limit the growth of this sector.  The U.S. has significant economic challenges to be faced.  The transition from Keynesian fiscal stimulus and easy money to a sustainable course is a necessary first step.  U.S. economic productivity, competitiveness and innovation have not been undermined by the Great Recession.  The business cycle provides a natural boost to recovery from inventory replenishment, capital spending and durable goods demand as we are already seeing.  Let’s hope that the president can have a real meeting of the minds with Congress and begin to address the long-term structural challenges faced by the country that go far beyond the 2010 and 2012 elections.

A Rising Tide Lifts All Boats

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“A rising tide lifts all boats”.  When economic progress is steady, or at least not interrupted for too long, this saying seems to hold true.   When everyone benefits from progress, people invest their effort into getting ahead.  Today we face the greatest economic disruption in 75 years.  Without a clear path forward, people of all political views are turning their thoughts enviously towards the boats others.  International trade, labor, spending, health care and tax policies are all being reviewed through the lens of protecting current advantages or redistributing funds.

The classic focus of redistribution is on the “rich” and the “poor”.  Bankers and corporate executives have lost the “entrepreneurial” and “value added” shields of the last 30 years.  Citizens are now concerned about the distribution of income and are willing to consider tax and regulatory changes that would have been unthinkable a decade ago.

The share of income captured by the top 1% of earners receives the most attention.  From 1917-1941, through boom, bust and preparation for war, the top 1% earned 15% of all income.  This changed dramatically during WWII and afterwards, leading to a 35 year period from 1953-1987, where income at the top was cut in half, with 8% of the total going to the top 1%.  Top 1% income grew rapidly in the late 1980’s, reaching 13% and then 15% by 1999 and 17% by 2007. 

The spread of income within the center of the population has also broadened in the last 40 years.  In real 2007 dollars, average household income has increased 30% since 1967, from $40,000 to $52,000 per year.  Families at the 20th percentile have also seen a 30% increase, rising from $17,000 to $22,000 per year.  The dollar and percentage growth at the higher percentiles has been much greater.  Households at the 80th percentile have gained 55%, with incomes rising from $67,000 to $104,000.  Those at the 90th percentile have gained 66%, boosting incomes from $85,000 to $141,000.

There is no “natural” or “optimal” distribution of income.  The US has historically had a greater concentration of wealth or income than other economically advanced nations.  As shown by the top 1%, the concentration can change dramatically through time.  However, most economists agree that there is a level of marginal taxation on income, wealth, dividends and capital gains that significantly reduces incentives for hours worked, innovation, risk taking and entrepreneurship.  

Small changes to the taxation and incentive structure of the US economy are not likely to cause too much damage.  Significant tax increases could do significant short-term and long-term damage to the economy and to those at the lower end of the economic pyramid who depend upon the rising tide to lift their boats in the long run.

Indiana Metro Growth Trends Continue

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Since 1900, a majority of Indiana counties have grown by less than 0.4% per year.  These 47 rural counties have been trapped in a time machine, slowly evolving from 20,000 to 24,000 people per county.  In 1900, they accounted for 38% of the population.  This dropped to 23% in 1950 and 17% in 2010.  These counties account for half of the counties and land, but only one-sixth of the population.  The urbanization of Indiana continues slowly, decade after decade.  The 47 rural counties had a population of 960,000 in 1900 when William McKinley of Ohio was elected president and only 1,120,000 in 2010.

 On the other hand, the urban counties have more than tripled in population (+241%), increasing from 1.6 to 5.3 million.  Indiana has grown by 155%, from 2.5 to 6.4M people.  Fully 96% of this growth has taken place in the 45 urban counties.

 The ten medium-sized cities and their immediate counties increased by two-thirds between 1900 and 1950 and then by one-sixth through 2010.  They accounted for 460,000 people in 1900, increased to 760,000 in 1950 and maintained minor growth to 870,000 in 2010.  Evansville, Anderson, Muncie, Terre Haute, Kokomo, Marion, Richmond, Bedford, New Castle, and Huntington grew from counties with 30-70,000 residents in 1900 to counties with 40-170,000 citizens across the century.

