The Republican candidate's chances of winning the Hawkeye State may be blowing away. Dan Gross explains why.
President Obama ended his second presidential campaign in the state where his first presidential campaign gained its first crucial breath of wind. Four years later, it seems wind may be giving Obama a boost in Iowa.
Mitt Romney speaks to supporters in Dubuque, Iowa on Nov. 3, 2012. (Charles Dharapak / AP Photo)
Iowa is a swing state that Mitt Romney has contested but doesn't look to be winning. The RealClearPolitics poll aggregation gives Obama a 48.7 - 46.3 lead over Romney. Nate Silver's 538 projection gives President Obama an 84.3 percent chance of winning the Hawkeye State. And wind may have something to do with it. Why? Romney, along with many Congressional Republicans, has opposed the renewal of the longstanding wind energy production tax credit, which makes wind energy projects viable. And no state gets more economically from wind than Iowa does.
In August, I spoke with Rob Hach, founder and president of Anemometry Specialists, based in Alta, Iowa; he's a registered Republican and 2008 McCain voter who was attending the Democratic National Convention as an Obama supporter. His firm, which has 27 employees, conducts assessments on wind projects and wind resources to see where they are economically feasible. "In Iowa, there are thousands of people employed making wind turbines, blades. There are a lot of farmers who have been able to enjoy the royalties. There are a lot of students going to school at community college to go to work on wind turbines," he said. "They are quite disappointed with Governor Romney's position on renewable."
Wind is a big business in Iowa. According to the Iowa Wind Energy Association, the state is the third largest for wind production, with 4,536 megawatts of capacity. Texas and California are first and second. When it comes to the percentage of electricity generated by wind, Iowa is far and away the leader in the U.S., with 20 percent. "As more of our new wind farms come online, I wouldn't be surprised to see it reach 25 percent in the next 6 months," said Harold Prior, executive director of the Iowa Wind Energy Association.
Putting up wind turbines creates a lot of good collateral economic activity. Wind turbines are very large and heavy, and hence difficult to ship over long distances. So areas that erect a lot of wind turbines tend to attract manufacturers and suppliers. The state's 2,800 turbines have brought hundreds of manufacturers and suppliers to Iowa, from which they export to other states and countries. The construction of wind farms is leading other investors to plow cash into constructing electricity distribution and transmission lines. Several thousand Iowa jobs rely on wind power. And each year, landowners collect more than $14 million in payments in exchange for allowing turbines to stand on their property.
Of course, the industry is only viable thanks to the 20-year-old production tax credit, which gives the owners of turbines a tax refund for every electron of electricity they generate in the turbines' first ten years of operation. But the Federal Renewable Electricity Production Tax Credit is in danger of sunsetting at the end of this year. As such, it is another one of the victims of the bizarre politicization of alternative energy.
George H.W. Bush signed the first production tax credit into law in 1992. In 2008, George W. Bush rhapsodized about the possibilities of solar. "I really see a day in which each house can be a little electric generator of their own and feeding back excess power into the gird through the use of solar power," he said. But since the election of President Obama, Congressional Republicans have generally opposed efforts to back alternative energy. In part it's because there was a lot of green energy stuff in the stimulus, which virtually every Republican opposed. In part it's because a lot of big GOP donors are in the oil and coal industry, which rightly view renewable energy as a threat. And in part it's because some alternative energy programs involved making large loan and investments in individual companies like Solyndra. To nobody's surprise, despite intense lobbying from the large companies involved, the Senate and the House have not agreed to extend the production tax credit.
The hurricane exposed the vulnerabilities of our new just-in-time economy. Daniel Gross on the economic mentality that makes us susceptible to natural disasters—and massive inefficiencies.
Hurricane Sandy upended the plans of thousands of marathoners, and the lives of hundreds of thousands of people who are still without power or access to their homes. It also upended one of the most important concepts in modern business: just-in-time management.
Workers remove the remaining protective plywood from store windows in Times Square following Hurricane Sandy in New York City, Oct. 31, 2012. (John Lamparski / Getty Images)
The discipline of just-in-time started with manufacturing. Companies began to realize that it made sense to keep on hand only the parts that were needed to assemble products on any given day. Keeping excess inventory around tied up cash, cluttered up factory floors, and imposed storage and management costs. Retailers were the next to catch on. Information technology and an understanding of consumer habits spurred stores to have only the amount of stock necessary to meet demand. There was no point in bringing in Christmas goods to stores in July and August; just wait until November. The mentality applied to people and services as well as goods. How many times have you waited on a plane for the pilot and flight crew to arrive from another plane?
Next the just-in-time mentality was married to long supply chains. In a world of rising interconnections, it made sense to source materials and services from locations where they can be produced cheaply. Our clothing and electronics no longer arrive from South Carolina and California; they come from China. Oil arrives on ships from Angola and Russia rather than on trucks and trains from Pennsylvania. Tech support comes from India, not from the guy working on the fifth floor.
We’ve learned, however, that the just-in-time economy is subject to disruptions by forces of nature. Last year, Japan’s tsunami quickly led to shortages at Honda and Toyota dealerships in the U.S. And we’re seeing it with Sandy today. Because of its size and location, Sandy inflicted maximum damage on the just-in-time economy. It took out 19th-century infrastructure (ports, rail), 20th-century infrastructure (tunnels, highways, airports), and 21st-century infrastructure (cellphone and Internet service). “The New York area’s port system is the largest on the East Coast, and the third largest in the nation. Last year, it handled $208 billion in cargo,” as Stephanie Clifford and Nelson Schwartz reported in The New York Times on Monday. And that is causing significant disruptions. “The supply chain is backing up at a crucial time, just as retailers normally bring their final shipments into stores for the holiday shopping season, which retailers depend on for annual profitability.”
