Three inter-related forces are beating on the economy: cyclical, secular, and presidential. Dispensing with economic jargon, the recession, longer-term trends, and Obama. Here are some guesses as to the shape of some of the industries that will emerge from the interplay of these forces.
The housing industry probably receives more attention that any other because of its key role in this recession. It is the collapse of the mortgage market; the subsequent decline in prices and rise in repossessions; the mounting number of unsold homes; the lay-offs in the construction industry, and the ripple effect on the sales of everything from fridges to lawnmowers that dominate news reports. But the industry will recover as a rising population and more reasonable pricing whittle down the unsold inventory. The 22,000 square foot house that sold in Aspen, Colorado recently for $43 million might not be a harbinger of things to come, but the pickup in sales and buyer traffic in several markets around the country certainly are.
Government will impose some changes on the industry: energy-saving but dangerous and dim bulbs will replace incandescent lighting, and a bit more insulation will be required here and there. But a few years from now things in this industry will be largely indistinguishable from pre-recession days, with the important exception of more stringent credit conditions imposed on buyers seeking mortgages.
Not so the investment banking industry, which will probably be changed forever by the recession. Bear Stearns and Lehman Brothers are no more. CitiGroup, if it does survive, will emerge with its name intact, but otherwise unrecognizable from the unmanageable behemoth cobbled together in a series of mergers. All in all, the banking industry will both consolidate and fragment.
Highly successful Goldman Sachs (trading), and JPMorgan Chase (investment banking) will mop up a larger share of the businesses at which they excel, while at the other end small, boutique advisory firms will thrive, manned by refugees from the big banks and the scrutiny of government regulators. Opaque markets will be more transparent, there will be new jobs for regulators, and my guess is that we will still be discussing compensation issues for years to come.
Other industries are in the midst of secular change, some of it accelerated by the recession, but changes that would have occurred even if we had been spared this downturn. The most obvious is the media industry, where newspapers are trying to figure out how to charge for the content that readers have come to expect will be theirs without charge, publishers are trying to figure out what to do about Kindle and other electronic publishing devices, and film makers are trying to figure out what to do about pirates and declining sales of DVDs. It seems safe to guess — and a guess is not a forecast, which is a silly exercise in an age of rapid technological change — that what will emerge from this maelstrom is something like this. Newspapers will survive, with the last man standing in each market quite profitable. Books will survive, in part because new electronic distribution is cheaper and will permit price cutting that makes them accessible to a larger audiences. Film producers will prosper beyond their wildest dreams, as the price of “talent” continues to fall, the world gets richer (even in a recession box office receipts are up 12%), and devotes a larger portion of its incremental income to entertaining itself, especially in the environment of theaters that provide what the industry likes to call “a collective experience”.
That takes care of a few industries that will be changed by recession and longer-term forces. Then there are those that seem to be in the hands of Barack Obama.
The auto industry will be changed. General Motors will produce small cars that please limousine-riding politicians rather than consumers, and remain on life support until the government sets in place regulations that more or less force buyers to take the sort of product the GM will have on offer.
The electricity supply industry will be changed. There will be some solar and wind power, enriching equipment manufacturers in China and Germany. There will be some nuclear power, but far less than the industry’s advocates predict, mainly because political opposition and constantly rising costs will restrain the industry’s growth. There will be lots more coal plants, most of them in India and China, and very few in the United States, where overt and covert rationing of electricity will replace the good old days of adequate and cheap supply, with negative consequences for the competitiveness of American industry.
The Obama factor will also affect the health care industry, if Congress passes anything like his proposed remake. Insurance companies will initially prosper because the deal they cut will increase earnings. They have promised to insure people with pre-existing conditions in return for a government mandate forcing healthy, young citizens to carry insurance. Give the industry tens of millions of young people who will pay premiums but not need care, and it willingly takes on a relatively few insureds who are already sick. But then comes the closing of the trap, as the government insurance company offers lower rates — no taxes to pay, taxpayer moneys in unlimited amounts available to subsidize its competition with private-sector insurers — and drives the private sector companies from the field.
One last industry — pharmaceuticals. The big companies have promised to reduce prices of drugs to seniors by $80 billion over the next decade. In return, they have wrung from Obama a promise to remove from any legislation encouragement of the reimportation of their drugs from Canada, which buys them at low, government-mandated prices, and sends them back across the border to patients here. And Congress has agreed to a seven-year extension of the current five-year exclusivity period during which branded drugs are protected from the competition of generics. But the industry’s executives shouldn’t uncork the champagne just yet. Enforcement of their promise to lower costs will inevitably result in government review of their prices, and the president is pressing for a review board with the power to control costs by limiting the sale of drugs not deemed sufficiently effective to warrant their cost.
There’s more: some hospitals will close as Medicaid reimbursements decline, the construction industry will grow as more money is channeled into infrastructure projects, the lobbying industry will flourish as the government claims a larger and larger portion of the nation’s economy and politics replaces the market as the determinant of which companies prosper, and the number of small business start-ups will drop as the taxes on those enterprises and their entrepreneurs reduce the possibility of financial success.
Just a few thoughts from an economist who is certainly not an investment adviser, for those of you thinking about re-entering the stock market as you head for the beach.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
