US Slowdown/Recession and its Repercussions

Is it a slowdown or a recession? Is it a slowdown leaping towards recession? Is it a recession deepening to become a depression? Is it just a natural cycle of slowing down economic activity? Well, there are way too many opinions and economic pundits worldwide are divided in their degree of pessimism. No matter what it turns out to be, it’s definitely an opportunity for doomsayers to earn some money. Since 2000, US slowdown never went out of fashion anyways and there have been noises all through the decade announcing it’s round the corner. Irrespective of the brouhaha, there were three troublesome spots on the horizon:

• Large and growing current account deficit (hovering well above 5% of GDP.) This simply means that the country is borrowing from abroad to finance the gap between imports and exports of goods and services. Further, the quality of this deficit has been worsening - the money borrowed was increasingly being used to finance imports for consumption vs. being deployed for growth.




• The real estate bubble. The real estate prices in some parts of the country spiraled up without any good rhyme or reason. There was not enough economic activity impetus to justify very high prices. This led to unnatural property valuations (and subsequently, large mortgage loans, which became ‘sub-prime’ when property prices crashed.)




• Spurt in sub-prime loans. Financial institutions distributed loans like never before to anyone and everyone creating a largely credit driven spending. This created a mess when people started defaulting on these loans. Some investigation needs to be done to find out why banks went on an overdrive to give a loan.

So a correction to rebalance the economic equation was overdue. However, whether it will result in a full blown recession or depression is yet to be seen. Also, since economies of world are so tightly integrated now that any change in one parts creates immediate ripples across the world, this may act either as a shock absorber or as a single ignition point of to detonate the large part of world economy. Earlier recessions had a regional flavor but this time that does not seems to be the case.

Another important point to note is that since US is a largely consumption driven economy, most of the slowdown is very negative sentiment driven. This phenomenon has troubled the economists no end and none of the fiscal or monetary measures taken by Fed chief Ben Bernanke or his predecessor Alan Greenspan have succeeded in stimulating higher consumption in US. The phenomena definitely created space for some Nobel laureates though but so far no one knows how to induce higher consumption by American people. Maybe consumption levels have saturated and can not go up any further. Economists need to find other levers to stimulate the American economy.

I sometime wonder if recession is really an economic phenomenon - it seems more econo-psychological - you talk more about a possible recession and it will arrive. That’s what seems to have happened this time - for over a year, everyone who is anyone in financial market has been talking about a possible recession in US and it seems to have arrived. The reason is simple - as US is a very consumption driven economy and if people stop, slow down or postpone spending, it creates a vicious negative feedback loop for economy (less spending >> high inventories >> price crash & output reduction >> layoffs >> defaults on loans >> strain on banking system >> less spending >> and the cycle continues!) If I am a consumer convinced by innumerable financial wizards that US is going into recession and people will loose their jobs, my basic instinct will be to cut down on spending and save every penny I can for that possible rainy day. And I have started a downward spiral - the less I spend, the more economic activity slows down, the more the doomsayers talk and I cut down on my spending even more. Gentlemen, you have created recession out of the blue!

But not everything is lost here - the economic indicators are inconclusive on whether the US is in a recession or not (indicators like unemployment claims, unsold inventory levels, quarterly corporate results, price stability, inflation, etc. are mostly a mix bag not showing any special favor.) Further, US has many structural features to make a recovery faster and there is no political paralysis to put spanner in the recovery engine.

Let’s all talk about recession being over and it will run away!

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Internet Industry Trends in Year 2008

The year 2007 went in a flash with not much to write about except iPod economy extending to iPhone, Facebook becoming darling of developers & speculators, sub-prime crisis and a failed summit in Bali to tackle almost irreversible climate changes. However, this should not desist me from thinking about what might happen in the New Year, and the optimist I am, here are some of the internet industry trends that I think will gain momentum in 2008.

• Ad $$ will start moving towards social networking as well

Social networking sites like www.facebook.com, www.orkut.com, www.myspace.com, etc have seen outrageous traffic jump in last couple of years but their business model has always been suspect. However, it will change this year and we will see them attracting a significant pie of online advertising dollars. Whether this will be additional money flowing in or money moving away from other destinations (traditional media, search advertising, other favorite online destinations, etc.) needs to be watched carefully.

• Ad Networks will gain momentum

Advertisers will take a harder look at the ROI from online advertising and the cost of placing these ads on various destinations and ad networks will establish themselves as a better alternative for running ad campaigns. The advertisers will continue looking for much better targeting and conversion.

• Web will become more ‘semantic’

Aren’t we all tired of just poking our friends or leaving scrapes on their wall? I think the web is a few steps away from becoming much more ‘semantic’ where it will be possible to do much more meaningful interaction than poking and it can make that leap of faith in this year. What kind of application or applications will do that and what will be the nature of that ‘meaningful’ interaction is not very clear to me yet but that inflection point seems to be in sight. And this trend is not limited to social networking only!

• Emerging markets will continue to attract attention

Footprint of internet economy will keep expanding in the emerging economies with more and more local services getting delivered or initiated on the internet. However, this growth will not be like the Internet’s growth in US as there are some inherent structural rigidities and limitations in most of the emerging economies. But a decent growth is plausible.

• Internet & traditional media convergence will gain momentum

Maybe someone will find a good and clean way to make money out of video on the Internet! The convergence of traditional media (TV, Newspapers, Radio, etc) and Internet will continue and Internet will carry more and more of traditional media content. The efforts will be on to find and define a ‘universal media’ but they may not see much result this year. But coming years will see it not only being defined but created as well – both for audience and advertisers.

• Mobile will overtake PC as choice of Internet endpoint

The small screen mobile will take over large screen PC as an endpoint of choice to access and interact with Internet. With phones becoming powerful and feature packed day by day and some of the biggest web applications like search and mail getting available easily on the mobile phone, it’s a natural phenomena waiting to happen.

However, serious business transactions will continue to be delivered from PC for some more time to go.

• New user growth rate will slow down in developed world across the board

The new user growth rate on all the popular destinations will go down across the board in the developed world as Internet penetration in those countries (esp. US) seems to have already peaked out.

• I will earn my first $ from this Blog

Well, the point is not about me really. The bigger point is that advertising $$ will start chasing focused audience that, by virtue of their online hyper activity, leaves a rich trail of data usable for behavioral targeting. And viral through referral advertising will gain momentum.

What’s in store for us in near future is not an easy question to answer and anyone else’s guess is as good as mine. I will watch these trends in the Internet Economy closely this year and may be some of my guesses will be termed as ‘predictions’ later!