The Eleven-Three Theory
November 1 2010 by Dale Buss
T.J. Rodgers likes to compare allocating capital for a Fortune 1000 company to planting asparagus: Your first crop doesn’t appear for twoyears. “So when am I going to start investing in seed and workers to plant it?” said the president and CEO of Cypress Semiconductor about hisdecision-making in light of current economic uncertainties. “Once I can see forward and believe that, when the crop comes up two years from now, therules aren’t going to have changed.”
But not everyone is an asparagus farmer. And not every day is “11/3/2010.” Â While big-company CEOs like Rodgers must move slowly to place bets onrenewed economic vigor, smaller-company managers, entrepreneurs, consumers and investors are all freer to act more precipitately in their financialdecision-making.
That’s one major reason for predictions that the Republican electoral tide coming on Tuesday will have a bigger impact on the economy, and morequickly, than called for by the persistent conventional wisdom — which Â foresees only a continued modest U.S. recovery, building only slowly. According to this thesis, there are at least 11other reasons to believe a good, old-fashioned American economic rebound will sprout more quickly and more robustly than most are expecting right now.
And a growing minority of forecasters agree with that thesis. “The economy will do better than the general wisdom,” said Gary Wolfram, a professor ofeconomics at Hillsdale College, for instance. Eli Lehrer, director of the Center for Finance, Insurance and Real Estate at the Heartland Institute,similarly foresees “robust growth, happening more quickly” than presumed.
Â The contra-indicators to this bold forecast are obvious, and huge. There are no exact, reassuring precedents to cite from recent politico-economichistory. The housing market lolls at moribund lows. Â Unemployment remains almost 10 percent. Government entitlement obligations hang like the sword ofDamocles, and multi-trillion-dollar federal deficits are projected as far as the eye can see. Greece still may default on its sovereign debt. And theUnited States Treasury is depending on Chinese bond purchases to prop up the whole mess.
But here are the 12 reasons that more prognosticators are adopting an “11/3″ theory for why U.S. GDP could surge out of its current 2-percent-growthmode, perhaps as soon as the fourth quarter:
“Animal spirits” are champing at the bit. Ironically, it was Keynes who coined the phrase to describe that “spontaneous urge to action rather than to inaction” — the human-behavioral forcesthat propel a capitalistic economy. After two years of Great Recession and ineffective Obamaism, innumerable economic actors are poised to re-take thestage in a big way, advocates of the 11/3 theory hold.
Executives in industries ranging from autos to housing describe various degrees of “pent-up demand” by businesses and consumers that attest to what isabout to become unleashed. And certainly investors have already tipped their hands by continuing to push the stock-market averages higher, even in theface of general economic stagnation.
There will be a cessation of worsening: President Obama can’t understand why he doesn’t get more “credit” for his legislative “accomplishments.” The reason suggested by many pundits is thatthe American people perceive health-care reform and other personal victories for Obama as more economic millstones around their necks – not asachievements to be celebrated.
And come November 3, everyone will know for certain that the Democrats’ spendthrift inclinations will be thwarted for at least two years, the theorygoes. That mere knowledge is expected to create significant economic confidence on its own. The elections “will tell CEOs what is the tone andtemperature in this country around support for having the private sector invest and create jobs and innovate and start moving things forward,” saidChristopher Lofgren, president and CEO of Schneider National, the nation’s largest privately owned truckload carrier.
Cash and capacity are at the ready: For Fortune 1000 companies, “The psychology is just so negative right now,” UPS CEO Scott Davis said. But psychology can and does flip quickly even forbig companies – just ask Ford CEO Alan Mulally, for instance — and that will happen broadly in the coming months, 11/3 theorists believe. “If we turnto anything positive,” Davis added, “we have room to surprise on the upside.”
Major corporate players will re-engage by beginning to deploy the $1 trillion or more in cash upon which they have been notably sitting for months,this argument goes, and by bringing their idle capacity back on stream. Yes, they’ll be more confident at this point about investing inproductivity-enhancing machinery and processes rather than creating jobs with it. But as they do, they’ll create a burgeoning private-sector stimulusthat – unlike the poorly directed federal-government stimulus – will help kick the U.S. economy back into gear, some economists and executives believe.
Small-business owners want to move forward. As the economy finally pulled out of its dive, entrepreneurs began to look for expansion opportunities. Many have spied them, but so far, few have beenwilling to bet on them by investing capital and hiring workers.
With strong reasons to believe that the federal government will cease what they perceive as its hostilities with capitalism beginning November 3,small-business owners could begin resuming their historic role as the true engines of the U.S. economy. The slowly thawing freeze on credit for smallcompanies may be all the extra encouragement that they need, some economists say.
Consumers want to consume again. They have sobered their covetousness, perhaps permanently, and have increased their savings rate, again maybe for the long term. But American consumersleverage their economic confidence by spending. And most of them, this theory holds, are going to interpret the election results as a harbinger ofeconomic “hope and change.”
