Economy & Business Environment Blog


Italy says no, Renzi resigns, what to know about the Italian referendum

This blog was written by Ilaria Maselli, Brian Schaitkin, and Klaas de Vries.

Asked whether they agree or not with a set of changes to the Constitution, 65 percent of Italians (almost 33 million voters) showed up to answer on Sunday December 4. The response was a loud no: 59.1 percent of the votes. How did this referendum become such a critical question not just in Italy but also for the global economy?

  • In the past weeks some commentators made the connection between an eventual no win and the risk for Italy to leave the Euro Area. The initial reaction from the markets was quite mild and contradicted this argument. The spread between the interest rates on Italian and German government bond (a common measure of sovereign risk in Europe) did increase initially, albeit limitedly (on December 14 is 150 base points). This is because key economic agents anticipated the risk of a no vote.
  • The no side was driven to victory by strong support from those under 35 years old, while those who were 55+ voted to support the referendum. Despite vast disparities in wealth among regions, the referendum was rejected everywhere except for Italians voting abroad. The share of no-votes was particularly high in southern regions.
  • Urgent issues on the table of the resigning government are the Budget law for 2017 and the recapitalization of the banks. Monte dei Paschi is on the top of the list, but it is not the only bank that is suffering due to a combination of bad management and large amount of non-performing loans after years of stagnant growth. As many as 360 billion euros of credit are at risk of not being paid back to banks after years of economic stagnation.
  • One way of thinking about this referendum is as “the anti-catennacio referendum,” named for the famously defensive style of generations of Italian national football teams. The aim of the referendum was to change the structure of government to make possible the more ambitious reforms former PM Matteo Renzi had in mind even when they conflicted with entrenched interests. Growth in Italy has been shallow for the past two decades. When Greece and Spain were experiencing a boom before the 2008/09 recession, Italy was struggling to achieve a 1.5 percent GDP growth. Since then, unemployment has remained stubbornly high, especially among the young.
  • The rejection of the reform is a lost chance of modernizing the economy and making product market reforms easier. As our global economic outlook model shows, the problems with the Italian economy are mostly on the supply side. Since 1999, total factor productivity – that is efficiency with which production factors, labor and capital, are being used in the productivity process – contributed negatively to growth (see chart). In other words, talents, capital, ideas, credit started to match in a less efficient way compared to the past.
  • There is no room for optimism down the road: the new Gentiloni government has a narrow mandate. This means that the lack of further reforms risks making Italy a less and less attractive place for business. This will eventually translate into even slower growth.


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Why the Decline in Earnings Isn’t That Bad

Even as the US economy continues to expand, largely on the back of solid household spending, the corporate profits environment is turning south after several years of exceptional performance (chart 1). This profits recession has led many to believe that an economic recession may be around the corner. However, while a return to substantial corporate profits growth is unlikely in the foreseeable future, we don’t believe this decline signals an imminent recession for the economy as a whole.

Chart 1


Source: Bureau of Economic Analysis. Shaded areas are periods of recessions.

But let’s take a step back first. How did corporate profitability perform so strongly in the first five years after the financial crisis, despite the mediocre growth recovery? Part of the answer lies in a period of remarkable cost-cutting that began in the late 1990s and continued through the Great Recession, which saw U.S. workers replaced with technology (productivity growth) or less expensive labor located in emerging countries (offshoring). Likewise, there is growing evidence that increased industry concentration in many U.S. sectors drove rising profitability over the past decade.

Two additional factors contributed to the high profitability rates of US corporations during the post-crisis years. First, as a result of high unemployment, wage growth was historically low between 2009 and 2015. Second, interest rates have also remained historically low ever since the Great Recession, thus reducing the cost of financing. Corporate profits soared from the confluence of all these forces.

But periods of very high profitability tend not to last very long, and it seems that U.S. corporate profits peaked in the second half of 2014, and are now on a downward trend. Some of the trends that contributed to high profits earlier have reversed themselves in recent years. Offshoring activity has declined substantially from the previous decade, productivity growth has been anemic in the last six years, and tighter labor markets are beginning to accelerate wages. On top of that, the appreciation of the U.S. dollar lowers profits generated in other countries.

The recent decline in profits has raised the alarm about the possibility of a recession. In almost every expansion since 1959, a recession followed less than two years after a peak in corporate profits (chart 2). We are now about two years removed from the 2014 peak. Is a recession therefore imminent?

