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A Deflationary Recovery Could Benefit IBM

An article in The Salt Lake Tribune by Tom Harvey reports on a talk to the Utah Technology Council.  The entire article can be read here.

The talk, by IBM's chief economist Phillip Swan, cited a number of economic factors:

1.  In the second quarter productivity surged 6.6% (annual rate), far above the average rate of 2.5% for the past several years.

2.  Labor costs fell in the second quarter at a 5.9% annual rate, the steepest decline since 2000.

3.  "Swan said his biggest worry is the competition that could develop for a limited amount of money that is circulating in the economy. It will come from consumers looking to buy goods, businesses wanting to make investments and the federal government needing to finance its debt and pay down deficits."    

4.  "Swan said he expects consumer spending to rise in the third quarter, given that Americans will have more disposable income because of tax-relief measures passed as part of the economic rescue package."

Direct quotes from the news article are highlighted.  Other quotes:

The U.S. economy has bottomed out and should be poised to reap the rewards of a "productivity dividend" as it starts to grow again, IBM's chief economist told a Utah audience Wednesday.

"If we're able to sustain that kind of productivity gain, that means we can have an awful lot of upswing in the economy," 

Many economists said Wednesday that rising productivity and lower labor costs supported their view that the longest recession since World War II is coming to an end.

Mark Zandi of Moody's told The Associated Press that it's "very typical" for productivity to surge at the end of a recession as businesses aggressively cut costs.

The effect could be that employers will be persuaded to slow their pace of layoffs and eventually resume hiring.


I find the tenor of this article and the information cited to be quite optimistic.  IBM is in the productivity business, and they will do well if economic activity increases with falling labor costs.  But this sounds like a jobless recovery and, if that is the path we follow (as in 1992 and 2002), the consumer vigor anticipated in the third quarter from stimulus activities may be very short-lived, as lack of employment puts a major damper on consumer spending.

There is a reason IBM business has remained strong during this recession.  They support economic activity that does not depend on the level of employment, but benefit from sales of their tools and services that improve labor productivity.  This is not a criticism of IBM; they provide some of the most valuable products and services.  But IBM doing well does not presage an economic recovery.  If the productivity lead recovery ensues, as Swan envisions, IBM will do very well as an engine of productivity growth.

So IBM doing well is not an indicator of a recovery.  But a recovery, even if weak,  may be an indicator of strong IBM growth.

One of the most significant comments from Swan is the third bullet above.  He foresees a recovery limited by the amount of money in circulation.  In other words, he sees a modest (or even weak) deflationary recovery.  Obviously, he is viewing credit deleveraging continuing for some time.  A deflationary recovery is not a term I have heard elsewhere.  This concept is the most important one that I took away from the summary of Phillip Swan's comments.

Hat tip to Neil Doyle at First here.

Disclosure:  The author has a significant position in IBM stock.