Markets

5 Hidden Ways That Globalization is Changing

Published

2 years ago

January 17, 2019

Jeff Desjardins

Globalization has been a powerful force in shaping modern human history.

The world economy has become increasingly connected and interdependent over recent decades, and conventional wisdom suggests that this will only continue in the years ahead.

But while it’s tempting to extrapolate the past effects of globalization into the future, such a leap may also be a mistake. That’s because there is growing evidence that globalization itself is quietly transforming – and how it ultimately evolves may be markedly different from what most business leaders might expect.

How Globalization is Changing

Today’s infographic highlights the most recent research about globalization from the McKinsey Global Institute, the business and economics research arm of McKinsey & Company.

Below are five major shifts that have gone mostly unnoticed, as well as the countries and companies that could benefit:

The 5 Hidden Ways That Globalization is Changing

The findings of the report show that globalization is not static or constant, and that structural changes in the nature of globalization have been occurring in the background over the last decade or so.

>> View the Complete Report Here:
“Globalization in transition: The future of trade and value chains”

The impact that these shifts could have on the global economy is substantial: international trade already adds up to $22.4 trillion each year, or about 28% of global GDP. Even a minor change in this paradigm could affect the list of countries, corporations, and workers that stand to benefit.

The 5 Ways Globalization is Changing

The report looks into 23 different industry value chains in 43 different countries, representing 96% of global trade.

From that comprehensive data, five major structural shifts have been identified:

1. A smaller share of goods is traded across borders
Trade is still growing in absolute terms, but a smaller share of the physical goods made worldwide is now being traded. More specifically, during the span of 2007 to 2017, gross exports as a percentage of gross output decreased from 28.1% to 22.5% globally.

2. Services trade is growing 60% faster than goods trade
When we think of trade, we often focus on the trade of physical goods (i.e. autos, aerospace, oil). However, services are becoming increasingly important to the global economy – and if accounted for properly, it’s possible that the value of services is closer to $13.4 trillion, which is higher than the total goods trade.

3. Labor-cost arbitrage has become less important
It’s a common perception that trade flows are driven by companies searching for low-cost labor. However, in value chains today, only 18% of the goods trade is based strictly on labor-cost arbitrage.

4. R&D and innovation are becoming increasingly important
Companies are spending more on R&D and intangible assets such as brands, software, and IP as a percentage of overall revenue. This spending has increased from 5.4% to 13.1% of revenue over the period of 2000-2017.

5. Trade is becoming more concentrated within regions
The geography of global demand is changing as emerging markets consume a higher percentage of total goods. Since 2013, intraregional trade has increased by 2.7 percentage points – a reverse from the longstanding trend.

The mix of countries, companies, and workers that stand to gain in the next era is changing.

– McKinsey Global Institute

Why These Changes Matter

What types of countries are likely to benefit from these shifts, and which will face headwinds?

Type of economy	Possible opportunities or challenges
Advanced economies	Strengths in innovation, services, and highly skilled talent put advanced economies in a strategic position to benefit from changes in globalization
Developing economies with close proximity to large consumer markets	As production moves closer to consumers, developing economies in close proximity can take advantage
Developing economies that are less connected	The window is narrowing for low-income countries to use labor-intensive exports as a development strategy

Policy makers and business leaders must understand how the trade landscape is shifting so they can prepare for globalization’s next chapter and the opportunities and challenges it will present.

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Markets

Visualizing the Recent Explosion in Lumber Prices

Lumber prices in the U.S. continue to break records as pressure from both the supply and demand sides of the market collide.

Published

4 days ago

May 8, 2021

Marcus Lu

Visualizing the Recent Explosion in Lumber Prices

Lumber is an important commodity used in construction, and refers to wood that has been processed into beams or planks.

Fluctuations in its price, which is typically quoted in USD/1,000 board feet (bd ft), can significantly affect the housing industry and in turn, influence the broader U.S. economy.

To understand the impact that lumber prices can have, we’ve visualized the number of homes that can be built with $50,000 worth of lumber, one year apart.

A Story of Supply and Demand

Before discussing the infographic above, it’s important to understand the market’s current environment.