The just-in-time mentality has spread from manufacturing and retailing into other businesses, and into our personal lives. And the logic is both compelling and unavoidable. We don’t power our homes by running coal-burning stoves and storing electricity in immense batteries; we bring in power produced by distant coal-burning plants over wires. Gas-station owners take delivery of gasoline every other day. Why? Doing so lets them conserve cash and maintain flexibility in pricing. What’s more, maintaining bigger supplies would require the construction of expensive, unsightly, and environmentally problematic storage tanks. We don’t arrive at a train station an hour before the train leaves; we arrive just before it does. We don’t can and pickle vegetables, or store meat in the chest freezer we had when I was a kid; we have it delivered just-in-time from Freshdirect.com or Peapod. We don’t walk down to the boutique; we order from Rue La La.
In fact, e-commerce is a massive and growing just-in-time industry. See something you want, click and buy it, and wait for the UPS truck. According to the Census Bureau (PDF), electronic and online sales are up 11.5 percent this year, more than twice the rate at which the overall retail market is growing. Such just-in-time commerce accounts for about 9 percent of retail sales. And it’s growing. Just wait until Amazon.com rolls out same-day delivery. Meanwhile, we’re now turning data into a just-in-time business. Why go to the expense and inconvenience of storing and managing your own information, when it can reside in the cloud—and be served to you where you want it at any time.
It’s all to the good. But once a link in the chain is broken—or when several links are broken at once—outages, delays, and shortages ensue. And that causes massive economic inefficiency.
Mayor Bloomberg says Sunday’s marathon will bring New Yorkers together—but how exactly will they get together with the subways crippled and traffic a horror show? Marathon veteran Dan Gross wonders.
New York City without the marathon would be like New Year’s Eve without Times Square or July 4th without fireworks. So to argue that Sunday’s race should be canceled or suspended this year in the wake of Hurricane Sandy may seem spiteful. And yet the marathon backlash is not surprising. The logistics of staging the event just six days after Sandy hit make it a tough sell.
Workers assemble the finish line for the New York City Marathon in Central Park, Thursday, Nov. 1, 2012. (Richard Drew / AP Photo)
Running in the New York City Marathon is one of the most life-affirming things you can do. You set off on the Verrazano-Narrows Bridge as fireboats spray water and Sinatra’s “New York, New York” blares over loudspeakers. After the long, endless haul up through a packed Fourth Avenue in Brooklyn, the crowd thins out to a few curious Chasids in Williamsburg. After slogging through an industrial patch of Queens, runners accelerate over the long rise of the 59th Street Bridge, eager to reach Manhattan and First Avenue’s wall of sound. A few miles north, a brief, cold turn into the Bronx, a trot down Fifth Avenue, and you start running downhill into Central Park. When I ran New York in 2006 (3:25, thanks for asking!), I never felt more alive.
Plenty of other cities stage marathons. But none quite like this one. The New York City Marathon is fueled by thousands of professionals, volunteers, medical staff, and emergency crews. New York Road Runners CEO Mary Wittenberg presides over an operation that Wal-Mart would envy: goods, people, services, and stuff flow through a crowded city with great ease.
And of course, after disruptive episodes, events like the marathon can provide a much-needed return to normalcy. Thousands of people around the world have spent a lot of time and money to train and travel for the race. Many are running for reasons that have nothing to do with personal bests and everything to do with survival—celebrating a triumph over cancer, or running in memory of loved one, or raising money for charity. For the bars and restaurants that line the route, the marathon means big business, adding up to $350 million of economic activity.
But the marathon involves a certain amount of conspicuous consumption of basics—fresh fruit, water, gasoline, and electricity—all of which are in short supply in New York and the surrounding region. Staten Island is a remarkably inauspicious place to start. In the hours before the race, thousands of people arrive in New York’s least populous borough and shed disposable clothes, jam themselves full to bursting with Gatorade and water, and then leave behind a huge mess. This year, it will all take place with people on Staten Island lacking water and electricity, with many residents suddenly homeless, and with volunteers and professionals retrieving drowned bodies.
It takes a lot of human power and energy to run those 26.2 miles. But it also requires a lot of power and energy to run the race: to fuel the cars and rescue vehicles, to power the sound systems and run the communications networks. In ordinary times, nobody would begrudge the use of fuel and mobile-generating capacity for the marathon. But these aren’t ordinary times. Hundreds of thousands of people within a stone’s throw of the race route lack power. The New York Post noted that the mobile generators used for the marathon could power 400 homes on Staten Island. Meanwhile, the U.S. military is airlifting generating equipment to the East Coast. The disparity between the spare-no-resource attitude of the marathon and the slow-motion restoration of electricity in the New York region is noticeable.
A young boy rides his bicycle on a flooded street in the New Dorp Beach neighborhood of the Staten Island borough of New York, November 1, 2012. (Lucas Jackson / Reuters / Landov)
In case anyone’s wondering how the economy is doing, it’s looking relatively awesome, based on today’s numbers. That’s good for Obama—and good for America. Dan Gross reports.
