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Quick Look at the Economy

2016 isn’t off to the greatest economic start if you’re anywhere but the United States. China’s stock market has flirted with free fall, the Middle East has Shia-Sunni outright war in the tea leaves, and commodity prices have all but collapsed. The EU and Japan still pass the mirror test to see if they’re breathing – but barely.

With clients in agriculture, financial services, and construction on the agenda for the first half of the year I’m asked to weigh in. Generally, I’m optimistic.

There are problem areas. Commodity prices in the low range means crop farmers see the end of their 6-7 year run of record returns. Not a lot of new pickups in the shed these days. It’s a return to eking out profit from slim margins. Livestock producers benefit from lower feed prices. A lot of eyes are on the presidential election where a Republican win could affect biofuel policy that’s been buoying up grain prices – with corn as the leader. Plus the El Nino introduces even more weather and moisture uncertainty than usual. The dollar is expected to remain strong, working against exports. Huge amounts of US grains are sold overseas and the competition is stiff.

Financial service companies – banks, insurance, credit unions – depend on a stable to rising economy to produce loan demand. A GDP performance for the US economy usually points to a reasonably good year but it’s not quite that simple. The Fed is raising interest rates, albeit tentatively. The rest of the world is not. It makes for difficult decision-making. I’ll be in the room for about a dozen strategic planning meetings in this sector this year and the discussions will be “interesting.”

No sector deserves a better environment than construction and the outlook is fairly good this year after nearly a decade of abysmal to bad news. Commercial construction for 2016 should be up. One of the key indicators, billings at architectural firms, were up significantly for all of 2015 which should translate to buildings coming out of the ground in ’16. The home building sector is also looking positive. The National Association of Home Builders is projecting about a 25% increase in 2016 year on year despite some nagging worries about labor availability and costs. Job creation is a big driver in this sector.

But the question about whether the US economy can stand up to a world slowdown still stands. There are several factors that work in the country’s favor:

  • The US is so much better an investment destination than other global regions that it stands to attract more capital.
  • US consumers, as long as the job outlook remains strong and fuel prices remain low, will spend.
  • China is a totalitarian state. Don’t overlook the possibility that it can do almost anything it wants to get growth back up to a 5% GDP range. Plus it still possesses huge cash reserves.
  • The EU and Japan don’t have a great recent track record for growth but neither do they stand to take a deep dive into recession.

The Analytics Payoffs

For a lot of years I’ve been sharing a conclusion from decades of observing small group activity. I believe that when 5 or more people work together effectively on a challenge they bring the intellect of at least a genius to the work. It doesn’t matter if the group members are smart or high in an organization or what we believe is well-educated. I watched it for years and then put a measure to it.

Back when we used to have more time during training or planning or decision-making settings I used to administer a short quiz fashioned after the preliminary entrance exams for membership in Mensa, the society of genius-level IQ holders. I would do it as an intellectual warm-up. In order to determine if you could gain entry to Mensa you would need to score at least 7 out of 10 correct answers.

Every group, whether made up of corporate executives or hospital maintenance workers, to which I gave the test scored 7 or higher. Around half would score perfectly.

Today, the use of analytic techniques is proving my point. At the Wharton People Analytics Conference an interview published on Knowledge@Wharton cited Google’s head of HR Laszlo Bock who is an evangelist for the use of analytics in the field. Teams, when put together correctly, are at least geniuses.

The Wharton interview is full of useful bits of information. Make sure an employee being “on-boarded” meets their management on the first day. A person’s success at a company depends heavily on who they work for. A team IQ is often greater than the sum of the parts. A mix of introverts and extroverts along with norms of behavior make the most productive teams. Moneyball got it right and is at least partly responsible for the upsurge in the people analytics.

Surprisingly, the best firm on hiring, according to Wharton experts, is Teach for America. A not-for-profit that has embraced analytics in order to get better teachers in front of kids. But the organization also knows that they don’t know enough yet. That’s a good lesson for those of us who are futurists. Go with the best information you have but always doubt it and find even better ways of making good decisions.