In just one year, the price of lumber has increased 377%—reaching a record high of $1,635 per 1,000 bd ft. For context, lumber has historically fluctuated between $200 to $400.

To understand what’s driving lumber prices to new heights, let’s look at two economic elements: supply and demand.

Shortened Supply

U.S. lumber supplies came under pressure in April 2017, when the Trump administration raised tariffs on Canadian lumber. Since then, lumber imports have fallen and prices have experienced significant volatility.

After a brief stint above $600 in April 2018, lumber quickly tumbled down to sub $250 levels, causing a number of sawmills to shut down. The resulting decreases in production capacity (supply) were estimated to be around 3 billion board feet.

Once COVID-19 emerged, labor shortages cut production even further, making the lumber market incredibly sensitive to demand shocks. The U.S. government has since reduced its tariffs on Canadian lumber, but these measures appear to be an example of too little, too late.

Pent-up Demand

Against expectations, COVID-19 has led to a significant boom in housing markets, greatly increasing the need for lumber.

Lockdowns in early 2020 delayed many home purchases until later in the year, while increased savings rates during the pandemic meant Americans had more cash on hand. The demand for homes was further amplified by record-low mortgage rates across the country.

Existing homeowners needed lumber too, as many Americans suddenly found themselves requiring upgrades and renovations to accommodate their new stay-at-home lifestyles.

How Many Homes Can You Build With $50K of Lumber?

To see how burgeoning lumber prices are impacting the U.S. housing market, we’ve calculated the number of single family homes that could be built with $50,000 worth of lumber. First, we established the following parameters:

Lumber requirements: 6.3 board feet (bd ft) per square foot (sq ft)
Median single family house size: 2,301 sq ft
Total lumber required per single family house: 14,496 bd ft

Based on these parameters, here’s how many single family homes can be built with $50,000 worth of lumber:

Date*	Lumber Price	Total Lumber Purchased	Total Homes Built
2021-05-05	$1,635 per 1,000 bd ft	30,581 bd ft	2.11
2020-05-04	$343 per 1,000 bd ft	145,773 bd ft	10.05
2015-05-01	$234 per 1,000 bd ft	213,675 bd ft	14.74
2010-05-01	$270 per 1,000 bd ft	185,185 bd ft	12.77

*Exact matching dates were not available for past years.
Source: Insider

As lumber prices continue to set record highs, the National Association of Home Builders (NAHB) has reported that the cost to build a single family home has increased by $36,000. Most of this cost can be passed down to the consumer, but extremely tight supplies mean homebuilders are unable to start more projects.

The Clock is Ticking

Despite their best efforts to increase output, it’s likely that sawmills across the U.S. will continue playing catch-up in 2021.

“There was a great fear among sawmills to prepare for a downturn. When home buying surged, they could not open up capacity quickly enough.”
– Lawrence Yun, National Association of Realtors

Analysts are now warning that lumber prices could reach a flashpoint, where affordability becomes so limited that demand suddenly falls off. This has led the NAHB to ask the Biden administration for a temporary pause on Canadian lumber tariffs, which currently sit at 9%.

U.S. tariffs on Canadian lumber were first introduced in 1982, and represent one of the longest lasting trade wars between the two nations. The U.S. is currently appealing a World Trade Organization (WTO) ruling that states its 2017 tariff hike was a breach of global trading rules.

Markets

Mapped: The State of Small Business Recovery in America

Compared to January 2020, 34% of small businesses are currently closed. This map looks at the small business recovery rate in 50 metro areas.

Published

2 weeks ago

April 28, 2021

Iman Ghosh

Mapped: The State of Small Business Recovery in America

In the business news cycle, headlines are often dominated by large corporations, macroeconomic news, or government action.

While mom and pop might not always be in focus, collectively small businesses are a powerful and influential piece of the economy. In fact, 99.9% of all businesses in the U.S. qualify as small businesses, collectively employing almost half (47.3%) of the nation’s private workforce.

Unfortunately, they’ve also been one of the hardest-hit sectors of the economy amid the pandemic. From the CARES Act to the new budget proposal, billions of dollars have been allocated towards helping small businesses to get back on their feet.

