What in the World?

Egypt, Libya and Japan have certainly provided plenty of economic fodder to contemplate since the last edition of Automation World. Add in a generous mixture of food price increases and imported inflation and it is no wonder many business leaders are looking rather dazed. Let’s spend a few minutes sorting it all out.

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Will high oil prices stemming from the problems in Egypt and Libya cause the United States to slip back into recession? We do not think so. We have been forecasting higher oil prices anyway, concurrent with our projection of general economic growth in 2011 and 2012. Recent political events have at least temporarily accelerated the rising trend, but in our opinion, we are not seeing oil prices that will disrupt our outlook. To date, the oil-related issues are consistent with our forecast of a slower rate of rise in the U.S. economy in 2011 (a bend in the trend). We think oil prices would need to rise a lot higher to actually break the current general business cycle ascent.

The percent of U.S. income used to purchase gas and oil has varied from as high as 3.8 percent to as low as 1.5 percent over the last 30 years. The average over that time is 2.4 percent. We are currently at 3.0 percent. That means there is no immediate danger to the U.S. economy. Sustained oil prices at, or above, $120 per barrel could bring the recovery to a halt. Again, we do not think this will happen, as the new regimes (or re-established old regimes) will need petro-dollars to maintain order and to keep the economy moving forward.

The natural disasters that have hit Japan and the resulting human tragedy are immense, and our thoughts go out to the people of Japan. It is our conclusion that, as bad as the situation is in Japan to date, we do not need to revise our outlook for the U.S. economy and probably most of Asia’s—Japan being a probable exception. Our thinking is that the disruption to production in Japan is not likely to have a major impact on U.S. consumer demand.

There is certainly the potential for Japan to slip into recession. However, Japan was already on the backside of the current business cycle, slowing in its ascent from a year-over-year gain of 14.4 percent in early 2011 to what we were projecting would be a 1.2 percent gain for 2011 as a whole. Events of the scope that impacted Japan have the ability to exacerbate trends, but are unlikely to cause trends over anything but a short-term horizon (less than one year). Beyond that, Japan is going to be investing billions of yen into rebuilding. Billions of yen will be spent that otherwise were not likely to be spent, at least by the government. There will certainly be economic winners in Japan because of this, just as there will be economic losers. On balance, how far below (if any) our original +1.2 percent projection Japan comes in for 2011 will be a measure of a) how quickly and effectively the government moves (speed and size matter) and b) the resiliency of the culture.

Limiting your vision of the future based on the pain of the past downturn is a very normal reaction given the severity of the business cycle decline we have been through. It is time to recognize the opportunities that the downturn has handed to us and boldly move forward.

Alan Beaulieu, alan@itreconomics.com, is President of the Institute for Trends Research (ITR). His weekly radio show, “Make Your Move,” can be heard at www.voiceamerica.com every Monday at 4 p.m. (Eastern time). Podcasts are available through voiceamerica and through iTunes.

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