Edgelings

The Incredibly Uneven Recovery

THE INCREDIBLY UNEVEN RECOVERY by Rich Karlgaard


Prior to this recession, the most notable feature of the late 20th/early 21st century economy was its volatility. The silicon chip, the Internet and globalism were accelerants to the renaissance of entrepreneurial capitalism that began in the late 1970s. Around the world, the storyline was familiar. New products, services, distribution paths and business models would appear out of nowhere and cause damage to the old and slow.

The global consultant, McKinsey & Co., summarized this effect in a famous 2005 paper called “Extreme Competition” (published in McKinsey Quarterly). “Extreme Competition” said top companies, across all industries, faced a 20% to 30% probability of falling out of leadership in a five-year period. The chance of toppling from the top ranks had tripled in a generation.

Will this pace of disruption and churn continue during the recession and recovery? I think so. It is tempting to see a recession as a yellow caution flag that slows all cars in the field. But in fact, recessions tend to shake out the old, slow and bloated that masked their decline in flusher times. The 1973-74, 1980 and 1982 recessions dealt death blows to the incoherent conglomerates created during the 1960s. The 1990-91 recession killed off the minicomputer industry and nearly did in IBM. The recession of 2007-09 has shredded the Michigan auto industry. Big city dailies are falling everywhere. Were they killed by the recession or Craigslist? (By both.)

Recovery from this recession is likely to be weak. Rising oil prices amidst increasing supply and falling demand is proof of U.S. dollar weakness and portends stagflation. Real growth for the American economy when recovery starts will be in the 1% to 2% range, instead of the usual 3%. It will be the 1970s again.

But remember: GDP growth is an aggregate number. Peel back this pedestrian top line figure, and what you’ll see is a jagged landscape of booms and busts. Some companies, industries, cities, regions and skill sets were never hurt much and will experience a robust recovery. Others will be mired in permanent depression.

As one example, the New York Times columnist, Bob Herbert, points out the disproportionate problems of uneducated young males:

“The Center for Labor Market Studies is at Northeastern University in Boston. A memo that I received a few days ago from the center’s director, Andrew Sum, notes that ‘no immediate recovery of jobs’ is anticipated, even if the recession officially ends, as some have projected, by next fall

The memo said: ‘Since unemployment cannot begin to fall until payroll growth hits about 1%–and payroll growth will not hit 1% until [gross domestic product] growth hits at least 2.5% to 3%–we may not see any substantive payroll growth until late 2010 or 2011, and unemployment could rise until that time.’

“We’ve already lost nearly 5.7 million jobs in this recession. Those losses, the center says, ‘have been overwhelmingly concentrated among male workers, especially among men under 35.'”
As another example, today’s Wall Street Journal has a fascinating tale of two Michigan cities, Ann Arbor and Warren:

“The divide between Ann Arbor, with a population of 116,000, and Warren, population 126,000, is large and widening. Ann Arbor’s unemployment rate of 8.5% in March trailed the nationwide rate of 9% and was well below Michigan’s overall rate of 13.4%, based on nonseasonally adjusted figures. By contrast, Warren’s unemployment rate of 17.3% is among the highest in the state. The average family income in Ann Arbor was $106,599 in 2007, compared with $69,193 nationally and $60,813 in Warren.

“That economic gulf wasn’t always there. In 1979, the average family in Warren made $28,538 annually, not much below Ann Arbor’s average of $29,840. But in the past 30 years, the U.S. economy has undergone a sweeping transformation that has benefited cities like Ann Arbor and hurt manufacturing hubs like Warren.

“Warren is suffering from its reliance on the auto industry.

“As transportation and communication costs fell, and countries like Japan and, now, China, increased their manufacturing capability, Michigan’s advantages have faded. Those same forces of globalization benefited educated workers–an area where Michigan largely fell short.

The science fiction writer, William Gibson, likes to say: “The future is already here–it is just unevenly distributed.”

Likewise, the economic recovery has already started. But its distribution will be highly uneven.