Small Business Recovery in 50 Metro Areas

During the pandemic, many small businesses have either swiftly pivoted to survive, or struggled to stay afloat. This map pulls data from Opportunity Insights to examine the small business recovery rate in 50 metro areas across America.

So, has the situation improved since the last time we examined this data? The short answer is no—on a national scale, 34% of small businesses are closed compared to January 2020.

San Francisco is one of the most affected metro areas, with a 48% closure rate of small businesses. New York City has spiralled the most since the end of September 2020.

U.S. Metro Area	% Change in # of Small Businesses Open (As of Sep 25, 2020)	% Change in # of Small Businesses Open (As of Apr 23, 2021)	7-month change (p.p.)
Albuquerque	-23%	-34%	-11
Atlanta	-26%	-35%	-9
Austin	-32%	-38%	-6
Bakersfield	-31%	-35%	-4
Baltimore	-28%	-35%	-7
Boston	-33%	-47%	-14
Charlotte	-18%	-28%	-10
Chicago	-27%	-38%	-11
Cleveland	-26%	-34%	-8
Colorado Springs	-23%	-28%	-5
Columbus	-21%	-28%	-7
Dallas-Fort Worth	-21%	-28%	-7
Denver	-25%	-29%	-4
Detroit	-28%	-38%	-10
El Paso	-25%	-26%	-1
Fresno	-26%	-30%	-4
Honolulu	-41%	-25%	+16
Houston	-30%	-34%	-4
Indianapolis	-25%	-34%	-9
Jacksonville	-18%	-28%	-10
Kansas City	-15%	-26%	-11
Las Vegas	-22%	-30%	-8
Los Angeles	-27%	-34%	-7
Louisville	-23%	-35%	-12
Memphis	-21%	-24%	-3
Miami	-23%	-34%	-11
Milwaukee	-22%	-27%	-5
Minneapolis	-21%	-29%	-8
Nashville	-21%	-26%	-5
New Orleans	-45%	-39%	+6
New York City	-21%	-42%	-21
Oakland	-32%	-35%	-3
Oklahoma City	-26%	-35%	-9
Philadelphia	-24%	-31%	-7
Phoenix	-19%	-31%	-12
Portland	-34%	-36%	-2
Raleigh	-16%	-29%	-13
Sacramento	-33%	-34%	-1
Salt Lake City	-18%	-23%	-5
San Antonio	-34%	-40%	-6
San Diego	-28%	-38%	-10
San Francisco	-49%	-48%	+2
San Jose	-35%	-44%	-9
Seattle	-28%	-30%	-2
Tampa	-22%	-40%	-18
Tucson	-27%	-28%	-1
Tulsa	-23%	-32%	-9
Virginia Beach	-	-36%	0
Washington DC	-37%	-47%	-10
Wichita	-15%	-28%	-13

Data as of Apr 23, 2021 and indexed to Jan 4-31, 2020.

On the flip side, Honolulu has seen the most improvement. As travel and tourism numbers into Hawaii have steadily risen up with lifted nationwide restrictions, there has been a 16 p.p. increase in open businesses compared to September 2020.

Road to a K-Shaped Recovery

As of April 25, 2021, nearly 42% of the U.S. population has received at least one dose of a COVID-19 vaccine. However, even with this rapid vaccine rollout, various segments of the economy aren’t recovering at the same pace.

Take for instance the stark difference between professional services and the leisure and hospitality sector. Though small business revenues in both segments have yet to return to pre-pandemic levels, the latter has much more catching up to do:

Small Business Recovery Supplemental - Business Revenues

This uneven phenomena is known as a K-shaped recovery, where some industries see more improvement compared to others that stagnate in the aftermath of a recession.

The Entrepreneurial Spirit Endures

Despite these continued hardships, it appears that many Americans have not been deterred from starting their own businesses.

Many small businesses require an Employer Identification Number (EIN) which makes EIN applications a good proxy for business formation activity. Despite an initial dip in the early months of the pandemic, there has been a dramatic spike in EIN business applications.

ein business applications

Even in the face of a global pandemic, the perseverance of such metrics prove that the innovative American spirit is unwavering, and spells better days to come for small business recovery.