Great post by Eric Schonfeld in Techcrunch today, JP Morgan Predicts 2008 Will Be Nothing But Net, about JP Morgan Internet analyst Imran Khan and his team's hefty report, Nothing But Net, that paints a bullish picture for major Internet stocks. The interesting point and chart spotlights the fact that broadband penetration and e-commerce revenues are rising at similar angles, with advertising revenues arching even higher. The Cliff's Notes version is that Khan and company think internet advertising, and e-commerce in general, will explode over the next two years. In addition to more ubiquitous broadband, Schonfeld notes that high GDP rates around the globe are offsetting modest growth in the U.S., and companies that are truly global are the beneficiaries of the stronger, global economy.
I'd like to add some thoughts, as I think about consumers, and how open their wallets will be this year. The consumer has confounded skeptics over the past two years as the housing market went into full crumble mode. Pundit after pundit has tossed around the R word (recession), shouting that since consumer spending makes up a fat chunk of economic output, and since we're not tapping home equity like we once were, it must mean spending will soon plummet, and along with it, the economy.
But bears and skeptics and chicken littles like to cherry pick particular data that serves the gloom and doom. The same can be said for bulls and their merry (some would say blind) band of optimists. In the truthful middle we find things like incredibly low unemployment (4.8 percent - anything below 5 is considered 'full employment'), rising wages, and solid consumer spending. Some great quotes from a Dec. 22 Washington Post article:
Personal spending rose 1.1 percent last month, the biggest gain in two years, the Commerce Department reported yesterday. It was the latest contradiction between what people say about the economy and what they do. In surveys, U.S. consumers said they were sharply less confident about the state of the economy in November than they had been the month before.
That wasn't enough to keep people out of stores. "Apparently Americans are really depressed so are compensating by going shopping," said David A. Wyss, chief economist at Standard & Poor's. "It's retail therapy."
"For two years now, we've been talking about the idea that housing will get weak and that will affect consumer spending," said Neal Soss, chief economist at Credit Suisse. "That simply hasn't happened yet. It may happen soon, but it hasn't happened yet."
And from my friend Jerry Bowyer, Chief Economist for Benchmark Financial Network:
There are 146 million of us working here in America. That number has never been higher. Compared to that there are only 7 million unemployed. Roughly 79 million are not in the labor force at all. This includes people who are underage, retired, disabled, ne'er do well scions of great fortunes, and people who have simply given up looking for work. The last group is officially refferred to as 'discouraged workers'. At 320,000, it is an infinitesimally small proportion of the total labor pool - less than a third of a percent. Contrary to widespread assertions in the blogosphere (and the editorial page of the New York Times), it has not been rising. In fact, over the past 4 years, people have been rushing into the job market, not out of it.
And this, from Mr. Bowyer's article in National Review Online:
The recessionistas have been disproved, although they’ll never be discouraged. They will continue their dirge starting, well, today. Through 2008 they will ask, “When will high gas prices kill the consumer?” And the answer will remain the same: never.
Gas-price hikes will never, ever, ever cut into consumer spending. It’s a mathematical impossibility. Here’s why: Gas prices are a component of consumer spending.
You see, when gas prices climb from $2 a gallon to $3 a gallon, one of the components of retail spending goes up. Gas stations are retail establishments. People make money working at gas stations (which now generally serve as convenience stores). People make money managing the corporations that own these stores. And, of course, people make money by owning shares in these companies.
So let's hear it for the consumer, keeping the overall economy pumping. Another reason to be optimistic about e-commerce is that advertisers are taking their ad dollars and spewing them into the web with increasing velocity. The great transition is almost in full swing, to the detriment of TV, radio, print, etc. I also believe 2008 will witness a virtual land rush by small businesses, as they realize the benefits and necessity of embracing the New Web. That could mean new ad revenue, and new business in genreral for the internet.
Now, the bears have some good points. No one knows how much cruchier the housing crunch will get. And broadband numbers, while going up, are pitiful for the world's leading economy. The U.S. was ranked 4th in 2000 in terms of penetration. Last year, we dropped to 15th in the world. The typical Japanese citizen enjoys broadband speeds some 20 times our average. That's ridiculous. But right now, if I have to choose sides, I'm choosing to hang with the bulls. Because that's where the consumers have been, even when they won't admit it.