This is what Morning in America looks like. As the floodwater receded Wednesday and Thursday, government and industry groups this week released a slew of economic data points. All of them generally pointed in the right direction, and confirmed a thesis some wise analysts (OK, me) have been propounding for months. Yes, global growth is slowing and businesses are nervous over faltering exports and political uncertainty. But the innards of the economy—consumer spending, the housing market, the manufacturing sector, and the auto sector (which is the largest single manufacturing and retail sector), are all doing quite well.
Consumers return to Times Square in New York City on October 31, 2012. (John Lamparski / Getty Images)
Far from being in decline, the U.S. economy is expanding and recovering. The virtuous circle of confident consumers, rising domestic activity and more jobs, all help explain why President Obama is poised to win reelection next week— not in spite of the economy’s performance in the past four years, but because of the economy’s performance in the past three years.
Let’s review. People are feeling better about the status quo. Thursday, the Conference Board reported that its measure of consumer confidence rose to 72.2 in October—the highest level for the year. Last week, the University of Michigan/Thomson Reuters consumer-sentiment index came in at its highest level since 2008. And Gallup’s economic optimism index, while still in negative territory, showed its best reading since 2008. Consumer confidence is bolstered by two important measures: the jobs market and the housing market. Most people don’t own stocks or collect capital gains. But they do have jobs, which account for the lion’s share of their income. And most Americans do own homes, which account for the lion’s share of people’s net worth. Both sectors have been depressed for much of the past several years, but are showing signs of life. Lynn Franco, director of economic indicators at the Conference Board, cited “improvements in the job market as the major driver” of rising confidence.
On employment, Friday’s jobs report will be the big tell. But the preliminary data released Thursday points in the right direction. ADP, the payroll-processing company that reports its own monthly jobs figure, said the private sector added 158,000 jobs in October. Not spectacular, but pretty good. Also on Thursday, the Labor Department said first-time unemployment claims fell to 363,000 last week, down from 372,000 the previous week. Yes, there’s still an unemployment crisis. But here’s the reality: the labor market is probably in better shape today than at any time since late 2007.
The same might be said for housing. As we’ve been noting for months, housing is back. This past year has brought persistently higher levels of new and existing home sales, and, finally, of home values. On Tuesday, Case-Shiller reported that home values rose in August, and are up 2.0 percent from August 2011. On Thursday, the Census Bureau reported that construction spending(PDF) turned in a healthy showing in September—rising 0.6 percent from August and up 7.8 percent from September 2011. The gains were driven entirely by housing. Spending on private residential construction in September 2012 was up an impressive 20.9 percent from September 2011, and total private construction spending was up 14.4 percent from September 2011. And what I’ve dubbed the “conservative recovery” persists. Thanks to continuing austerity measures, public spending on construction fell 0.8 percent in September from August, and was off 4.2 percent from September 2011.
Good news in housing tends to be good news for other parts of the economy: for the labor market, since housing is a labor-intensive business; for manufacturing, since a lot of materials used in housing are made domestically; and even for the car companies, which tend to sell a lot of high-margin pickup trucks when the housing market expands. And here, again, Thursday brought positive news on these sectors. The ISM reported that its purchasing managers index for manufacturing in October was 51.7, a bit higher than September. Any reading above 50 indicates the sector is expanding. This is the 31st straight month of expansion.
The auto industry is both the largest manufacturing sector of the U.S. and the largest retail sector. As go cars, so goes the economy. And so far this year, the auto industry has been gaining speed. On Thursday morning, the car companies began to report U.S. sales for October.
The former BBC director general faces a battle with the Times’ unionized employees over a new contract, and a simmering controversy back home over what he knew about the case of Jimmy Savile, the late Beeb star accused of sexually abusing numerous women and girls.
There have been some rocky crossings of the Atlantic from the U.K. to the East Coast of the U.S. The Mayflower had a tough time of it in 1620. The Titanic didn’t make it in 1912. Now, Mark Thompson is the one encountering choppy water.
BBC director general Mark Thompson speaks to the media outside the BBC's Television Centre in White City, west London, on March 2, 2010. (Ben Stansall / Getty Images)
The former BBC director general was tapped in August to be the next chief executive officer of The New York Times Company. At first blush, it seemed like a strange choice. Hiring a Brit who ran a government-owned, not-for-profit global television business to run a company dominated by its U.S.-based newspaper?
But Thompson had helped a venerable, powerful organization extend its global brand, and clearly had the chops to run a sprawling, high-brow news organization. Britain’s media culture may have been soaked in scandal, but the BBC enjoyed a reputation for journalistic probity and high standards in the U.K., much as The New York Times does in the U.S.
The timing seemed propitious for Thompson, too. Yes, the Times Company’s stock has been in decline for a long time. And, like every other print entity, the paper has had difficulty making a profitable transition to a digital world. But the business seems to be stabilizing, thanks in part to a lot of tough decisions made by the company’s much-maligned executive leadership.
To cope with declining advertising revenue, the Times installed a controversial paywall. In Thursday’s earnings report, the company reported that total revenue fell marginally—ad dollars were down nearly 9 percent from the year-ago quarter—but circulation revenues rose 7.4 percent. Why? “Paid subscribers to The New York Times and the International Herald Tribune digital subscription packages, e-readers, and replica editions totaled approximately 566,000 as of the end of the third quarter, an increase of approximately 57,000 or 11 percent since the end of the second quarter of 2012.”