 The five largest cities – Indianapolis, Fort Wayne, Gary and South Bend/Elkhart – grew significantly faster.  They increased from about 0.4 million in 1910 to 1.4 million in 1950 to 2.2 million in 2010.  The rapid growth from 1900 to 1950 has since tapered off.  These 5 areas have grown from one-sixth of the state’s population to slightly more than one-third.  

 The greatest changes have taken place in the suburbs.  Fully 28 counties plus Lafayette and Bloomington have benefited from the growth of metropolitan areas.  These 30 counties have grown from a 1900 average population of 23,000 (abut the same as the rural counties) and total of 680,000 to 860,000 in 1950 (up 26%) to 1,950,000 (up a stunning 186%) in 2000 and an even higher level of 2,250,000 in 2010.  The suburban counties have increased from 27% to 35% of the Indiana population.

 Indiana’s population growth is expected to drop back to 6% for the 2010 decade after a 10% increase in 2000, 1% in 1990 and 6% in 1980.  This follows a post-war period where 15% growth per decade was the norm.  This decade continues to show very unequal growth.  The 30 suburban counties show a 14% growth of 305,000 people.  The other 62 counties increased by only 1%, from 4.1 to 4.2 million people.  The 30 suburban counties have 88% of the population growth. 

 Indiana has been blessed to have 6 urban areas that drive significant population growth: Chicago/Gary, South Bend/Elkhart, Ft. Wayne, Indianapolis, Cincinnati and Louisville.  The state legislature would be wise to adopt policies that reinforce this century long trend.

The Effective CFO: Black and White!

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A friend of mine has been a highly successful CFO with middle market companies for 25 years.  I pondered what made him succeed in a variety of companies and industries.

 He’s professionally competent and intellectually curious.  He’s always had a large professional network.  He is a good listener and is especially skilled at cutting through ambiguous or complex situations to identify the core problem or most promising solution.  He understands the basis for business success in his industry and he’s a good negotiator.

 On the other hand, he’s sometimes overly direct, not a technical leader in the CPA profession, not someone who automatically attracts the spotlight, doesn’t outsmart the quantitative business analysts and doesn’t often lead cross-functional projects.

 I think he succeeds because he has established a role and the skills to guide all key players to honestly confront the gray reality of situations.  He offers the financial perspective, but is just as quick to insert a sales, strategy or cultural viewpoint.  He ensures that risk versus return is considered through numbers, stories and analogies.  He contrasts short-term with long-term factors.  He plays devil’s advocate as needed to derail quick decisions or to shore up support for a tough alternative that must be chosen.

 In addition to these decision making skills, he has the wisdom, courage and skills to anticipate the perspectives of the key roles and to guide players into greater self-awareness and understanding of other perspectives.

 He helps finance, accounting, HR and IT staff to see that the fully integrated system and a 1,000 page policy and procedure document, without exceptions, is probably too structured.  He encourages engineers and six sigma black belts to reduce variation and to consider financial and strategic implications.

 He works with entrepreneurial owners to support change and risk taking, but to also gauge how much can be digested, how it can be hedged and what an ideal portfolio looks like.

 He works with boards and shareholders to understand that stock values do not always go up in a predictable manner, unless the books have been “managed”.  The long-term growth in shareholder value includes short-term fluctuations.

 He works with IT, engineering and product developers to have resources, time and authority to learn, experiment and develop new products – within a framework of long-term evaluation.

 He provides sales and marketing teams with the freedom and flexibility to meet company goals, but ensures that measures of final results are fair and the system can’t be beat.

 The effective CFO serves as a fulcrum in Jim Collins’ world of “both/and”.  Stakeholders and role players must be able to leverage their talents and preferred styles AND the contrasting factors which must also be considered for long run success.  CFO’s need to be more than gray; they need to be both black AND white.