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Thursday, April 30, 2020

GDP Contracts 1st Q of 2020-Is It a Short Lived Shock and Digital GDP Recovery?

The humming economic engines of the U.S. economy went into an abrupt screeching halt as our business and personal lives were derailed by a phantom disease. COVID-19 caused worldwide supply chain and employment disruptions that will shift our fundamental economic assumptions about how business is conducted for a long time to come. Contractions in the first, and perhaps the second (or third) quarter were expected as our economy shifts and adjusts to the voracious appetite of an economic cookie monster. The question becomes what happens after we put the "beast" back in the can? We are either in a recession or we are part of a short-lived shock. The answer may lay in our ability to adapt to a new digital platform that includes short term economic boosts and long term economic mastery.

The U.S. Bureau of Economic Analysis states.....

"The decline in first quarter GDP was, in part, due to the response to the spread of COVID-19, as governments issued "stay-at-home" orders in March. This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.(BEA, 2020)."

While it may be difficult to extract the causes in a novel and chaotic situation they do provide additional insight......

"The decrease in real GDP in the first quarter reflected negative contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, and private inventory investment that were partly offset by positive contributions from residential fixed investment, federal government spending, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased (table 2)."(BEA, 2020).

Modified for Emphasis


What is an Economic Shock and Resilience (From a Network Perspective)?

Economic shocks are unexpected chaos situations that put overwhelming pressure on our economic system in a way that can be devastating for a defined period of time. In any chaos situation there is a time frenzied task oriented behaviors to overcome immediate threats that eventually give way to longer term adaptation strategies. A hit, recovery and thriving is possible if there is coordinated adjustments to existing economic structures that improve the total functioning of the system for long-term synergistic growth.

 According to a paper in the Journal Review of Regional Studies...."community structure of a regional economy should provide a new perspective to understand the aggregate economic response and resilience. In turn, these insights could help to develop unique and specific policies for different regions to improve their stability, resilience, and growth prospects over time (Hana & Goestza, 2015, pp.147).

A community in an economic sense is something that relates to how businesses act and interact with each other in a way that is more robust than in other areas of the economic systems (Watts and Strogatz, 1998). Thus, these components function across county lines, regionally, nationally and at times globally. As an example, we can see this occur in the Midwest with its automotive manufacturing base that impacts the entire region (Likely one reason why regions are opening in a coordinated manner.).

Massive Growth in Digital GDP?

The U.S. has one of the largest Digital GDP in the world and it is expected to continue to grow into the long-term future. According to an article comparing 100 countries in the Wall Street Journal the U.S.digital economy amounts to 35% of GDP when compared to 18.5% average for other advanced nations (Wladawsky-Berger, 2017). Those numbers are based in part on a limited definition of GDP that is likely to change now that a significant portion of the world's global economy transitions online.

......a potential opportunity brewing?

Furthermore, the growth in Digital GDP has vary large untapped source of value for the U.S. and is likely to be a continual source of short and long term development. More and more companies are going online and e-commerce will increasingly become a key aspect of the global economy. According to Abode Digital Economic Index e-commerce sales from COVID-19 are up 25% and groceries have more than doubled (Abode Analytics, 2020). Growth in groceries as representative of a basic staple not only impacts our daily lives but also represents an interaction between the virtual and physical worlds.

Significant technology and intellectual based jobs are moving to virtual telecommuting as an indication of a necessary trend. A  Gartner, Inc. survey of 317 CFOs found that 74% plan to move at least 5% to permanent remote and a quarter to move at least 20% of their workers to permanent remote positions (Gartner Inc., March 30, 2020). There will likely be mass increases in virtual work and that in turn means new methods of understanding how the Digital GDP functions across multiple sectors of society. In essence, much of our economy will begin shifting to the virtual world and that means new definitions and opportunities for an advanced nation like the United States to move into novel uncharted territory.