In January 2009, the company, desperate for cash, borrowed $250 million from Mexican industrialist Carlos Slim Helu at a sky-high 14 percent interest rate. But after years of heavy cost cuts and cash-preserving measures like cutting the dividend, it managed to retire the debt it owed to Slim in July 2011. Meanwhile, the Times has been holding a garage sale of sorts: in late 2011, it sold off its collection of regional newspapers for $150 million. Last month, it sold About Group for $300 million to IAC, parent company of The Daily Beast. Earlier this month, it received $167 million for its share of Indeed.com, a jobs search engine, which was sold.
But here’s the irony. As Thompson prepares to assume the position of CEO—his first day is supposed to be Nov. 12—he’s facing two significant issues that will bear directly on his ability to lead the organization: a scandal over journalistic ethics in London, and a long-running, increasingly bitter labor dispute in New York.
IAC, The Daily Beast’s parent company, got a lesson in how auto-generated data can wreak havoc on a corporation’s best-laid plans.
Stock markets are supposed to be efficient. Rational actors continually process data in a methodical way and spit out the appropriate price. But today, the market is increasingly peopled by machines–algorithms, programs, trading bots, and high-frequency traders swapping large and small bits of stock at an insanely rapid pace. High-frequency trading accounts for about half the volume on U.S. stock exchanges. And in recent years, we’ve learned that dispassionate machines and software can act in ways that seem highly irrational.
A trader works on the floor of the New York Stock Exchange. (Mario Tama / Getty Images)
One move in the market triggers a reaction, which pushes a machine to issue a trade, which triggers a host of other trades, and so on. That’s how the Flash Crash came to pass. On May 6, 2010, the Dow Jones industrial average lost about 1,000 points in 20 minutes as computers ran amok. All it takes is one misplaced or mistimed trade, one small bit of misinformation or incorrect data, to set off a chain reaction.
We got a view of that on Wednesday, when the stock of IAC/Interactive Corp., The Daily Beast’s parent company, gyrated wildly in the mid-morning. The culprit was a single piece of information that turned out to be incorrect. The mistake was corrected, but not before several hundred millions dollars of shareholder value had disappeared.
Here’s what happened. On Tuesday, IAC’s stock closed at $52.46. In the morning, IAC released its third-quarter earnings, which were generally better than analysts had expected. In trading before the stock market formally opened, shares rose. At 10:30 a.m., IAC submitted the required filing to the Securities and Exchange Commission. This filing contained additional information about expected 2013 results for specific units, including the “Media” unit and a unit labeled “Other.” The filing included some complicated accounting language but basically said those two units were expected to report a loss for 2013. After opening higher than its Tuesday close, the stock began to drift downward. Again, nothing abnormal.
At 11 a.m. IAC started a conference call during which executives discussed the results with analysts and investors. (You can check out the call here. Then, at 11:28, StreetAccount, a unit of financial-data provider FactSet, incorrectly entered data suggesting that IAC had reported that it expected the whole company would report an operating loss in 2013—not just the “Media” and “Other” units.
Within seconds, as the chart shows, the stock began to plunge. Of course, markets are supposed to process new information that might affect a stock price. And some investors may have dumped the shares based on FactSet’s new piece of information, which turned out to be incorrect. But it’s also highly likely that electronic traders picked up on the action in the stock, thus triggering their own sales—which in turn triggered more trading systems to hit sell. And so a decline quickly became a rout. The stock, which stood at about $50.50 at about 11 a.m., plunged to $45.57 by 11:34—a decline of nearly 10 percent. At 11:34, NASDAQ, the exchange on which IAC is traded, halted trading in IAC’s stock—that’s what it does every time a particular stock falls rapidly in such a short period of time.
Informed of the activity, IAC’s management told investors on the conference call, which was still happening, that incorrect information had been disseminated. Trading resumed at 11:39 a.m., and by noon, the stock had regained much of the ground it gained in its mini-crash. The stock closed the day at about $48. By the middle of the day on Thursday, IAC’s stock had rallied back to almost precisely where it was before the mini-crash.
An Amazon facility in Northern Virginia that lost power this week took a chunk of the Internet down with it. Dan Gross on why the episode is a reminder that the vaunted cloud is much like the Web in the 1990s—young and far from foolproof.
When an Amazon facility lost power in a storm this week, it caused a major cloudburst of its own.
A decent chunk of the Internet went down, with massive sites like Reddit and Foursquare unavailable, and smaller ones like TheRoot.com having difficulty posting new items. Entrepreneurs couldn’t get onto FastCompany.com. Even The Daily Beast’s commenting system went down. And plenty of other companies had difficulty accessing vital data. Those affected Tuesday morning were clients whose data was stored at an Amazon Web Services (AWS) facility in Northern Virginia.
Amazon.com is one of several large entities offering cloud-based computing services. Other big providers include Rackspace and Concentric. Amazon doesn’t break out revenues for its AWS unit, which provides data storage and processing services to all sorts of companies. But James Staten, an analyst at Forrester Research, says his firm anticipates that Amazon gets about $1 billion a year in revenues from Web services. While Forrester doesn’t provide a current forecast, Staten guesses that the cloud-based infrastructure business is a $2 billion-a-year business.
Cloud-based storage is surfing two huge trends. First there’s the rise of the cloud itself—the shift of data and the software that powers businesses off-site, managed by a third party, yet easily summoned at a moment’s notice. As is the case with many outsourcing decisions, the logic is inescapable. Why bother to buy, install, maintain, and upgrade server farms when somebody else who does it at great scale will do it for you? The second trend is the rise of Big Data. With processing and storage power getting cheaper by the day, more and more businesses rely on constant data-processing to run their business. Think, for example, of the way retailers can use information on consumers’ individual purchasing histories to offer instant sales at the cash register. Cloud-based computing can make businesses more efficient and cut costs, which is very appealing to managers.