Chart 2


Source: Bureau of Economic Analysis. Shaded areas are periods of recessions.

As the current economic growth trend is only about 1.5 percent and corporate profits are declining, the probability of a recession is indeed higher than in most periods of expansion. Investors and executives do not like to see profits declining, and we could be approaching a watershed moment that decisively shifts companies into a cost-cutting mindset, followed by drop-offs in spending and investment. And indeed, business investment fell by one percent over the last four quarters—the first decline over four quarters in a non-recessionary period in 30 years. And remember, it takes much less to move the current growth rate of 1.5 percent into negative territory than dropping from three percent—the average postwar growth rate during an economic expansion—to zero.

But all that said, The Conference Board Leading Economic Index® (LEI) for the U.S. has yet to show any signs of looming recession. The household and government sectors seem able and willing to continue to spend, and thus offset the lower spending of the business sector. In addition, partly as a result of the very mild expansion, the US economy has yet to develop the sort of obvious bubbles or over-spending and -leveraging that triggered previous recessions.

If a recession does occur, corporate profits will plummet, as they always do when demand contracts. However, even if the US economy manages to avoid a recession in the coming years, the outlook for corporate profits remains negative. Economic growth is likely to remain slow and the labor market is only getting tighter. Having fallen back down to Earth from the antigravity era of 2011–14, the sustained headwinds now squeezing corporate profits should incentivize business leaders to find new ways to increase the productivity of their existing workers. The urgent question is how—and the answers may determine the shape of U.S. economic performance for years to come.




Fewer Shrinking Industries – the end of disruption?

This post was written by Gad Levanon, Chief Economist, North America and Frank Steemers, Research Assistant.

One of the surprising features of the US economy in recent years has been rapid employment growth despite only modest economic growth. While GDP in the current economic expansion has been growing much more slowly than in previous expansions, employment growth has been quite robust (chart one).

Chart one

July 15 Chart Blog


Much has been written about this topic in recent years. In this blog we are looking at rapid employment growth by considering the share of shrinking industries in the economy. When a small share of industries are shrinking, overall employment growth tends to be higher. This blog examines the share of industries that have been shrinking in each of the past 25 years. We look at all 4 digit NAICS Code industries (there are about 240 of them), and for each year we plotted below the share of the industries that experienced an employment decline. We divided the industries into manufacturing and non-manufacturing.

Chart two

Gad Blog Jul 15 chart 2


In Chart Two, it is important to look beyond the spikes around recession years. There is obviously a jump in the number of shrinking industries in recession years. It may be more useful to compare numbers over time in non-recessionary years. Let’s start with manufacturing industries. Recently, the number of manufacturing industries with declines in employment in recent years has been the lowest since at least the early 1990’s.[1] In 2015, only 21% of manufacturing industries experienced a decline in employment. Between 1991 and 2010 that share never dropped below 32%, and between 1999 and 2010 it never dropped below 55%.


Why have so few manufacturing industries experienced a decline in employment in recent years? It has certainly not been due to strong demand. As mentioned above, economic growth has been unusually weak in the current expansion. The answer is probably a combination of a slowdown in productivity growth, lower offshoring activity and slower import penetration from foreign competitors.

When employers in a certain industry are able to maintain production with fewer workers due to technological improvements or other reasons, the number of workers in that industry is more likely to shrink. At The Conference Board we have been writing a lot about the slowdown in productivity growth. See here and here for example. Many others have been writing about this as well. One reason for this lack of productivity growth is a lack of innovation and – what economies like to call – creative destruction.

Similarly, when employers shift production to other countries, the number of domestic workers shrinks.  There are no official measures of the number of jobs lost to offshoring. One related data source that existed until 2012 was the Mass Layoff Statistics from the Bureau of Labor Statistics. One of the measures from that survey was mass layoffs due to movement of work to overseas locations. In 2012 that number was a fraction of the 2004 level (Chart Three), suggesting that offshoring activity slowed down significantly in the past decade [2].

Chart Three

Gad Blog Jul 15 Chart 3


In the non-manufacturing sectors there also are fewer shrinking industries now compared with 2001-2010 period, but the change is much less dramatic than in manufacturing.