The biggest question about the use of analytics overall? Why more top leaders are not embracing it. Whether it’s a lack of hubris or a fear that it might replace jobs it’s a baffling question but the condition exists. I hope for a change.

320px-DARPA_Big_Data
In almost all of my busiest industry niches there’s buzz about “Big Data.” Mostly buzz. Not much there, there yet. But it’s coming in a big way and the harbinger may be people measurement, especially help in hiring. Another observation I’ve made over the years of managing my own businesses was that a bad key person hiring (manager, salesperson, technician, creative talent) would cost at least 3-4 times their annual compensation. People analytics is proving it now.

While there’s more buzz about marketing analytics than anything else in the media my bet is on human resources as the place where the first major inroads will be for analytics in organizations.


April, 2014 - Long Overdue Update to Our Scanning

It’s economic forecast month for me. Several ongoing clients have me addressing a range of industries with a look specifically at macroeconomic cycles and impact. I always start with a disclaimer that I’m not a predictor but a forecaster and the difference.

Forecasters look into the future and express their views with a reading on relative certainty and change those forecasts with time and new information.

Right now the US economy, the topic I’ve been addressing this month looks generally favorable with a 75% to greater chance of working through 2014 with slow growth in GDP. Probably (over 50%) in the 2% range. In other words, without “escape velocity” that would allow robust growth, a rise in interest rates, a spike in consumer confidence, and a greater demand for credit.

In short, for my clients in banking and construction, it’s OK news but we’re probably not too excited about it.

2015 looks better fundamentally. I’d move my forecast up to a 2.5 to 3% GDP growth rate in the year with a 75% probability and I think I’ll be elevating probability by year-end.

Agriculture is one of my key client segments. I’ve been privileged to work with North America’s smartest agriculture leaders, commodity associations, agribusiness companies, and farmers. I love them. And the business in this sector has been extremely good for a run of about 6 years. Unfortunately that may be ending.

Due to a combination of factors crop prices will almost certainly be falling and the bloom is off the rose for a number of players in the field. The counter-cyclical beneficiaries may be the animal protein sector where lower commodity prices translate to lower feed prices. Cattle might benefit particularly if its prices haven’t gone so high in the supermarket that consumers will further reduce their consumption.

Nobody deserved a good run more than the farmer. In my opinion they’re the most misunderstood business executives in North America today. While some critics of “production agriculture” whinge about “millionaire corn farmers” and “corporate farms” they completely ignore the statistics that over 90% of US farms are family-owned. And what family that runs a business doesn’t have that business incorporated? Only the naive.

I’ll have more to say on the agriculture outlook in later posts. Thanks to those of you who reminded me to stay at the blog. The workload has been a bit heavy but I’m about to take some time away from the road to get an overhaul of a bum ankle soon and I’ll have more time to share what I’ve learned from my smart clients in the months ahead.

Prediction, Betting, & Forecasting

My scanning turned a media story recently about two presenters on the agriculture circuit who have been disagreeing about the future price of corn, making rival predictions, and backing up those predictions with a bet for $1000. I think this a microcosm of stupidity about the future. Yes, I’m invoking the s-word here.

One of these people will be right. One will be wrong. One will win. One will lose. And that’s exactly how NOT to look at the future. Too often I’ve seen organization leadership “make bets.” They roll the dice on what they believe will happen. When they’re wrong organizations collapse, people lose jobs, and assuredly investors lose money.

Prediction and betting are folly. No individual is prescient. It is the wrong example to set. Frankly, it smacks of the same arrogance that we saw in the last presidential campaign primaries when one candidate offered a $10,000 bet on a point of policy, labeling him as elitist and out of touch with mainstream America. It’s posturing, pointless, and doesn’t help the audiences they were in front of accomplish anything about understanding their future.

Over the last 5 years I’ve encountered one of the presenters, a “futurist.” After all, the only qualification to become a “futurist” in the US is to say you are one. That goes for me too. I’ve not been impressed with that fellow’s work. My respected colleagues in the futures field don’t predict. We forecast. We engage in useful foresight that changes with time and new information to help clients prepare and take action.

