Quarterly Economic Review

Slalom Consultant Denis Farmer

Slalom Client Service Partner Denis Farmer helps clients in the financial services industry win on their most strategic initiatives.

Welcome to the inaugural edition of the quarterly Economic Review.  The intent of this publication is raise awareness about some of the key issues and trends in the economy and to encourage debate and discussion.

Each quarter we will provide a National Economic Review, providing key national economic news from the prior quarter.  In part 2 of this month’s publication we will also examine what the rules to be written for the financial industry regulations recently passed might indicate about future legislation to come from the next Congress.

We welcome your comments and observations, as the debate is more valuable than the prose on the page!

– Denis & Andrew


Slalom Consultant Andrew Houston

Slalom Consultant Andrew Houston is an experienced Finance and Strategy consultant with more than 15 years of experience working with leaders across a broad variety of industries to define and implement solutions to key business issues.

Jobs, jobs, jobs…the October jobs report puts the official national unemployment rate at 9.6%.  Celebrated by some was the creation of 151,000 jobs in the month, the first significant increase since the Census inflated job reports of May.  Consensus forecasts are for similar numbers in the months ahead.  Sounds good doesn’t it?!

Unfortunately, buried in the same jobs report was another ominous record, 1.2 million “discouraged workers”.  To be counted as unemployed, you must be looking for a job.  If you have grown weary of the job search and decide to just stay home and maybe watch the endless number of Family Guy re-runs available, then you are not counted as “unemployed” but rather as “discouraged”.  An improving job market generally draws back these discouraged workers into the ranks of the unemployed.  This record pool of discouraged workers could make it difficult to actually decrease the unemployment number, even with moderate job growth.

US Unemployment, 2008-2010Economists watching these numbers also debate the impact of those permanently leaving the work force.  We’ve all heard for years how the pool of domestic labor will shrink as the boomers retire and are replaced by the less populous Gen Xers (followed, of course, by the much larger Gen Y).  Will boomers, with 401K’s decimated by the great recession, and traditional pensions as rare as a winning football team in the State of WA, hold off on exiting the work force?  How will this impact those trying to get back into the work force?



Despite high unemployment companies are certainly making money.  Optimism is reflected in the stock markets, with the S&P 500 surging almost 7.2% in the three months from Aug – Oct, with the broader Russell 2000 hitting 8.3% growth over that same time period.

Financial markets, Aug-Oct 2010Perhaps one of the drivers for this strong performance is increased productivity. Third quarter numbers from the Bureau of Labor Statistics reported a 1.9% increase in labor productivity.  This commonly cited number is a measure of all output divided by all hours worked.  The simplest way to move this metric is in the overused management mantra “let’s do more with less”, translated to increasing the denominator (output) and decreasing the numerator.  For the quarter, total hours did increase 1.1%, outpaced by improved output of 3%.  So is more work really being done by fewer people? Is technology driving this and what does it mean for employment – will some jobs no longer be required…?



You can’t review the national picture without at least some discussion of patient zero for this downturn.  The housing market remains mired in the doldrums.  Existing home sales increased 7.6% for August, but that’s following a monster 27% decline in July.  Year over year sales of existing homes were down 19%.  New home sales were flat for the month, but are also down 29% year over year.

It remains difficult to get a pulse on this market, as prior year numbers are obscured by tax incentives provided at the time.  Unsold housing inventory is high, with 11.6 months of housing inventory in existing homes, and 8.6 months of inventory for new homes.  Similar to our discussion above regarding discouraged workers, there is an unknown number of “discouraged sellers” of existing homes who might continue to put pressure on home prices by entering the market.  Together with jobs, uncertainty in the housing market is generally considered a drag on consumer spending.


Monetary Policy

Fed Chairman Ben Bernanke

Federal Reserve Chairman Ben Bernanke

QEII – no, it is not an ocean liner…it is the new phrase of the month: Quantitative Easing, round 2.  The Fed, seemingly out of ammo for traditional weapons  (are you getting more than a 1% on any on-demand deposit account?), has again adopted a policy of printing money to buy long term debt.  While seen as an extraordinary measure in some circles, Chairman Bernanke made the rounds to assure everyone this “was just monetary policy”.   Specifically, the Fed plans to purchase $600 billion of government bonds in the next eight months.

This policy is meant to create a stimulus effect by further driving down borrowing costs.   Some analysts expect this easy money policy to increase inflation.  Bernanke has insisted that the Fed policy regarding inflation is unchanged, and other analysts do not think this move has the scale to make a significant impact.  A chorus of doubters points out that no one benefits more from inflation than debtors, and our elected government is the world’s largest debtor.

Businesses with long term debt obligations will also benefit from inflation.  In addition, some inflation might encourage businesses to start spending the cash they have. Do you think inflation will take-off?  How do these assumptions impact your strategy and planning?


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About Denis Farmer
I am a Slalom Client Service Partner who helps clients in the financial services industry win on their most strategic initiatives.

9 Responses to Quarterly Economic Review

  1. Kevin C. says:

    Nice article Denis – Next quarter we can talk about inflation?

    • Denis Farmer says:

      Thanks Kevin. Yes, inflation will continue to be a theme. It’s been interesting to watch the yield curve over the past month as the market absorbs QEII. I’ll post more thoughts on this topic next week.

      I would be interested in hearing your thoughts on this topic also.


  2. Tom Polzin says:

    Very cool…I am looking forward to future posts…

  3. my armchair economist comments –

    older article, but of interest regarding your later comments on jobs and boomers:

    i think there is a simpler way to move the productivity metric – just fudging the math. 🙂 assuming gdp is not being overstated and inflation not understated, i’m sure many companies are doing more work now with less people. a lot of companies trimmed the fat (and then some) and anybody who still has a job would prefer more work rather than to lose it. i think that’s mostly what we have seen during the ongoing months of the recession rather than technology leading us to greater productivity. i speculate that improvement over the last quarter is due to a fragile recovery and recent upticks in productivity could indicate more demand and more pressure on companies to hire. although this pressure would be struggling against the sticky belief that we may dip again.

    • Denis Farmer says:

      Thanks Mike, good analysis. You may have seen the November jobs report, which reported a net increase of 39,000 jobs. That was quite a reversal from the upwardly revised 172,000 number from October. This was short of expectations. The government shed jobs again in the month, continuing a trend led by state and local governments dealing with deficits. The uptick in the unemployment rate in November can likely be attributed to discouraged workers getting back into the market.

      Companies remain on the sidelines, not hiring large numbers of employees. At some point, you would think more capacity would be required to support expansion.

  4. Dave Stewart says:

    In reference to the housing, I would think the current foreclosures and the numerous ones that are looming will continue keep existing home sales and prices down. Also, I can’t see people exicited to sell even if they see a good deal when purchasing. The loss of equity could be too much for many to handle….

    Great article! Thanks Dennis and Andrew.


    • Denis Farmer says:

      Thanks Dave. Home prices continue to be a challenge. S&P/Case-Shiller numbers were just released for October prior to the new year, and it’s hard to find any good news. Do you think we can fuel a meaningful recovery with this critical sector still in the doldrums?

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