One possible conclusion is that between the late 1990s and the start of the Great Recession the combination of rapid technological change, offshoring and import penetration caused a major disruption to US manufacturing, and a smaller one to non-manufacturing, but that this disruption is largely over by now. That is one of the reasons for the robust employment growth in this expansion despite modest economic growth.

Will we see more shrinking industries in the future? It is hard to predict future productivity growth and offshoring activity, but the tightening of the labor market is a factor that is likely to increase the number of shrinking industries. Faster labor cost growth and declining corporate profits in the US are likely to push more businesses to further automation and offshoring, though the scope for more offshoring appears much more limited than 10-15 years ago.

In case you are wondering which industries are still shrinking in recent years, the list is below. The majority of these industries have been constantly shrinking for one or two decades.

Here are the industries that were mostly shrinking in 2011-2015:

Electric power generation


Textile mills


Paper and paper products

Printing and related support activities

Computer storage devices, terminals, and other peripheral equipment

Communications equipment

Electricity and signal testing instruments

Wholesale and retail

Office equipment

Paper and paper products

Book stores and news dealers


Office supplies, stationery, and gift stores


Publishing industries, except Internet

Video tape and disc rental

U.S. Postal Service


[1] It was probably lower than in the 1980s as well. The shift in industry classification makes comparisons to the 1980’s problematic, but from looking at the data it seems that the number of shrinking industries throughout the 1980’s was higher than in recent years.

[2] According to a TD Economics report from 2012, the overall magnitude of job losses due to offshoring was large: “Of the 5.3 million manufacturing jobs lost since the turn of the century, we estimate that roughly 1 million were from the direct effects of offshoring to low-cost China.”



Young Brit studying in Belgium? Old Brit retired to France? EU citizen working in the UK? Brexit will harm you.

With only one week to go, the June 23 vote on the UK’s membership of the European Union is important not only for UK citizens and the British economy, but for the entire EU. A Brexit vote will significantly limit the mobility of students, workers, and businesses, whether they reside in the UK or continental Europe. Doing business or simply moving across the English Channel will become far more difficult.

1. Students will pay more. If the “Leaves” win, British students will no longer be able to register for school in Belgium and the Netherlands, where they can earn their degrees for lower fees andavoid student loans. At the same time, European students who dream of a degree from Oxford may lose access to the reduced tuition UK natives pay. The London School of Economics, to name another top UK school, charges 9,000 pounds to Britons and EU students, and almost twice as much to those coming from overseas.

2. Retired workers will pay more. And shiver more. For many of the 700,000 Britons who reside in Spain and 200,000 who reside in France, a “Leave” vote could uproot them from sunny, comfortable, and affordable retirements in southern Europe. The reason: they could lose access to both the healthcare and welfare systems of their adopted homes. Such access issues also apply to Britons are still employed in EU countries. Additionally, there will be an increased administrative burden for their employers.

3. EU workers in the UK might have to go home. The “Leave” campaign is increasingly focused on those who, every year, leave Poland, Italy and Spain to escape unemployment and earn a better wage in London or Edinburgh. There are currently 2.1 million workers in the UK from other EU countries. That number is equivalent to seven percent of the British workforce, with highest concentrations around London—and includes N’Golo Kante, the French star of the Leicester City football team. A Brexit will make them foreign workers overnight, imposing compliance burdens on businesses. The migration observatory at the University of Oxford estimates that in case of Brexit, as many as 70 percent of these workers might not be eligible for the so-called “Tier 2” visa, currently the main visa category for labor migration from outside the EU.

Even British Prime Minister David Cameron, the most prominent campaigner for the “Remains,” has promised to keep net migration from the EU below 100,000 per year. But the “Leave” camp argues that he won’t be able to keep this promise. They may be right. If the UK remains part of the EU, it cannot impose such limits on the mobility of people within the EU.

There are at least two reasons, however, why the status quo—a win for the “Stronger IN”—will ultimately benefit the UK’s economy:

1) Employment rates are higher among EU nationals compared to Britons in the UK

EU nationals who live in the UK have higher employment rates than native Britons: 83.8 versus 78.6 percent, respectively. This is mainly so because EU nationals living in Britain are mostly in the working-age bracket. This also means that proportionally they contribute to the welfare system more than locals. Moreover, EU citizens who work in the UK have very high labor force participation rates, which suggests that a large proportion of these workers is highly skilled.