Digital Transformation:

Digital transformation takes time. There are some companies (and countries) that are more prepared than others. According to an in-depth article entitled A Road Map for Digital Transformation by McKinsey & Company the digital transformation takes around 5 years (Catlin, Lorenz, Sternfels & Willmott, 2017). In the first two years there will be significant capital investment in organizational transformation which will have a profound impact on total Digital GDP and production capacity.

This report also discussed three primary stages of company transformation that include 1). Defining; 2). Launch and Acceleration; and 3.) and Scaling up. While five years is the projected rate it should be expected that acceleration and adaptation will be a conducted in a wider network of other companies adapting at the same time. Therefore, they will be learning form each other and engaged in clustered transactions that speed innovation. Thus, the time to adapt and overcome could be less
than 5 years.

Economic Clusters:

We have thus learned that economic shocks and recovery are based in part in the networks that exist in counties, states, regions, nations and globally. As companies adapt they will inevitably be impacted by growth in virtual work, e-commerce, new network development, and perhaps whole new innovative product line developments. We then need new theories that better explain how economic growth works in the virtual and physical world. There are a number of disconnected theories out that lack holistic foundations.

I have been working on one (i.e. paper in progress) and it is starting to be formalized but it takes a long time to justify. You can get a sense of the formation of an unfinished work in The Theory of Interactive Clusters for Innovative Economic Growth. (😱🙈)  At present I'm working applying some of the concepts to an investment ripe, but economically under-performing area, called Delta County Michigan that has tourism, resource extraction and small manufacturing potential that is well matched with an older existing export infrastructure based in mining and lumber.

Short or Long-Term Recovery Pattern?

I think this may not be an easy one to answer because of the multiple complex variables involved.  There could be short-term economic recovery as businesses open and reinvest back into their home ports so to speak. It may also open the possibility of longer-term economic growth as companies adapt to new digital realities and apply what is being learned to very practical things like advanced manufacturing.

It is entirely possible we may see a....... "Get Back to Work Boost" (3rd/4th quarter-1 year), followed by corporate transformation investments (1-3 years) and then boosted by digital economy synergy (3+ years). Time and initiative are the key determinants of how our economy will play out in the future. With pain there is possibilities for exceptional growth....its how we handle it that counts!

The projections from economists are likely all over the place so I'm curious how this turns out. Fingers crossed and hope for the best! 🤞

Abode Digital Economic Index (2020) Abode Analytics. Retrieved https://www.adobe.com/content/dam/www/us/en/experience-cloud/digital-insights/pdfs/adobe_analytics-digital-economy-index-2020.pdf

The U.S. Bureau of Economic Analysis. (April 29th, 2020) Gross Domestic Product, 1st Quarter 2020 (Advance Estimate). Retrieved https://www.bea.gov/news/2020/gross-domestic-product-1st-quarter-2020-advance-estimate

Caitlin, T., Lorenz, J., Sternfels, B. & Willmott, P. (2017). A Road Map for Digital Transformation. McKinsey & Company. Retrieved https://www.mckinsey.com/industries/financial-services/our-insights/a-roadmap-for-a-digital-transformation

Gartner, Inc. (March 30th, 2020). Gartner CFO Survey Reveals 74% Intend to Shift Some Employees to Remote Work Permanently. Retreived
https://www.gartner.com/en/newsroom/press-releases/2020-04-03-gartner-cfo-surey-reveals-74-percent-of-organizations-to-shift-some-employees-to-remote-work-permanently2

Hana, Y. & Goetza, Y. (2015). The Economic Resilience of U.S. Counties during the Great Recession. Journal Review of Regional, 45, pp.147 Retrieved https://rrs.scholasticahq.com/article/8059.pdf

Watts, Duncan J. and Steven H. Strogatz. (1998) “Collective Dynamics of ‘Small-world’ Networks,” Nature, 393, 440-442.

Wladawsky-Berger, I (September, 2017). GDP Doesn’t Work In A Digital Economy. The Wall Street Journal. Retrieved https://blogs.wsj.com/cio/2017/11/03/gdp-doesnt-work-in-a-digital-economy/

You can look at more source data "Key Source Data and Assumptions"

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