Economic Conditions Snapshot for Q2

Remember how at the beginning of the first quarter, some economic advisors were shouting that the sky was falling, sell everything, and run for the hills? How are things shaping up? Was that warning warranted? Let’s take a look at the economic conditions of the first quarter and how the second quarter is shaping up.

One of the most important lessons about economics is to do your own work. Download the data, make your own charts, run your own analysis. Don’t rely solely on the words of pundits, especially if they have a vested economic interest of their own. Market bears tend to be resellers for gold; market bulls tend to be resellers for equities.

Let’s begin our review with the 1 year view of the Dow Jones Industrial Average:

Dow_Jones_Industrial_Average©_-_FRED_-_St__Louis_Fed.jpg

After a shaky start to Q4 and a very sharp selloff at the beginning of Q1, we appear to have regained territory. No cause for alarm here, and if you went contrarian and bought in January, chances are you’re felling really good right now. In the big picture, we’re still plateaued, but for now, things look reasonably good.

We see an identical bounce in the S&P 500:

S_P_500©_-_FRED_-_St__Louis_Fed.jpg

And the NASDAQ:

NASDAQ_Composite_Index©_-_FRED_-_St__Louis_Fed.jpg

Let’s check market volatility, via the Chicago Board Options Exchange VIX. The VIX measures how volatile the market is; the more volatile, the more unsettled investors feel.

CBOE_Volatility_Index__VIX©_-_FRED_-_St__Louis_Fed.jpg

We see the complementary pattern to the major indices above; while volatility is above mid-2015 levels, it’s significantly down from Q4 and early Q1. Overall, the stock markets appear to be in good shape.

Let’s turn our attention to the banking system. We check 30 and 90 day LIBOR, the London InterBank Offering Rate. The more risk in the economy, the higher LIBOR is. The higher LIBOR is, the less banks trust each other and the more they want to hold onto cash. Unlike the American stock markets, LIBOR takes into account global instability.

1-Month_London_Interbank_Offered_Rate__LIBOR___based_on_U_S__Dollar©_-_FRED_-_St__Louis_Fed.jpg

30 day LIBOR shot up at the end of Q4 and hasn’t come back down since, almost tripling. The same holds true for 90 day LIBOR:

3-Month_London_Interbank_Offered_Rate__LIBOR___based_on_U_S__Dollar©_-_FRED_-_St__Louis_Fed.jpg

Banks are feeling cautious. These levels aren’t nearly as high as during the Great Recession, but the rapid climb and steady plateau indicates a need for more safety on the part of banks lending cash to each other.

Let’s look at mortgages. How does the 30 year fixed rate mortgage rate look?

30-Year_Conventional_Mortgage_Rate©_-_FRED_-_St__Louis_Fed.jpg

Contrary to market predictions, interest rates fell again significantly, putting them down at near historic lows.

Have jobs recovered?

Total_unemployed__plus_all_marginally_attached_workers_plus_total_employed_part_time_for_economic_reasons_-_FRED_-_St__Louis_Fed.jpg

Despite the dire words of politicians on the campaign trail (everyone has an agenda and something to sell you), total underemployment is down to almost pre-Great Recession levels. This is all unemployed people, plus marginally attached workers (day labor, etc.) plus people working part time who used to work full time. The jobs number is a very strong number.

So we’ve got a bit of a mystery. The American economy as a whole appears to be stable and strong, with affordable mortgages, strong employment, and rising stock markets. Why are banks reluctant to part with cash?

The answer is: not because of America. Let’s look overseas at the MSCI Emerging Markets index, an aggregated index of the economies of 23 nations:

Featured_index_-_Emerging_markets_-_MSCI_q2.jpg

Here we see the same bounce as in the American markets (owing to the American economy’s outsized influence on the global economy). While rebounding, growth is still low.

The Baltic Dry Index also remains at near historic lows:

BDIY_Quote_-_Baltic_Dry_Index_-_Bloomberg_Markets_q2.jpg

BDI is the going cost of ocean-borne cargo container shipping rates. Unlike other indicators, it’s lagging; you don’t speculatively buy lots of cargo space you don’t need. Above, we see that companies are still not buying up shipping space; prices remain low.

How does everyone’s favorite shiny commodity, gold, look?

Gold_Fixing_Price_3_00_P_M___London_time__in_London_Bullion_Market__based_in_U_S__Dollars_-_FRED_-_St__Louis_Fed.jpg

Again, we see a flight to quality. Globally, investment in gold has pushed prices up significantly in the first quarter.