“I get the sense there is a wave building,” says Gene Ruth, an analyst at the Gartner Group. When his clients discuss cloud computing, he says, the question has shifted from “why would you do that?” to “why aren’t you doing that?”
David De Lossy / Getty Images
But outsourcing has its limits. And these two trends also set the stage for high-profile, concentrated failures. Every day, in homes, businesses, large companies, and networks, there are calamities—outages, computers freezing, systems that are pokey and difficult to access. But it happens behind closed doors. The cloud centralized and publicizes such failure.
Staten, the Forrester analyst, notes that outages like Tuesday’s are “are par for the course, not just in the cloud, but in traditional hosting and corporate data centers.” It was only shocking because “we are making the dumb assumption that the cloud is more highly available than any other data center.”
Here Comes Housing, Cont'd
Housing is back, Vol. IX, Part 62
For several months now, we’ve been arguing that housing is back as an economic force. And with each passing month, the thesis becomes more clear. The level of housing-related activity – housing starts, new homes sales, existing home sales – has been on the rise all year. And in recent months, housing prices have started to rise.
Wednesday brought confirmation of the trend. The Census Department reported that in September, home sales came in at an annualized rate of 389,000. That’s an increase of 5.7 percent from the August rate of 368,000. But what really matters is how much September new 2012 home sales rose from September 2011. The answer? They were up 27.1 percent. Through the first nine months of 2012, new home sales are up 21.8 percent from the first nine months of 2011.
As demand rises, supply seems to be shrinking. Builders have generally been cautious about putting up speculative homes in recent years. And who can blame them? But they’ve been caught off-guard to a degree by the surge in home sales. At the end of September, there were only 145,000 new homes for sale in the U.S. That’s down from 160,000 for sale at the end of September 2011. At the current sales price, there are only 4.5 months worth of inventory on the market. A year ago, there were 6.3 months worth of inventory clogging the market. In September 2012, the inventory as a function of the rate of sales was the lowest it has been since October 2005.
What happens when demand rises on a relative basis while supplies fall on a relative basis? Why, prices go up. The median price of a new home sold in September 2012 was $242,400, up 10.3 percent from $217,000 in September 2011.
The Dow Jones lost nearly 250 points in a rough start Tuesday. But don’t worry, writes Daniel Gross, the U.S. domestic economy is actually doing better than most of its global rivals.
The U.S. stock market fell out of bed Tuesday. The Dow Jones Industrial Average lost nearly 250 points in its first hour of trading, and was muddling along down 170 points midday. The main culprit? Poor earnings reports and chastened outlooks delivered by large, multinational firms, like 3M, the large manufacturer, and UPS, the global delivery service.
A trader works on the floor of the New York Stock Exchange on Oct. 19, 2012, in New York City. (Andrew Burton / Getty Images)
The action on Wall Street Tuesday highlights a larger truth about the U.S. economy and its markets at this moment in time. As we’ve noted before, these days it seems that American consumers are from Mars, while global business is from Venus.
That represents a 180-degree from the state of affairs in 2009 and 2010. Then, companies whose fortunes were tied to the U.S. consumer were getting the tar beaten out of them. Consumers, traumatized by crushing declines in the housing and stock markets and massive job losses, began saving, hoarding, and generally spending less. At the same time, regions that had escaped the subprime crisis—Latin America, China, India, sub-Saharan Africa—continued to power ahead. So as small businesses that catered primarily to U.S. consumers suffered, multinationals that got most of their business from overseas found a steady source of orders, demand, and markets materializing out of nowhere.
But a few years later, the shoe is increasingly on the other foot. American Consumers may not be partying like its 2006, but things have been moving steadily in the right direction. The job market is improving, with more than 4 million jobs added since early 2010. Consumer confidence, as measured by the University of Michigan, is at a five-year high. Financial failure is down across the board, as consumers are generally doing a better job keeping up with financial obligations. And as regular readers of this space should know by now, housing is back. Sales, construction activity, and prices are all higher through the first nine months of 2012 than they were in the first nine months of 2011. So it’s no surprise that retail sales continue to rise and that the National Retail Federation expects holiday sales to rise a healthy 4.6 percent in 2012. (Amazon.com’s stock was up on Tuesday.)
As for global business, that’s another story. The giant companies with operations around the globe that are now finding their dependence on overseas markets for growth is problematic. Even though the worst of the sovereign debt crisis seems to have passed, the euro zone—the wealthiest single entity outside the U.S.—is in recession and doesn’t have much prospect of growth. China, the motor of the world’s economy, is showing signs of slowing down. In the third quarter, China grew at a 7.4 percent annual rate—the lowest such number it has posted since early 2009. India is shifting into a lower gear. Simply put, the volume of goods, services, and people whizzing around the globe is still rising—but at a slower rate than previously thought. The IMF in September reduced its estimate for trade growth in 2012 from 3.7 percent to a mere 2.5 percent. (In 2011, global trade grew 5 percent.)
And so the news from large corporations has been generally dispiriting for the last few months. IHS iSuppli earlier this month reported that global PC shipments are expected to fall in 2012 for the first time since 2001. That’s bad news for companies like Intel, Microsoft, Hewlett-Packard, and Dell. Equipment maker Caterpillar on Monday reported a solid quarter(PDF) but dialed down expectations for 2012 revenues and profits due to “global economic conditions that are weaker than we had previously expected.” Chemical giant DuPont on Tuesday morning reported disappointing earnings.
