What Will the Next Economic Drivers Be?

From 1982 to 2007 the U.S. economy had an unprecedented expansion. The twenty five year period was driven by innovation, economic global expansion, favorable economic policy, increase in population and expansion of debt. During this period most of the current professional started their careers. The resulting concern is the current professionals are not trained to offer advice in anything other than a near perfect economic environment.

Briefly, let’s review the 5 aforementioned economic drivers from 1982 to 2007 Dr. Albert Niemi, Jr. Dean of the Edwin L Cox School of Business at the Southern Methodist University. The first driver was innovation. The invention of the microprocessor and innovation of technology contributed to a new level of productivity and life style. Currently, Dr. Niemi does not see a new invention or technology to fuel growth. Also he does believe bio-tech discoveries may fulfill a pipeline in 15 – 25 years.

Second, free market economics has opened up the economies around the world. During the past 25 years former closed communist economies from Easter Europe, the former Soviet Union countries and some countries in Africa have join a free market system. The conversion of communist based economies to free market based economies has helped fuel global economic expansion. Dr. Niemi does not believe there are many more countries that can be added to the global economy which can have a material effect.

Third, economic policy has been favorable during this 25 year period. The economic policies included a reduction in tax rates, a decrease in inflation and policies which allowed for free trade between countries. Dr. Niemi believes taxes will increase (in the US) due to demographic of our aging population and government deficits (which have accumulated over the past 25 years).

Fourth, the population continued to expand during the past 25 years. The generation of the “baby boomers” was the beginning, driving force and continued to create a population explosion. Currently, Dr. Niemi believes there is a current trend for younger generations to reduce the amount of offspring and the younger generations are waiting longer to have offspring. Additionally, the policies towards immigration have become less favorable. The result is a lower population growth rate.

Fifth, changes in the financial system influence individuals to save less and increase debt amounts. The savings rate before 1970 was 7% and in 2007 it was 0%. During the same time period the percentage of debt to household income rose from 25% in 1970 to (more than double) 60% in 1982 to (more than double) 130% in 2002. The decrease in savings and increase in debt allowed for individuals to consume more (thus expanding the economy). Dr. Niemi believes individuals are more prone to saving and financial institutions will not lend as generously in the future.

So what may drive the economy in the future? Can we no longer depend on these drivers? What can we do about it? I do agree with Dr. Niemi on several conclusion including technology has not offered the new “wow” invention (i.e. the microchip), the global economy has expanded to most relative economic areas, economic policy will not be as favorable, the population growth is slowing and expansion of savings and a reduction is being forced by financial institutions. However, the economic drivers of the past may not be the same economic drivers of the future.

A new driver to our economy could be productivity. Technology may not currently have a new invention to build an economy around, but technology allows us to increase our productivity (i.e. we can do more with less). Additionally, to keep our economy the same size (or to growth it) with less people each employed person will have to due more.

A second driver could be in the investment sector. Savings rates reached 0% in 2007 and have begun to increase since. Our current economy is signaling individuals and businesses need more liquidity and to reduce debts. The new round of savings may fuel a new round of capital which can be placed and managed around the world.

Why is this knowledge important? Business owners and advisors have grown up in environment of economic roses. The economy only suffered 16 months of recession between 1982 to 2007. According to Dr. Niemi the 100 year period before 1982 had about 40 years of recessions and about 60 years of growth. Dr. Niemi believe we are heading toward more challenging economy times were the economic balance might be 40% recessions and 60% growth. Advisors and business owners must understand the difference in business tactics and business positioning during more challenging and volatile economic periods.

Business tactics may need to be long-term focused instead of the short-term mind set we have grown accustom to over the past 25 years. Business positioning my require more liquidity, less debt, more equity and better margins which would replace two decades of minimal liquidity, increase debt, minimal equity and a focus on revenue growth instead of margins.

Other challenges we might need to overcome are social attitudes. We will need to work harder and work smarter. We need to increase our competitive mindset (people who finish last do not deserve a trophy). We need to understand that life is challenging and may not always “be fair.” These challenges do not have to stand in the way of progress. Businesses can be prepared by creating a business plan. After the plan is written the businesses can form a board of directors (or an advisory board) to meet regularly to keep a business on course. Finally, in good economic times businesses should strengthen their financial position (and owners should do the same). Have discipline to use your profits wisely to prepare for the future instead of increasing your life style.

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