We know something is dampening the global economy. What? The OECD’s global consumer confidence levels finally tell the tale:

Leading_indicators_-_Consumer_confidence_index__CCI__-_OECD_Data_q2.jpg

While the OECD as a whole is down slightly in consumer confidence, what’s brought down the rest of the world is China. The People’s Republic of China is applying significant drag to the global economy.

How does this affect us?

For one thing, almost every American presidential candidate is making a lot of noise about the dire state of the American economy. The overall American economy is quite healthy, healthier than the rest of the planet.

For marketers, if you don’t have much global exposure to risk, the year appears to be turning around. Going into the second quarter, stock prices are rising, volatility is low, prices are relatively cheap, and consumer confidence in America is high.

B2C will see benefit first; consumer spending has to work its way up the supply chain before B2B sees the impact. That said, there is just cause for optimism for both B2B and B2C marketers.

Don’t buy into the self-serving lies of politicians and pundits with something to sell you. Right now, the macro economy looks fairly good.

Disclosure: I am invested in several funds as part of retirement planning, but do not track or purchase individual equities. I receive no compensation from any organization, category, or vendor in this post.


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What’s the right marketing budget?

As 2016 marketing planning shifts into high gear, one of the top questions marketers and stakeholders ask is, “What should we spend on marketing? What’s the right marketing budget?” The answer is a bit like Goldilocks: not too much, not too little — spend just the right amount. Marketing and advertising tools can help us find the right answer for us.

Let’s assume you haven’t taken my data-driven digital marketing planning course (though you should). Why do we care about how much to spend? After all, typically we marketers ask for a budget and get a fraction of what we asked for. Shouldn’t we ask for the moon and accept the inevitable outcome which leads us to exclaim, “That’s no moon!”

No. Why? Most marketing channels experience diminishing returns. Every channel has its Goldilocks moment.

We can spend an insufficient amount and not achieve the performance we need to meet our goals.
We can spend the right amount to maximize our ROI, our Goldilocks moment.
We can spend too much and hit diminishing returns.

Our challenge as marketers is to identify the Goldilocks moment for every channel in our marketing mix.

Let’s look at an example using Google’s AdWords advertising software. I’ve got a new book coming out soon about innovation. What’s the right amount I should spend on AdWords? Given my keyword list, here’s what AdWords says is the range I could spend – from nothing to $300,000 a year:

marketing budget - adwords_uncharted.jpg

I find their lack of specificity disturbing. If we look more closely, we see two major zones in the chart above.

On the left, where the line climbs steeply, we are not spending enough. Our ads will not run in ideal position, at ideal times.

On the right, where the line becomes flat, we are spending too much. We will not gain significant new traffic, new customers by spending as much as possible.

Where the line turns from steep climb to flattening out is our sweet spot, where our return on ad spend will be highest:

adwords_charted_out_for_DR.jpg

What if our marketing method of choice doesn’t have a convenient ROI calculator built in? We build one! All we need is a spreadsheet and careful tracking of our data. What we’ll do is spend incrementally larger amounts on each marketing channel and measure the result we get.

Here’s a very barebones example.

roi_example.jpg

In the first column, we list what we spent on any given marketing method at various levels of spending.

In the second column, we list what we earned from our spend at that level.

In the third column, we calculate our ROI. Remember, ROI is a simple math formula: (Earned – Spent) / Spent.

In the fourth column, we calculate our change in ROI, which is the same formula: (New Value – Old Value) / Old Value.

Where we see the big number changes in ROI is our sweet spot. Everything before the change is spending too little. Everything after the change is spending too much.

If you chart out your ROI, as I have in the example above, we see where our ROI jumps and then levels off.

Not every marketing channel will look this clean, this obvious, when we do our analysis. However, we are better off for doing it than simply throwing darts at a budgetary board. Blindly guessing at a marketing budget and getting it right would be one shot in a million at best.

How much should you spend on marketing? Ignore what other companies do, what “the top companies in X industry” spend. Instead, do your own work to find your marketing Goldilocks budget, the amount you need to spend to get it just right.

For a more in-depth marketing budgeting method, take my data-driven digital marketing planning course.


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2016 Economic Conditions Snapshot: Don’t Panic

I shared the dire predictions of the Royal Bank of Scotland for 2016 recently; the TL;DR version was “panic, sell everything, and hide in your bunker“. Is their prediction warranted? Panic isn’t, but caution is.

One of the most important lessons about economics is to do your own work. Download the data, make your own charts, run your own analysis. Don’t rely solely on the words of pundits, especially if they have a vested economic interest of their own.