All of which means the U.S. domestic economy is now doing better on a relative and absolute basis than many of its global peers and rivals. UPS’s earnings report was one of the reasons the stock market fell early Tuesday. But look closely inside the company’s earnings. It shows the dichotomy. The company’s U.S. business revenues rose a bit from the year-ago quarter, and average daily volumes rose nearly 4 percent. In international operations, by contrast, revenues fell nearly 4 percent and daily volumes were flat.
Three banks failed in the U.S. on Friday
Failure Friday is back. After a lull of a couple weeks, three banks failed on Friday.
Gulf South Private Bank, a four-branch bank based in Destin, Florida, with $159 million in assets, failed and was taken over by SmartBank, based in Pigeon Forge, Tennessee.
First East Side Savings Bank, a one-branch bank based in Tamarac, Florida, with $67 million in assets, failed and was taken over by Stearns Bank National Association, based in St. Cloud, Minnesota.
Excel Bank, a four-branch bank based in Sedalia, Missouri, with $200 million in assets, failed, and was taken over by Simmons First National Bank, based in Pine Bluff, Arkansas.
This brings the total to 46 banks failing through the first 42 weeks of 2012. But that’s still progress. As the chart shows, bank failures rose sharply in the wake of the housing bust: 30 in 2008, 140 in 2009, and 157 in 2010. (The FDIC's complete failed bank list can be seen here.)
But the wave of failures has subsided. Bailouts, government guarantees, and the Fed's easy money policies helped buoy banks. Meanwhile, American companies, borrowers, and consumers started to do a much better job keeping up with financial obligations. This is one of the great underreported and underdiscussed features of the current economic expansion. In 2011, 93 banks failed. That's high by historic standards, but it was down 40 percent from 2010. And the size of the banks failing fell, too. All of which meant the systemic implications of bank failures became far less severe in 2011 than they were in 2010.
That trend is continuing through 2012. As noted, through the first 42 weeks of 2012, 46 banks have failed – more than one per week. But in the first 42 weeks of 2011, 86 banks failed. So far through 2012, then, bank failures are down 46 percent from 2011.
Showman, Lawyer, quant, jock. No, it’s not the next novel by John le Carré, author of Tinker, Tailor, Soldier, Spy. Rather, it’s the intrigue-filled succession of chief executive officers at Citigroup, the massive U.S. bank that was nearly killed in the financial crisis. On Oct. 16, CEO Vikram Pandit abruptly resigned, and the company announced that he would be succeeded by a largely unknown company lifer: Michael Corbat, the fourth top boss at the company in nine years. At the time of their respective appointments, each leader possessed precisely the right qualities to make up for the shortcomings of his predecessor.
First came the showman. Sandy Weill, the up-from-Brooklyn striver, built Citi into the nation’s largest financial institution. A creature of the razzle-dazzle 1990s, Weill ultimately merged Travelers Corp. with Citi, thus erasing the Glass-Steagall Act (which prohibited the marriage of investment and commercial banks) before Congress formally overturned it. But Weill’s empire was full of conflicts of interest. After the dotcom crash, Citi faced a host of regulatory and legal challenges over its stock recommendations and investment banking practices. So the company turned to a lawyer to clean up the mess. Chuck Prince, a corporate attorney, brought some order to the sprawling company. But Prince’s theory of extending credit seemed remarkably laissez-faire. By mid-2007, when things were clearly getting out of control, he famously told the Financial Times: “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Prince danced Citigroup to the brink of failure.
In late 2007 the bank decided that what it needed was a numbers guy—a quant. And it found one in Vikram Pandit, a Columbia finance Ph.D. turned hedge-fund manager. Pandit took his slide rule to the bank’s balance sheet—accepting a massive federal bailout, cutting jobs, hiving off unwanted assets into a separate unit, and rebuilding the firm’s capital base and reputation from the ground up. The focus on hard data bore fruit. Citigroup repaid the government, sold off junky assets, and reduced spending (it even cut back the company’s name to just plain Citi). But Pandit wasn’t versed in basic CEO-ship. He couldn’t convince the Federal Reserve to sign off on its new capital plan, or convince shareholders to approve his pay package—two major embarrassments.
As 2012 wore on, observers noted that Citi lacked a leader versed in basic blocking and tackling. So naturally it turned to a former college-football lineman. Michael Corbat, who played at Harvard, is a lifelong Citi banker. He has spent 30 years getting to know the ins and outs of the company. Citi is now betting the lineman can transform into a quarterback.
A solid sales report sent the stock market climbing today, taking analysts by surprise. What’s the big shock, asks Daniel Gross? Signs of the rebounding consumer are all around.
The stock markets rallied nicely on Monday in response to a solid retail sales number. The Census Bureau reported (PDF) that in September, sales rose 1.1 percent from August, to a record $412.9 billion. In addition, the August figure, originally reported as a gain of .9 percent from July, was revised to a 1.1 percent gain.
Ryan McVay / Getty Images
Yes, higher gas prices accounted for a healthy chunk of the sales increase in September—about one quarter. But the numbers bear witness to a larger trend. In the summer and in the fall, Americans began to do what they do best: shop. For the three month period between July and September 2012, sales were up 4.8 percent from the comparable period in 2011.
