The Angelou Economic Forecast, 2011

Post by
Scott Francis

Angelos Angelou is a legend in Austin.? He's been giving the Angelou Economic Forecast for 25 years now, and it has become a real institution in Austin.? I believe over 700 people attended his forecast - occupying one of the large Ballrooms in the Austin Convention Center, and essentially filling it.? The core of the event remains two focused economic talks, one by Mr. Angelou himself, and the other by a prominent guest economist.? But around that core is an excellent opportunity to network with fellow Austin business owners, business leaders, and political leaders.? The demographics appear to lean toward law firms and financial institutions, but I was hardly the only consultant in attendance.? I sat next to the assistant City Manager from Waco (the city management of several local cities were represented at the event), a couple of bankers, two lawyers, and a microsoft solutions partner.? Representatives of several politicians were also in attendance, along with our emcee, Kirk Watson.? At the forum, you sit at round tables over breakfast - encouraging a little discussiong before the talks get started.? As we introduced ourselves, I explained how Lance and I started BP3 back in 2007, and a bit about our trajectory to this point.? Only a few minutes into the first talk, Mr. Angelou made a comment about unemployment being under-reported because many people drop out of the job market and become "consultants".

Mr. Angelou led off with a discussion of the Austin economy - how his previous forecast fared against reality (pretty well - directionally correct, and he correctly captured the "perception" of the growth), and his forecast was going forward.? First the overall context of the US:

  • losing 650,000 jobs in 2010 (compared to losing north of 800,000 jobs in just January of 2009),
  • an increase in GDP of 3.6%,
  • an influx of 4.3 million people into the US,
  • 6 quarters of consecutive growth
  • household net worth is up
  • consumer debt declining
  • direct foreign investment is up
  • US exports are up quite a bit

And yet, the gray lining:

  • Likely, 200+ banks will fail this year
  • Commercial loans are coming due for refinancing in large numbers.? Unclear how many of these will successfully emerge.
  • Lower rents and lower occupancies - good for businesses generally, bad for the landlords and the banks.
  • Significant cuts are coming in State, City, and County budgets as they confront mounting deficits amidst declining revenues

So how is Texas doing?

  • Added 26,000 jobs in 2010.
  • 8.2% unemployment
  • Added 363,000 people.
  • VC funding up nearly 30%
  • Gross state product was down
  • Retail sales down
  • State deficit for the next two years: in the neighborhood of $20B.

Austin, in particular, is looking good compared to other tech hubs.? But, ironically, that is largely because of Austin's non-tech work (government, for example).? Austin is forecast to have:

  • 2.8% annualized growth rate
  • 5.8% unemployment by end of 2012
  • Might cross 1.9million residents in the metro area by 2012.? 25 years ago: 500k.? We've come a long way.
  • Estimated 125,000 new residents over the next 2 years.

The trends are basically all "up" over the next three years, but there is room for improvement.? Tech has been underperforming based on the statistics, and the median wage has been stagnant as more jobs enter the market but the new jobs are largely service sector, lower wage, jobs.

However, being an observer of Austin myself, I see some silver lining that may not show up in the numbers yet:

  • Known as a "great place to start up", the employment of startups is largely hidden from the statistics until the companies become established enough.
  • VC investment doubled from 2009 to 2010 - $344MM in 2010.? That's great news.? But Austin is home to one of the most active boot-strapping and lean-startup ecosystems.? These companies won't show up as VC investments - but many of them are growing, or at least sustaining.

After Mr. Angelou finished, Greg Ip gave a talk about the financial crisis - how we got there and how we're getting out of the mess.? His first argument was that a decade or two of great moderation typically leads investors and business leaders (and political leaders) to take on great risk.? This risk is primarily measured by the amount of leverage businesses are engaging.? One of the charts he showed was breathtaking in terms of how fast leverage grew relative to the modest economic growth.

Current account balance was highly symmetric with respect to the rest of the world.? As our balance went increasingly negative, the rest of world went increasingly positive.? There's been a big correction back, but it is still a wide gap.

A key point in Ip's analysis is that deleveraging recoveries take longer to take hold and get the economy back to the size it was when the crisis started.? People are still increasing savings, banks are continuing to sit on their capital.? The value of collateral (and therefore the ability to borrow or lend) has declined.? Ip discussed Quantitative Easing (aka "printing money") - and why this makes sense to do.? Because at the moment, it doesn't raise much risk of inflation - after all, Banks aren't lending enough to create the multiplier effect you would normally worry about, and wages aren't increasing, which prevents a wage-price spiral from taking hold.

Of course, as the US arrives at a more realistic view of what we can afford (both within government and personally), who will buy all our stuff?? Well, Mr. Ip proposes that Quantitative Easing has the effect of putting downward pressure on the dollar, as does our historically low prime rate.? The Rest of World is growing quickly.? China, India, and Brazil are all expected to grow north of 4% annually over the next 3 years.? When exchange rate changes and trends stick, over a long period of time, they start to really affect trade, because it affects the investments of corporations.

For the first time in a long time, the emerging markets now consume more than the US.

Of course, this blog only scratches the surface of the two talks.? I appreciated the opportunity to step outside the BPM bubble to hear how other people perceive the economy.? Sounds like things are looking up.

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