FEI Daily spoke with Sergio Rebelo, Tokai Bank Chair in International Finance at the Kellogg School of Management, about mega trends in the world economy, changes in the labor market and consumer behavior.
FEI Daily: To set the stage a bit: when you look at the various trends like growth slowing in China, low oil prices, low commodity prices and the strong dollar, are those connected, or are we seeing separate trends playing out at the same time?"
Sergio Rebelo: These are mostly separate trends. The dollar has appreciated in response to the prospect for a renormalization of U.S. monetary policy at a time when other central banks, such as the ECB and the Bank of Japan are still expanding their quantitative easing programs. The low prices of commodities are related to the slowdown in China. But, in the case of oil and natural gas, the large increase in supply associated with fracking and horizontal drilling has had a large impact on prices.
China’s slowdown is an inevitable part of its convergence process. It is a phenomenon we understand well because we have seen it play out in Japan and in other fast-growing Asian countries.
FEI Daily: Which of these trends affects US companies in the short term?
Sergio Rebelo: The strength of the dollar gives companies an incentive to look outside U.S. borders for potential acquisition targets. More generally, the large movements in exchange rates show how important it is to match sales with local production in every major region of the globe to insulate companies from exchange rate volatility.
FEI Daily: What are the major changes you’re seeing in the labor market?
Sergio Rebelo: We are seeing very large structural changes in the labor market with a significant number of routine jobs being outsourced or automated. The wages of these routine workers have either stagnated or declined in real terms over an extended period of time. These wage trends are clearly being reflected in the ongoing presidential election.
FEI Daily: What major changes do you see in consumer behavior?
Sergio Rebelo: The middle class feels squeezed in terms of income. The way middle-class consumers adapt to this squeeze is not by consuming less but by “trading down,” that is, by consuming lower quality goods and services. At the same time, we have a part of the economy that is doing extremely well, and those consumers are trading up to consume luxury goods and services. So, we have a polarized economy where growth opportunities are plentiful for value and luxury brands but scarce for brands that have traditionally targeted the middle class.
FEI Daily: What other issues should be on the radar of a CFO?
Sergio Rebelo: It is important to understand and monitor the renormalization of monetary policy by the Federal Reserve. This renormalization will have a major impact on the term structure of interest rates and on the cost of capital.
Sergio Rebelo and Robert Wolcott, Co-Founder & Executive Director of the Kellogg Innovation Network (KIN) and a Clinical Professor of Entrepreneurship & Innovation at the Kellogg School of Management, Northwestern University will be presenters at the Northwestern Kellogg School of Management and the FEI Chicago Chapter Professional Development Program on May 3, 2016. To register for the full day professional development day, click here.