Analysts were surprised by the results. But the time has long since passed when we should be surprised by positive signs emanating from the American consumer. Sure, there is great uncertainty in the world—in Europe, in Asia, in the markets, and in the U.S. But the Greek bailout and the China slowdown affect business behavior far more than they influence consumer behavior. Consumer spending tends to be driven by three pretty significant forces. Each was trending down for much of 2009 and 2010. Each is now trending up. Check out the chart of U.S. retail sales below.
First, and above all, there’s the job market. Most Americans shop with their earnings. Even with wages relatively stagnant, when more people work, it tends to translate into more consumer spending. In September 2012, there were 1.8 million more Americans with payroll jobs than there were in September 2011; and 4.2 million more than there were in February 2010.
Second, there’s consumer confidence. The labor market isn’t good by any stretch of the imagination. But consumer sentiment and psychology plays a role in spending decisions. If people are feeling better about their current situation and future prospects, they’ll be more likely to spend a chunk of their paycheck—and more willing to take on a little debt in order to go to the mall. And consumer confidence is definitely on the rise. The Conference Board’s most recent reading of consumer confidence shows it spiked in September and stands at its highest level since February 2012. Last Friday, the University of Michigan’s measure of consumer sentiment came in at a five-year high.
Consumer confidence rises and falls with the job market, which is on the upswing. But it also rises and falls with the value of assets held by the American consumer. A booming stock market tends to make the minority of Americans who own stocks feel wealthier, and hence more confident about spending. And a rising housing market tends to make the majority of Americans who own homes feel wealthier, and hence more confident about spending. (Check out this article by my colleague Matthew Zeitlin to understand precisely how that works.) Data from Case-Shiller suggests that for the first time in years, home prices began rising in the U.S. this summer on a year-over-year basis.
One by one, over the past two years, the gears that make the mighty consumer engine go have been engaged. And the data points to an ironic twist in the trajectory of the U.S. economy. Businesses, which thrived and boomed in the early years of this subpar economy, are now increasingly taking a backseat to increasingly upbeat consumers.
The decline of financial failures is one of the big underreported stories in the economy
Something comparatively unusual happened on Friday: no banks failed.
Since the onset of the financial crisis, the last day of the work week has typically been Failure Friday. After the markets close, the FDIC's SWAT teams swoop in, close down listing banks and then transfer ownership to a new entity who can reopen for business on Monday. After years in the middle part of the last decade when no banks went down, bank failures rose sharply: 30 in 2008, 140 in 2009, and 157 in 2010. (The FDIC's complete failed bank list can be seen here.)
But the wave of failures has subsided. Bailouts, government guarantees, and the Fed's easy money policies helped buoy banks. Meanwhile, American companies, borrowers, and consumers started to do a much better job keeping up with financial obligations. This is one of the great underreported and underdiscussed features of the current economic expansion. As defaults on mortgages and other debt declined -- as financial failure declined, in other words - bank failures started to go down, too. In 2011, 93 banks failed. That's high by historic standards, but it was down 40 percent from 2010. And the size of the banks failing fell, too. All of which meant the systemic implications of bank failures became far less severe in 2011 than they were in 2010.
That trend is continuing through 2012. Through the first 41 weeks of 2012, 43 banks have failed. That's still (duh!) a pace of about one per week. But, again, it is down sharply from 2011. In the first 41 weeks of 2011, 80 banks failed. So far through 2012, then, bank failures are down 46 percent from 2011. And in the past 11 weeks, only four banks have failed.
That's good new for owners of banks, for depositors who tend to get stressed out when their bank fails, and for the FDIC deposit insurance fund, which continues to replenish itself. It's also good news for the economy at large.
Jack Welch, who accused Obama of manipulating the jobs report, is just one of the wealthy white dudes, mostly in their late 60s and 70s, who’ve been stalking the airwaves, print, and social media, attacking the president. Daniel Gross offers a guide to the aging moguls who loathe Obama.
They’re everywhere! In the past few weeks, it’s been hard not to notice a new species: Maleus Americanus Crustius. Sure, they’ve always been with us. But these days, the alpha-male specimens, white dudes mostly in their late 60s and 70s, have been stalking the airwaves, print, and social media. They’re full of rage and fury about politics, tax policy, and the resident of 1600 Pennsylvania Avenue. They share certain characteristics: north-south migration patterns, brittle egos, receding hairlines, and long records in business. While they respond well to obsequiousness and stroking, they exhibit a tendency to snarl when put on the defensive. And they don’t need medication to get blood moving to their extremities. The mere mention of President Obama does the trick.
(From left to right) Real Estate Investor Sam Zell, Wynn Resort's Founder Steve Wynn and News Corp CEO Rupert Murdoch. (AP Photo (3))
Our Field Guide to Angry Old Obama-Hating Rich Men.
Name: Jack Welch
Pedigree: Titan of industry, 20-year CEO of General Electric, turned speaker, management guru and columnist with wife Suzy. Active on Twitter.
Natural habitat: Boston, Nantucket, Palm Beach.
Recent noteworthy activities: Starting with a series of tweets last Thursday, Welch has been all over the media—on CNBC, on MSNBC, on the Wall Street Journal op-ed page—accusing the White House and the Obama campaign of manipulating the September jobs report. He’s also generally been running down the conduct of the U.S. economy under the Obama administration. Reacted to harsh pushback from reality-based community by comparing U.S. to Soviet-style authoritarian regime in which any and all dissenting views are crushed.
Ostensible reason for anti-Obama rage: Is convinced the Obama administration is cooking the books on labor market, and is anti-business.