I can’t accurately predict commodity prices as to specific time and amounts. Neither can the two fellows who are making the bet. But what I can do is point up the key factors to observe, outline robust strategies to take, recommend a highly probably range in which a commodity might trade. Those pieces of information are much more useful to a listener than arguing over who’s going to win a bet.

The Drought and Farmer Viewpoints

It’s been almost two decades since I first worked with a bunch of smart farmers who lead their state associations for the corn and soybean commodities. I’ve learned their business, watched them navigate a series of farm legislations, try to wean themselves away from government subsidies, and then prosper as prices came up dramatically over the past five years.

This year I returned to the same gathering for a fresh class of state association leaders. I didn’t know quite what to expect in a severe, brutal drought. I talked with some producers who were not going to harvest much of a crop. A very few lucky farmers located further north in the country or in the relatively moist East are going to do extremely well. But even the unlucky were optimistic as one can only be when you put almost everything in your business on the line every year and throw yourself on the mercy of nature.

If you want to see an example of resilience listen to these men and women as they talk about their ground, the crops, and their plans for the future. Certainly crop insurance plays into the situation. But they firm their jaws, speak frankly about the risks, and when asked about another drought “event” (that’s the term they use) they become gravely contemplative.
“That would take us back to zero,” one farmer told me. Another said, “We could deal with that but we’re probably going to sit back and see how the winter reestablishes our moisture before we even decide to plant next year.” The implications are serious for food supplies, energy prices, global trade.

If the breadbasket of America was to see anything similar to the conditions that have ravaged Texas for almost a decade we might look at food security suddenly becoming a strategic concern. The executive branch might need to step into the farm situation instead of allowing Congress to continue to argue over food stamps for the poor instead of providing a safety net for the people who feed the country.

Technology Trends from the Trenches of Enterprise IT

I’ve moderated and presented the closing keynote at the largest global gathering of information security professionals for the past two years. It gives me insight to what they see as emerging technologies, issues, and dangers.

This is an unusual conference. A task force guided the producers to stage a three day global meeting that departs from the typical talking heads and death by PowerPoint. Incisive interviews, extremely well-moderated panels, and audience interaction are the norm. This year there was an especially intriguing hands-on session co-led by IDEO and Deloitte on how to provide the right space for innovation within organizations.

In 2011 the huge buzzword was “Cloud.” It was so pronounced that by the third day we were joking about avoiding the “c-word.” This year the cloud was taken as a matter of fact, a reality that all executives (CIO’s, CISO’s, VP-level info security types, and consultants) take in stride and provide for in information security tactics. Here are some other salient tech trends from the conference:

  • SAAS – using the cloud, “software as a service” is now reality in many organizations. Google’s penetration with Google Docs into large enterprises or sales departments’ non-IT-aided implementation of SalesForce are both examples.

  • BYOD – lots of acronyms, right? “Bring your own device.” Workers want to use their personal technology-du-jour on the job. That means organizations can’t mandate Berries but have to adjust to iPhones, Droids, and the various tablets as accessing sensitive company information.

  • Big Data – this has been around in various forms, most often in the term “data-mining” for well over a decade. But now there are accessible, pragmatic tools to allow organizations to probe their mountains of data for patterns, opportunities, and profit generation.

Six years ago, on the eve of the Great Recession, a financial services CEO criticized me bitterly for engaging her board in scenarios that forecasted the possibility of individual customer experiences or products. Today large financial institutions can use Hadoop to gather information and do exactly what I posed as a possibility. That exec, incidentally, no longer heads that organization.

Energy Prices: Why Have They Moderated?

It’s seldom that I work with a client not affected in some way by energy prices. Whether it’s the shipping costs of manufacturing, input costs of agriculture, or even the impact of higher transportation expenses on business to consumer organizations this question about the future often plays into strategy and preparation for the future.

Everyone wants to know the future price of a barrel of oil or of a kilowatt of electricity. Like most forecasts the calculation is complex and the range is wide depending on the timeline. OPEC policy, supply, demand, new discoveries, emerging technology, consumption behaviors, geopolitical events can all have a bearing or effect on energy price.

