Fair Warning for Economic Developers on the High Risks of the Internet of Things

The International Data Corporation estimates that there were 15 billion Internet of Things (IoT) endpoints at the end of 2016. They expect the number of connected items to grow to 82 billion by 2025. Spending on IoT reached $737 billion at the end of 2016. By 2020 the amount invested in IoT is expected to be $1.3 trillion. The major investing industries are manufacturing, transportation and utilities. Economic developers often consider IoT to be a hot prospect.

But a new report from Cisco Systems reveals that the pursuit of the IoT reward comes with a lot of risk. "Sixty percent of IoT initiatives stall at the Proof of Concept stage and only 26 percent of companies have had an IoT initiative that they considered a complete success."  Interestingly, even the 26% success number is highly uncertain -- 35% of IT executives thought that their IoT projects were complete successes, while only 15% of business executives thought that their IoT projects were complete successes. One-third of projects got all the way to completion and were still considered failures. 

The Cisco report offers key findings that, frankly, are not different from lessons learned from primitive enterprise initiatives. For example: human factors matter, cooperation improves the likelihood of success, successes offer payoffs, failures offer lessons for the future. (Cue Casablanca clip.)

One of the lessons for the future from these failures for economic developers is that the cool IoT business that you attract today may being laying off employees in the not so distant future. When a locality attracts a business, especially if there are incentives and workforce programs implemented in the process, it is investing in the business along with the owners of the company. Considering the risk of the business (along with the trendiness of the buzzword) is important.

The internet is here to stay and IoT is clearly the wave of the future. But there are a lot of rough seas and wrecks ahead for IoT investors, including employees and communities.

Lower New Home Prices Aren't Enough to Sell More Houses

According to data from the U.S. Census Bureau, new home sales fell in April by 11%, dropping to a seasonally adjusted annual rate of 569,000. This marks a decrease from a revised rate of 642,000 in March. The April number is much lower than expected.

The median sales price of new houses sold in April 2017 was $309,200. This means that builders were cutting prices by 3%, but the lower prices weren’t sufficient to increase sales. Compared to this time last year, the median price of a new home is down almost 4% while sales of new homes are up only 0.5%.

The increase in new home sales over the last year has all occurred in the Midwest and the South. Sales in the West and Northeast are down. Between March and April, sales of new homes dropped 26% in the West.

German Business Climate at Record High

Results of the German Center for Economic Studies' May 2017 Ifo Business Climate Survey show a high level of economic optimism among German businesses. The Ifo Business Climate Index rose to a record high of 114.6 points from a previous level of 113 points last month, the highest reading on record since 1991. German companies raised their estimates of both the current business situation and future business expectations. The rise was especially high in manufacturing, with capital goods manufacturers planning to increase both production and prices. In wholesaling, business expectations were optimistic while the index for assessments of the current business situation declined, with retailers making small downward adjustments. In construction the index increased, corresponding to an increase in both construction activity and optimism for the future business climate. Combined with other economic factors, these results suggest an economic growth of 0.6% in the second quarter.

Overall and for Manufacturing in Particular the US Labor Market Tightens

The US Labor Department reported that jobless benefits fell slightly in the second week of May 2017, reflecting tightness in the labor market. Initial claims fell to the 232,000 level, dragging the four week average down to 240,750. The total number of people seeking unemployment insurance also fell, corresponding to the record low unemployment rate.

The US Philadelphia Fed Business Outlook Survey reports that regional manufacturing activity has continued to grow in the month of May 2017. The survey also showed a rise in overall employment and work hours and all broad indicators improved or remained constant at high levels, pointing to expectations for further expansion.

UK Retail Sales Rise in April

According to a report by the UK's Office for National Statistics covering retail sales in Great Britain for April 2017, the retail sales increased by 2.3% while average prices fell to 3.1%.

EIA Reports that Crude Oil Stocks Decreased Last Week

According to a weekly update by the Energy Information Administration, US refineries produced 363,000 more barrels per day during the week of May 12 than in the previous week (averaging over 17.1 million barrels per day). Gasoline production decreased, with an average of 10 million barrels produced per day, while distillated fuel production increased to an average of over 5 million barrels per day. Inventories of crude oil fell 1.8 million barrels during the week of May 12 to 520.8 million barrels. This makes the sixth consecutive weekly drawdown. Refined product inventories also decreased, with gasoline down 400,000 barrels to 240.7 million, and distillated fuels down 1.9 million barrels to 146.8 million. West Texas Intermediate Crude futures prices jumped 70 cents to $49.30 per barrel after the release of the report. The EIA report was inconsistent with a report by the American Petroleum Institute that indicated stocks of crude had *increased* by 882,000 barrels. 