Real reasons for generalized anger: Legacy as a highly praised CEO who raised revenues from $26 billion in 1980 to nearly $130 billion in 2000 but has been attacked recently as just the wins of a bull market economy. Meanwhile, his hand-picked successor, Jeff Immelt, who accepted an Obama appointment to a jobs council, has racked up much less impressive record—but is much better-liked.
Name: Leon Cooperman
Pedigree: Founder and CEO of Omega Advisors, wildly successful hedge fund
Natural habitat: Lower Manhattan
Recent noteworthy activities: Cooperman featured prominently in Chrystia Freeland’s recent article in The New Yorker about angry rich guys. He distributed a letter to colleagues complaining about Obama’s divisive rhetoric and class warfare, and obliquely compared Obama’s political rise to that of Hitler.
Ostensible reason for anti-Obama rage: Obama occasionally refers to the wealthy as fat cats, says people who fly in private jets should pay higher taxes, blames banker and Wall Street for woes of economy.
Real reason for generalized anger: Neither Obama—nor his kids—sent Cooperman a thank-you note after he presented the president with a volume of self-published poems written by Cooperman’s teenaged granddaughter.
Name: Sam Zell
Pedigree: Legendary real estate investor, known for jumping into distressed situations. Ill-fated, highly leveraged acquisition of Tribune Company wound up in bankruptcy.
Natural habitat: Chicago, distressed-investing conferences.
Recent noteworthy activities: In an appearance on CNBC on October 2, Zell tore into Obama, suggesting that it didn’t make sense for people like him to invest at a time when business is under attack.
Ostensible reason for anti-Obama rage: Obama wages class warfare by arguing that those with higher incomes should pay higher taxes than they pay now.
Real reason for generalized anger: Even after a successful career as contrarian investor, Zell is mostly known to the public for his disastrous, money-losing purchase of the Tribune Company in 2007.
Name: David Siegel
Pedigree: Founder of Westgate, a large time-share business. Builder of 90,000-square-foot home in Florida, featured in documentary, The Queen of Versailles.
Natural habitat: Orlando
Recent noteworthy activities: Recently circulated an email to employees in which he said he would fire employees if President Obama were to be reelected.
Ostensible reason for anti-Obama rage: Obama’s plans to raise taxes on rich and health care costs will make it impossible for businessmen like him to make money. Also, president has apparently failed to stimulate sufficient demand for the low-end vacation time shares he sells.
Real reason for generalized anger: He came off badly in documentary about his unfinished 90,000-square-foot house.
Name: Steve Wynn
Pedigree: Charismatic founder of Wynn Resorts, helped reinvent Las Vegas.
Natural habitat: Las Vegas, Macau
Recent sightings: In an interview with journalist Jon Ralston earlier this week, Wynn raged about the president’s practice of class warfare. “I can’t stand the idea of being demagogued, that is put down by a president who has never created any jobs and who doesn’t even understand how the economy works.”
Ostensible reason for anti-Obama rage: Obama has called for higher taxes on the wealthy, and has made off-handed comments that are harmful to casinos’ effort to pry dollars from consumers. For example, he warned companies that accepted bailout funds: “You can’t go take a trip to Las Vegas or go down to the Super Bowl on the taxpayer’s dime.” He also told Americans: “You don’t blow a bunch of cash in Vegas when you’re trying to save for college.”
Real reason for generalized anger: Enraged that Andy Garcia got to play the role of the casino owner in the Ocean’s 11 franchise.
The introverted leader, the lady heir apparent, the dubious plans for financial success—it all matches. If the Obama administration were a company, it would have to be Facebook. Daniel Gross explains.
We’ve had some fun in recent weeks comparing the Romney campaign to corporate entities like Chick-fil-A and the New York Jets. But if the Obama administration/
campaign were a company, what would it be?
Pablo Martinez Monsivais / AP Photo
Let’s review the similarities.
Both were extremely hot and really popular among young people a few years ago but have reached something close to saturation in the U.S. market. The metrics suggest Facebook is running out of Americans to sign up to join its network. The polling data suggest President Obama is showing signs of running out of Americans to sign up to join his network. Meanwhile, fickle fans of both entities are constantly looking for other alternatives—i.e., Twitter, Romney.
Both were organized around a somewhat introverted, awkward young guy who spent a few formative years in Cambridge, Mass., and who cultivates an aloof public persona with his constituents—investors for Mark Zuckerberg, voters for Obama.
At both Facebook and the Obama administration, the most effective leader and future heir apparent may be an older woman who serves as the diplomat, who served in the Clinton administration, and who is an iconic figure for working moms—i.e., Sheryl Sandberg and Hillary Clinton.
Both were designed to level the playing field, promote an egalitarian, barrier-free society, and give voice to the voiceless. But both have wound up lining the pockets of insiders and making the rich richer as middle-class folks suffer. Since 2009, median income in the U.S. has declined, even as the stock market has risen sharply, the wealthy have enjoyed low tax rates, and income inequality has risen. Just so, in the Facebook initial public offering, the Wall Street underwriters made money, early venture-capital investors and insiders cashed out—and the ordinary investors who bought the stock when it opened for trading have lost about half their money.
After a University of Massachusetts student found significant errors in a study beloved by budget cutters world over by Harvard economists Kenneth Rogoff and Carmen Reinhart, Stephen Colbert does what he does best -- leaves them in the dust.
Landfills are generally useless, smelly eyesores. But many towns are finding new, profitable uses for the piles of junk that dot America’s landscape—as solar-power plants.