Luxury segments already have seen a return to happier times; the next step is for consumers overall to spend more on discretionary items. The NationalRetail Federation has predicted that holiday sales will increase by more than 2 percent this year as consumers “take baby steps toward a new normal,”said Matthew Shay, president and CEO of the National Retail Federation.
Overseas demand will help. Americans don’t want to see the dollar enfeebled, but at least its newly low regard by currency markets is helping U.S. exporters. Meanwhile, economicengines abroad are revving, most notably China and India. “When you see 1.3 billion [Chinese] moving essentially from a planned state into marketcapitalism, that will make the world as a whole more productive,” Professor Wolfram said.
Even last week, a noted economist was urging corporate CFOs to take heart because of that. “There is tremendous opportunity building up in the worldeconomy,” said Raghuram Rajan, a University of Chicago economist and former chief economist of the International Monetary Fund. “It’s a time to startbecoming more optimistic.”
Republicans will dictate tax policy. The biggest remaining and imminent economic question mark after November 3 will be the fate of the Bush-era tax cuts: Will Congress retain them allwhen the witching hour strikes on December 31? Or — as Democrats have been advocating – will only Americans grossing under $250,000 benefit fromretention of lower rates? In December, the president’s anti-deficit commission may recommend allowing the lower rates to lapse, according tospeculation.
But adherents of the 11/3 theory believe any such calls would be overridden during the lame-duck session by newly elected and re-elected Republicans onCapitol Hill, many of whomhave targeted extension of the tax cuts for all Americans as the No. 1 way they can quickly demonstrate that they meanbusiness.
Positive trends already are underway: Contrary to how it might seem, the U.S. economy is growing again despite universal glumness, this theory notes. Talk of “double-dip”recession has faded quite quickly after rearing its ugly head again a few months ago. Last week, the government released its initial estimate ofthird-quarter U.S. Gross Domestic Product, saying that it grew at a 2-percent rate after 1.7-percent growth in the second quarter.
Meanwhile, auto sales for 2010, for example, are all but locked in at about 10 percent more than a year ago, and consumer spending increased at anannual rate of around 2.5 percent in the third quarter, the Fed said. Meanwhile, 26 percent of small businesses surveyed before the election byAmerican Express planned to do net hiring over the next six months.
Obama is doing a few helpful things. In his late-coming efforts to undercut his growing reputation Â as an anti-capitalist, the president has made or led some moves that are genuinelyhelping the economy or encouraging others to do so, 11/3 theorists say. For example, the Small Business Jobs Act that he signed on September 27 isexpected to begin loosening up credit for community banks to lend to small companies beginning in the fourth quarter.
And in signing that bill, the president demonstrated at least a glimmer of an understanding of what is important to get the American economy back on astrong growth track. “Small businesses produce most of the new jobs in this country,” Obama said. “They are the anchors of our Main Streets.Â They arepart of the promise of America – the idea that if you’ve got a dream and you’re willing to work hard, you can succeed.”
Gridlock will return to Washington. “Do no harm” is the Hippocratic Oath and applies to medicine, but 11/3 theorists believe most Americans will be happy that a similar sentiment now willapply to the federal government’s behavior toward its economic “patient.”
They note that, after two years of multiplying the deficit, discombobulating the health-care business, layering new regulations on industry afterindustry, and personally targeting CEOs, the Democrats simply won’t be able to do any more of that. The new Republican sheriff in Washington and inmore statehouses won’t be an economic panacea, these economists and executives say, but at least it will be harder for governments to continue tocreate obstacles to the private economy.
Inflationary expectations are rising. Worries about the inflationary impact of the federal budget deficits seem far on the horizon for now. The bigger worry now by far is deflation. “Rightnow, more inflation is a good thing,” Heartland’s Lehrer said, citing its effect on housing values, for instance.
Fed Chairman Ben Bernanke has expressed his determination to fight deflation and to build certain inflationary expectations into the economy in orderto encourage recovery psychology as well as to give the Fed some leeway for future rate easing if the economy falters again.
Bernanke is getting some help in that regard as well. McDonalds just said it expects to increase prices in the U.S. and Europe next year, for instance.And oil prices never have retreated as much as a Great Recession should have justified, so they may be ready to spurt again at stronger signs ofrecovery.
The Fed’s next meeting ends the day after the elections. Bernanke will be free to dig down to the bottom of his quiver and move further to stimulate the economy with monetary policy. Even his controversialplan to push “quantitative easing” at least indicates the chairman’s determination to stoke growth however he can, 11/3 theorists note.
Nobody can be certain what the Fed will conclude on November 3, but at least the central bank won’t have to tread lightly because of the elections -they’ll be over.
Businesses “are just waiting for someone to give them a clear path,” Mindy Grossman, CEO of HSN, the cable-TV marketer, told me.
And the American people seem about to do that.