December 2009 Archives

Over the next week or so, I hope to share with you results of studies pointing the directions we can expect technology trends likely will take next year, and in the decade ahead. The good news for Americans, and for many national economies around the world, is that the recovery is exactly on track. Yammering about "jobless recovery" and doubts over the U.S. economy's ability to expand until full employment returns simply demonstrate the commentators' ignorance of how economies work.

Garden variety depressions, which is what we've experienced over the past five years, take many years to play out. Calendar year 2008 saw the acute contraction phase, but things had been unraveling since late 2005. After a contraction, comes a bottoming, followed by an expansion phase.

Economic recoveries - that is the bottoming and expansion phases of a dip in economic activity - start with stock markets, which anticipate the turn around in general economic conditions by some months. The reason stock markets anticipate recoveries is that investment professionals, unlike media commentators, do understand economics, and recognize harbingers of business improvement long before the improvement happens. Just as meteorologists know that when days start getting longer, Spring is just a few months away, investors know that economic harbingers, such as inventory levels stabilizing at high levels, pre-announce changes in economic trends by several months, and stock prices rise as these investors put themselves in a position to capitalize on the new trend.

After stock prices hit bottom and begin to rise, we start seeing signs that the downward pressure on business activity begins to ease off. High inventory levels, for example, begin to drop. Productivity begins to rise as businesses streamline to cut costs. Later, these more efficient businesses begin reporting better than anticipated earnings on still-falling revenue. Still months later, revenues begin to rise as individuals and businesses can no longer put off purchases that have been delayed since the beginning of the downturn. More months later, employment figures, which conventional wisdom seems to think should lead the recovery despite the fact that it never happens, begin to recover as the productivity gains of a few months ago prove insufficient to meet the growing demand for goods and services. Finally, very late in the recovery, large capital investments, such as in real estate, reach their bottoms and start to recover.

At present, the U.S. economy, as well as that of most of the world, is recovering nicely. Trends in measures like corporate earnings are showing the correct patterns in the correct order and with the anticipated timing. Even the jobless numbers are tracking exactly as they're supposed to. Back at the end of 2008, when the depth of the dip became apparent, knowledgeable pundits were able to predict that the unemployment rate would reach just above 10%, which is just what it did, and begin to recover in late 2009, which it also has done.

By the way, don't listen to all that emotional drivel about some fictional "real" unemployment rate being something like 18% instead of the published 10% level. "The unemployment rate" is a real, clearly defined metric that we use to compare one time period with another. The "real unemployment rate" that Chicken-Little types yammer on about is poorly defined and very difficult to measure, so it's useless as an economic metric. It's only use is to give fear merchants something to shoot their mouths off about to their poorly educated audiences.

One extremely useful metric that can provide prescience about general industrial trends is expectations among industrial automation buyers and sellers about their purchases and sales (respectively) in the coming year.

To determine whether the market for industrial automation equipment was beginning to ascend from the depths of this latest downturn, or were destined to remain mired in the muck at the bottom of the pit for awhile longer, our friends at Control Engineering magazine in partnership with analysts at financial services leader Morgan Stanley surveyed participants in the industrial automation market. The reason to look especially at sentiment in this market is that factory automation is arguably the most important trend in industrial technology of the late 20th and early 21st Centuries.

Early in the 20th Century, factory automation was generally non-existent. We (or more accurately, our ancestors) simply did not have the tools available to automate production facilities in any meaningful way.

By the middle of the 21st Century, on the other hand, we anticipate that factories will run essentially fully automatically. That is, there will be no production tasks that are not done by automated machinery. Humans will generally hold supervisory positions. There will be CEOs, managers, engineers, maintenance technicians, and such like, but the population of assembly line workers, for example, will drop to more or less nil.

So, unlike the situation a few decades ago, perhaps the best measure of industrial activity available at the start of the second decade of this century is the level of activity in the industrial automation sector. That is what the survey set out to study, and that is why it's the first thing we looking at as we peer into our crystal ball.

"I'm happy to report that the survey does, indeed, offer more than few rays of hope," wrote David Greenfield, Control Engineering's editorial director, when reporting the survey findings in his article entitled 2010 Global Automation Industry Outlook. "Overall, the findings appear to indicate that a bottom in the market has been reached, pricing is holding firm, and that customers remain loyal - all positive signs for global automation players."

Greenfield cited four key findings of the survey:

1. The automation market has already bottomed; modest growth will return in 2010;

2. There is no evidence of a price war in automation equipment;

3. There is limited differentiation between the spending outlooks for process versus discrete industries;

4. While highly cyclical, automation is a good business to invest in over the long term.

It is important to note that the second finding belies the fear that inflation might be a an immediate threat. Despite concerns over accommodative monetary policies around the world, this survey shows no sign of inflation's return in the immediate future. It's axiomatic that for inflation to appear, prices must rise. This survey of a significant sector of the economy shows no hint of rapidly rising prices.