UK Employment Continued to Rise in the First Quarter

According to the Labour Market Report from the UK's Office of National Statistics, the number of workers in Great Britain increased while unemployment fell. In the first quarter of 2017. There were 31.95 million workers with a high employment rate of 74.8%. There were 1.54 million unemployed with an unemployment rate of 4.6% and 8.83 billion economically inactive with an inactivity rate of 21.5%. Nominal average weekly earnings (including bonuses) increased by 2.4%. 

A 210-Acre Silver Cloud comes to Henrico County

A former chip manufacturing plant with over 1,000,000 sq ft of building on 210 acres in Henrico county is the site of a new QTS data center. The location was originally developed by chip maker Qimonda AG. When Qimonda filed for bankruptcy it closed the plant and laid off 1,500 people in 2009, reports Data Center Frontier(DCF).

According to DCF, the Richmond area was attractive for this hyperscale data center in part because of the new undersea internet cables linking Virginia Beach with Europe and Latin America and the Henrico County Board of Supervisors reducing the business property tax rate on data center equipment by almost 90%. The trans-Atlantic cables are owned by Microsoft and Facebook and operated by Spanish telecommunications company Telefónica SA. Mid-Atlantic Broadband links the Virginia Beach cable landing to much of Southside Virginia.

For details on “The Economic and Fiscal Contribution that Data Centers Make to Virginia” check out the Mangum Economics report for the Northern Virginia Technology Council.

Modest Growth Across Europe

According to the UK's Office for National Statistics the Consumer Price Index annual inflation rate in Great Britain was measured at 2.7% in April with a 0.5% rise in consumer prices, slightly higher increase than expected. The increase is largely attributed to the rising price of airfare, clothing, vehicle excise taxes, and electricity. In another report by the Office for National Statistics, factory output prices have continued to rise in April 2017 by 0.4%, while input prices rose 0.1%. The annual factory output inflation rate remained at 3.6% while the annual growth rate for input prices fell to 16.6% (a decrease from January's high of 19.9%).

Eurostat reported today that seasonally-adjusted GDP rose by 0.5% in both the euro area and the EU28. Annual growth measured 1.7%. Of the euro area countries, Finland reported the highest level of growth at 1.6% with Spain growing at 0.8%, Germany at 0.6%, and France at 0.3%. The Italian National Institute of Statistics reported modest growth in the Italian economy for the first quarter of 2017, underperforming most other Euro Zone countries. The country's GDP rose 0.2% in the first quarter while the annual growth dropped to 0.8% from 1%. The Italian economy is being pushed forward by domestic demand while it still struggles to gain momentum.

Mixed Economic Reports in the US

Housing starts in April fell by 2.6% from March and came in significantly below expectations given the relatively strong March report. Starts for single-family homes rose 0.4%, but permits and completions both fell by 4.5%. So, overall single-family home construction has been and will likely continue to be uneven. The biggest weakness in the report relates to multi-family homes where starts fell 9.2%. And while permits for multi-family dwellings rose by 1.4%, completions dropped by 17.2%.

On the brighter side, industrial production rose 1% in April. And the manufacturing sector bounced back a full 1% in April as well, more than compensating for the March contraction. That is quite a reversal for the manufacturing sector which was flat for last year. In fact, industrial production and manufacturing are showing the strongest reports in over 3 years. Production of motor vehicles, business equipment, and consumer goods were all up. However, production of high-tech products and construction supplies were down. (The report on construction supplies helps corroborate the April housing report.) Mining was up 1.2%, possibly due to regulatory changes out of Washington. Utility output was up 0.7% in April over March’s record 8.2% jump that was weather-related.  

These reports combined with a number of other reports so far this month show mixed results for the US economy. Industrial production, manufacturing, and employment have shown strong indications, but retail sales, housing starts, and increases in consumer prices have indicated weakness. As housing is an important driver of economic growth and activity, the mixed news on the US economy will probably continue for the next few months.