First, the Dow Jones Industrial Average, 10 year view:

10_year_DJIX.jpg

We’re looking like a top, a plateau. 2015 looks like an inflection point. Is a crash coming? Not super soon, but some losses are inevitable.

SP500_10_year.jpg

The same holds true for the S&P 500.

NASDAQ_10_year.jpg

Also true for the NASDAQ. 2015 looks like a top.

Let’s check market volatility, via the CBOE VIX. The VIX measures how volatile the market is; the more volatile, the more unsettled investors feel.

VIX_10_year.jpg

The second half of 2015 was rougher, to be sure. However, volatility still isn’t in Great Recession territory, though it is substantially higher than the past two years.

How is the banking ecosystem? We check 30 and 90 day LIBOR, the London InterBank Offering Rate. The more risk in the economy, the higher LIBOR is. The higher LIBOR is, the less banks trust each other and the more they want to hold onto cash.

2016_30_libor_usd.jpg

30 day LIBOR has ticked upwards noticeably after 4 years of calm conditions. Banks may see some short term risk, enough to consider stockpiling a bit of cash.

2016_90_libor.jpg

In the 90 day view, we see the same uptick. Banks are being more cautious about the first quarter of 2016.

Are either of these a cause for alarm? Not yet. While rates are ticking up, they’re nothing like they were during the previous bubble, shown just before the dark grey regions of the above two charts.

What about mortgages, the source of the previous economic crisis?

2016_30_year_fixed.jpg

30 year fixed rate mortgages remain at very low levels.

How about jobs? The best data source to look at is the alternative measures of underemployment, which takes into account not only people who are looking for work, but people working at less than full capacity (part time when they were full time), plus discouraged workers:

2016_unemployment.jpg

Overall underemployment looks good. The rate continues to steadily decline, though we might be seeing hints of a bottom.

Let’s turn our eyes overseas to the MSCI Emerging Markets index, an aggregated index of the economies of 23 nations:

MSCI_2016.jpg

MSCI has dropped 23% year over year, 32% off its 2015 high. This is noteworthy, indicating downward market pressures in emerging economies.

What about one of my former favorite indicators, the Baltic Dry Index (BDI)? BDI is the going cost of ocean-borne cargo container shipping rates. Unlike other indicators, it’s lagging; you don’t speculatively buy lots of cargo space you don’t need.

2016_BDI.jpg

BDI remains at crazy lows, indicating that shipping of goods by cargo container continues to be weak.

What about consumer confidence? The OECD assembles some terrific data on this front:

oecd conf.png

Overall consumer confidence around the world and the United States is optimistic; the one big question mark is China. China’s consumer confidence has swung wildly over the last 5 years.

Do businesses feel the same? The OECD’s business confidence index is the place to look:

oecd business confidence.png

Business confidence in the economy has been eroding in the United States, sharply in 2015. Businesses are not as optimistic as consumers.

What about spot gold prices? Gold is where a fair number of investors run in a panic when economic conditions become unsettled.

2016_gold.jpg

So far, investors haven’t panicked into gold. In fact, gold is at multi-year lows.

What about black gold, also known as oil? Oil is essentially a tax; the more expensive energy is, the less consumers and businesses have to spend on discretionary items.

2016_oil.jpg

Oil has fallen off a cliff in the last year. We know this as consumers because the price at the pump is at $2 a gallon or less in the United States. If you drive a car or incur other oil-related expenses, you know this by the extra cash in your wallet.

Finally, a roundup of agricultural products.

commodities.jpg

Most agricultural commodities are at multi-year lows except for rice. Low agricultural prices mean lower fuel and food costs, which is good for the consumer, but bad for some producers and farmers.

What does it all mean?

Panic isn’t warranted, but caution is. We see what look like market tops in the stock markets, slightly increased volatility, and the floor falling out from under several major commodities, from food to fuel to gold. It’s a tough time to be a commodity producer, but a generally good time to be a consumer. Businesses feel caution is warranted; the underlying fundamentals around commodities are deflationary.

For the B2C marketer and business, 2016 still appears to be strong for you. Consumers have cash in their pockets, they’re getting jobs, confidence is rising, and commodity prices (and their derivative goods) are low.

For the B2B marketer and business, 2016 is shaping up to be a tough year. When businesses become cautious, they tend to slow down capital expenditures and investments. Whether businesses pare back hiring is yet to be seen.

To sum, don’t panic. It’s not justified. Be cautious. Keep your eyes open.

Most of all, don’t believe the hype – ever. Use the data sources in this post to do your own analysis. Do your own work!


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