The New "New" Economy

Remember in early 2000, when analysts and business commentators started talking about the "New Economy"? With inflation low, earnings strong and stock multiples moving higher, stocks were the place to be. But it didn't turn out that way. The tech bubble burst, bringing down the other sectors.

During the next couple of years the market adjusted and hit record highs in October 2007. Then came the pop of the subprime bubble, and now the market is going through another one of those "adjustment" periods.

What is our new, New Economy going to look like? First of all, I believe higher energy prices are here to stay. Oil and other commodities are being gobbled up not only by the developed world, but also by those countries that are racing to become part of the top tier of developed nations, including China, India and Brazil.

The Chinese government, for example, is in the midst of a building boom, creating new infrastructures. At the same time, Chinese consumers are clamoring for a wide variety of goods and services. Natural resources will be needed to fuel this growth. And although China has coal, they are importing considerable oil and copper. Their need for resources will only get greater.

That puts pressure on U.S. consumers as well, and U.S. consumers and the businesses that supply them will have to adjust to these and similar pressures. The good news is that we are already seeing that adjustment. There is an increase in sales of high-mileage vehicles, and Congress is being pressured to mandate significant increases in fuel economy. Truckers are slowing down to maximize mileage. People are taking public transportation, living closer to work or even working from home.

While consumers adjust to higher gas prices, retailers will bear the brunt of the consumer pull-back. Over the past seven years, retailer comparable-store sales have increased an average 5% per year because consumers have had so much excess liquidity (lines of credit, available subprime money, etc.). Going forward, if we are indeed entering a new paradigm in which credit starts to dry up, retailers will grow at most 2% to 3% and will need to recalibrate their business plans. This adjustment is already beginning, manifesting as more markdowns, more store closings and less innovation; in a slowdown retailers and businesses in general tend to take on less risk.

The banking industry, which has been in the center of the subprime debacle, will see dividend cuts, more layoffs and a general retrenchment from riskier products. After losing billions in long-term capital through poor business decisions, it will take years before the return on capital reaches historical levels. What this means for us is more technology, less branch banking and increased fees to make up for the revenue shortfall. At the same time, we will see continuation of recent practice of home equity lenders cutting unused lines of credit to consumers.

Other industries also are starting to adjust. The airlines, for example, are consolidating, raising fares (ouch!), cutting capacity, using more technology and adding fees for things like a second bag.

It will take time for business and consumers to adjust to the new New Economy, but I am confident that we will adjust. I believe we will find ways not only to survive, but to prosper. Historically, when faced with economic challenges, we have created opportunities. Our creativity, our innovation, our entrepreneurial spirit always have been among our greatest strengths as a nation.

As an example, look at the innovations going on at Apple Computer. Steve Jobs and the rest of the folks at Apple have changed the worldwide face of technology with the iPod, the iPhone and the iMac, using good old American ingenuity, imagination and determination. These traits have carried us through economic difficulties before, and I am confident that they will help us adjust to and thrive in this latest New Economy.

Garry K Schaefer
Atlanta, Georgia
October 7, 2009

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