Greenfield pointed out that the near-term trend in demand for automation equipment appears brighter than it did in early in 2009 because of the percentage of respondents expecting demand to increase, more budgets going up or staying level versus retreating, and increasing demand to replace aging equipment. In addition, pricing appears to be stabilizing in the near term. Few respondents expect to see prices fall, but neither are they expecting out-of-the-ordinary upward price moves by suppliers to help offset losses in the past year.

These results are exactly what we would expect at this stage of the present economic recovery. Pundits prophesying a double dip, an L-shaped recovery, or any similar pattern find no support for their views in this important economic indicator.

The good news this week is the trend in healthcare reform. It looks like the U.S. Legislature is once again finding itself incapable of passing meaningful healthcare-reform legislation. If this trend continues, what we'll be left with sometime next year is legislation that makes just enough change to allow the President and Congress to claim a victory, but not enough to make any real difference. This is not surprising, since it's been the same story for every major effort taken up by the current crop of Senators and Representatives.

It's good news because it means the Federal Government will at least do no harm. Or, at least no harm that can't easily be undone in the future.

We actually can't fault Congress for failing in fact, even if they find a way to succeed in headlines. There's a basic flaw in our health care system that can't be fixed. It's actually a flaw in the philosophical underpinnings of our society: we are incapable of applying the 95/5 rule from systems engineering to many of our social problems. We're seeing it in healthcare simply because that's the part of our social infrastructure that has most obviously run into a brick wall.

The 95/5 rule, like many systems engineering principles, sounds precise and quantitative, but isn't. It belongs in the realm of fuzzy logic, which only a few academics, and practically nobody else, understands. Unfortunately, nearly all decisions human beings are asked to make must be made using fuzzy logic. Fortunately, the ability to do fuzzy-logic analysis accurately and at blinding speed is one of the human brain's greatest strengths. Even better, the recognition of both fuzzy logic's importance and humans' aptitude for it is growing rapidly.

The 95/5 rule is just one expression of the fuzzy proposition that, as progress is made in any cumulative effort, gains become ever more difficult to achieve. (To the fuzzy-logic mavens out there: I know I've not couched this proposition in any rigorous way, but to do so would require a lot of verbiage that only you and I would want to read. Everyone else would go away, and thus miss out on today's exciting episode.)

The rule is an extreme version of the more familiar 80/20 rule, which says that 80% of the effort must be expended to achieve the last 20% of the gain. Conversely, the first 20% of the effort generally achieves 80% of the gain. Stated more generally, and more accurately, the effort needed to make further gains increases roughly exponentially with the gains already made. More fuzzily: you reach a point of diminishing returns.

Use the 95/5 rule when you've already blown past the 80% level. The next stop, of course, is the 99/1 rule that says you'll need 99% of the already-expended effort to get the next 1% gain. We try not to go there.

How this applies to healthcare is the simple statement that the easy gains have already been made. The reason healthcare costs are rising so rapidly is that we are now trying to push healthcare well past the point of diminishing returns. The Quixotic goal is highlighted by Pres. Obama's stated goal of providing health insurance for every dang American regardless of their ability to walk through the woods without bumping into trees.

Basically, we're trying to keep medical progress moving along a linear track. Ergo, the cost is rising exponentially.

In a misguided attempt to "fix the problem," most of us have, instead, tried to fix the blame on a boogeyman: the health insurance system. The theory seems to be that, if we can come up with a clever enough formula for health insurance, the cost of healthcare will take care of itself. This seems to be the tack Congress is taking, and, thank God, it isn't working. The cost of healthcare is taking care of itself, alright; it's expanding to take over the Universe!

In future blog entries, I hope to take a look at why medical progress is hitting a wall, and why we're fundamentally unable to deal with the situation. By way of a preview:

Medical progress is hitting a wall because most of the medical conditions that killed off our ancestors have already been eradicated. That was the easy stuff - requiring only a half dozen millennia to complete. Now, all we have to do is the hard stuff.

Human society can't deal with the problem because our basic moral and ethical assumptions don't allow us to throw our fellow human beings to the wolves.

To be sure, I do not have an answer. Like almost everyone else on the planet, I'm not ready to walk up to another human being, whether a loved one or stranger, look them in the eye, and say: "You're too old/sick/feeble/whatever to live. Go die!"

I know a lot of people willing to consider it as a philosophical exercise, but not-a-one who could bring themselves to do it in fact. Well, except maybe some inmates of institutions for the criminally insane.

Therein lies our dilemma.