Ilaira chart 1

                  Source: Eurostat and The Conference Board

2) The labor market is getting tight in the UK

The unemployment rate in the UK is currently below its long-term rate of 6.3 percent. 4.9 percent is the rate recorded in February 2016. While the joblessness rate drops, job vacancies increase: according to Eurostat (European Labor Force Survey), in the third quarter of 2015 there were 756,000 job vacancies in the UK.

In times of high unemployment one can more easily expect an anti-migration rhetoric to spread easily, but in the current economic circumstances limiting the number of EU nationals will translate into stronger pressure on private sector companies to find talent. When the labor market is tight, companies face problems not only finding, but also retaining their workers.[2]

Ilaria chart 2     

          Source: Haver Analytics and The Conference Board


The combination of an aging population and low and decreasing unemployment makes the risk of labor shortages for the business sector a concrete, and, soon, an urgent issue. This is true not only for the UK but for most European countries where the slow growth of productivity does not compensate for the risk of an aging and shrinking labor force. However, the issue is particularly pressing in the UK and Germany thanks to the vitality of the labor market.

All in all, an analysis of the migration issue that is rooted in data rather than emotions suggests that any limit to the mobility of people and workers within the EU would be detrimental for the British labor market, and for all Europeans with an interest in the UK.


[1] Migration Statistics Quarterly Report: May 2016, Office for National Statistics.

[2] See: Help Wanted: What Looming Labor Shortages Mean for Your Business, The Conference Board, April 2016.



Making dollars—and sense—out of the New Digital Economy

As the economy continues to digitize at an unprecedented pace, why don’t we see faster economic growth and productivity increases? The answer is that the diffusion process of technologies from the New Digital Economy—characterized by rapidly increasing spending on cloud computing, data analysis, and other services in a world of ubiquitous, Internet connections – has only just begun. In a new report on the digital economy, The Conference Board incorporates a suite of economy-wide, industry-specific, and firm-level data alongside interviews with executives in a dozen major companies to examine the progress of the New Digital Economy. In another blog we report on some of the metrics, in particular rapid price declines in ICT assets and services and an ongoing shift from investment in ICT assets to spending on ICT services, underlying our view that the productivity effects have yet to come.

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The New Digital Economy is not paying off in terms of higher productivity—yet

Despite rapid digital innovation, booming spending on digital services, and spectacular tech-price declines, the New Digital Economy of mobile, broadband, and cloud has had little visible impact thus far on hard measures of growth, productivity, or profits. Optimists argue we just need to be a little more patient. Pessimists suspect that, behind the techno-utopian buzz and bluster, there’s no “there” there. Who will turn out to have had it most right?

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Don’t be surprised if inflationary pressures build up steam as the economy gets increasingly constrained by the supply side

In the weeks after the Fed raised interest rates in December, global financial markets trembled and inflation expectations, as measured by the bond market, declined significantly. On February 9, market-based inflation expectation over the next five years fell to just 0.93 percent, the lowest level since the Great Recession. This drop in inflation expectations fueled calls for halting the rate hikes, with a growing cohort of economists and market participants questioning the wisdom of raising rates in the first place.

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Shock or Recession? Consumers Tell Us the Difference

What do Hurricane Katrina, the stock market crash of 1987, and the U.S. federal government shutdown of 2013 have in common? They were all shocks that temporarily impacted U.S. consumers and, as a result, consumer confidence. None of these events, however, led to a recession.

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Should we finally start worrying about inflation?

With the Fed raising rates this week, the monetary policy debate on the next step will commence, focusing on whether or not the Fed made a mistake in raising rates too soon, and what it should do going forward.

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Is Cheap Gas Here to Stay? Consumers Think So…

Flash back to the summer of 2014. Sunny skies, warm days, and consumers were paying, on average, $3.70 for a gallon of gas. But an autumn chill brought a rapid decline in the price of a barrel of oil that carried through the winter months. By the winter of 2015, the price of a gallon of gas had fallen considerably and was hovering slightly above $2.00 (Chart 1).  Consumers suddenly found themselves with extra cash, and it didn’t take long for the question to emerge: what were they doing with all the “extra” cash?? Would they spend it and help boost consumer spending? Or would they save it, and maybe even use it to help reduce their debt? Could the US economy be the beneficiary of a prolonged period of declining gas prices?

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