For several years I’ve been tying the price forecasts to global economic performance. This has been especially true as the globe goes through the most dramatic economic cycles since early in the last century. In fact, I’ve been forecasting a semi-permanent rise above a $100/barrel price floor sometime between 2011 and 2015. I still hold to it.

Many will ask what’s driving down short term spot prices in oil. Good question. Typically these short term fluctuations are driven by buildup in supply and the hidden effect of economic downturn and consumer behavior. That’s what’s been going on lately. I believe it also has to do with the discoveries of fairly large but very expensive sources of oil in the Western Hemisphere. Bakken oil (or “tight oil”), Alberta tarsands, and offshore Brazilian potential are all examples.

These “tight” and “dirty” sources have put off the depletion of other sources in the recent past. Eventually, however, the inexpensive oil sources are going to wane further and the price is going up. I believe to a fluctuating, often volatile range from $100 to $150/barrel.

Whether I’m right or wrong about the forecast is less important than preparation. I’m fond of the statement denial is not a strategy. That’s why I’m bemused, surprised, or sometimes frustrated by organizations that find reasons to deny any possibility of what would be painful developments. Those that believe the relatively inexpensive energy we enjoy today is going to be with us for the foreseeable future are in that denial.

The Oil Forecast

For the last three years, ever since it became obvious that the world was slipping into a recession and commodity prices would come down, I’ve forecasted an inevitable return to rising oil prices.

My logic: the recession reduces demand but only temporarily. Recovery from recessions is uneven globally. Some regions recover months, perhaps even years before others. A robust economy in Asia and to a lesser extent in Latin America will create demand that will drive prices up despite a slight fall in use in the U.S. and the EU.

Speculation or unexpected geopolitical events – “triggers” – will create volatility. Speculators will enter the market on supply shortages. No regulating body can keep them away from the opportunity to make money.

My forecast from mid-2008 forward: 75 to 85% confidence that an oil price spike and permanent plateau above $100/barrel will come sometime in the 2011-2014 time frame.

It’s been of interest to clients in, well, almost every field. Because as one CEO said to me on being asked what energy prices affect, “Everything!”

As the economic recovery has forged ahead strongly almost everywhere except the North Atlantic the price of a barrel of oil has risen back through the $50, $70, then $90 levels. Now the unprecedented events in the Middle East have taken Brent futures over $111. West Texas will follow.

Will it stay there? Of course it depends on a complex array of factors. Economic effects, how high the price spikes, volatility, whether the Saudi’s can really make up most of the shortfalls, refining bottlenecks, and more. In the weeks ahead I’ll place more information here on the implications of this important trend.

In the meantime I’m getting a lot of queries from clients who quickly remember my forecasts and are running through their Plan B strategies to react to the development or are confident because they planned for the high probability of this years ago.

Tracking, January 2011

A new year and new blips on the radar screen in our practice. I post items here from time to time that we’re watching because of our scanning, clients, or upcoming engagements.

Food Prices - for well over two years we’ve tracked a steady uptick in worldwide food prices. One visual element in our briefings and conference presentations is the UN’s index of world prices which shows a steady climb that now has exceeded the “trigger point” of 2007-08.

What do we mean by “trigger point?” When riots occur in less developed nations over food. Large portions of the population in these countries spend 50% or more of their incomes on food. This is a ticking time bomb that has been known to overthrow governments and even cause wars.

The
“North Atlantic Recession” - come on, it is no longer a global recession or even the “Great Recession” when you view it from Brazil, India, or China. It’s the recession that still either cripples or impedes the US and the EU. Even Canada is out and expanding.

The
“Employment Follies” - how badly can a government manipulate statistics? Just look at the jobless in America. OK, every governing administration wants to make the news better but creating 65,000 jobs in a month when it’s going to take over a quarter million new jobs every 30 days to get back to something like 5% unemployment is not good news. Especially when most of the jobs are in hotels, restaurant kitchens, or temporary services. Employment is a key trend for America’s return to economic health. We should be realistic about it.