Ellison Chair in International Floriculture
Ellison Chair in International FloricultureTeaching, Research, Extension and Service

Commentary on last week's market performance

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October is known as a month full of market surprises. For example, the Dow fell 508 points on 10/19/87 (22 years ago today), a record drop of 22.6% for the 30-stock index. The day became known as “Black Monday.” The Dow’s previous worst percentage drop was a 12.8% loss on 10/28/29, generally considered to be the start of the Great Depression. But October 2009, brings a recovery in the stock market? Few analysts can substantiate what is causing this “jobless recovery” amidst record government spending.

Last Wednesday’s close over the arbitrary 10,000 benchmark was greeted with enthusiasm by financial markets nationwide. Time will tell how soon the index will slip back below 10,000 — as it has done 25 times previously. The S&P; 500, the more widely-used benchmark of investment managers, finished last week up +22.8% YTD as corporate earnings results from the 3rd quarter continue to impress market watchers. The significance of the mild inflation number for the country reported on Thursday was not lost on investors, showing that earnings growth has occurred without igniting inflation pressures (source: BTN Research). In the first 9 months of 2009, the total market value of all US stocks increased by $2.0 trillion, reaching $12.6 trillion on 9/30/09. Stock values fell by $7.1 trillion during 2008 (source: Wilshire).

The final results for fiscal year 2009 are in and they are not pretty. $2.1 trillion of tax receipts were not nearly enough to cover $3.5 trillion of government spending. The resulting $1.4 trillion of debt for the entire fiscal year was more than 3 times the previous record ($455 billion) set just last year (source: Treasury Department).

Lastly, the Senate hopes to merge together health care bills from 2 different committees this week, leading the way to floor debate by the full Senate on the issue just a week from today. It’s going to get interesting folks!

Make sustainability a core part of your business

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From today’s Management Tip of the Day from the Harvard Business School:

Sustainability is here to stay. Yet too many organizations treat sustainability as a temporary compliance issue. Use these three tips to make sustainability central to your business:

  1. Elevate responsibility for sustainability to the C-suite. Everyone at the top of the organization should be focused on sustainability, but ultimately, responsibility should lie with one person. Establish a Chief Sustainability Officer and fill the position with someone who has the expertise and power to make it an influential role.
  2. Treat sustainability like a product or service. Incorporate the “triple bottom line” into the company lexicon. Ask people to think about economic, ecological, and social returns.
  3. Establish permanent partnerships with the sustainability community. Identify the NGOs who have influence in your field. Treat them like critical customer accounts and cultivate relationships that allow you to identify win-win solutions to problems.

Water webinar series continues

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[youtube=http://www.youtube.com/watch?v=E71XRCijH9E]

The Ellison Chair in International Floriculture announces the THIRD of a 3-part webinar series that focuses on water quality, conservation, and management on October 20 at 11:00 a.m. CDT.

Dr. Don Wilkerson of Texas AgriLife Extension Service will be our next featured speaker and he will address the topic: Water Management That Makes Cents!

CLICK HERE — or go to http://ellisonchair.tamu.edu/webinar.htm to register for the SECOND webinar of the series.

In case you missed them, CLICK HERE — or go to http://ellisonchair.tamu.edu/webinar.htm to view the RECORDING of the first two webinars of the series, which are now available online. Dr. Paul Fisher of the University of Florida was the first speaker and he covered: What’s in Your Water? Water Quality and Treatment for Pathogens and Algae. Dr. Peter Ling of Ohio State University was our second featured speaker and he addressed the topic: Knowing Exactly When to Apply Irrigation Water.

IMF World Economic Outlook available

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For those who may not know, the International Monetary Fund (IMF) is an organization of 186 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

The World Economic Outlook presents analysis and projections concerning economic developments at the global level, in major country groups (classified by region, stage of development, etc.), and in many individual countries. It focuses on major economic policy issues as well as on the analysis of economic developments and prospects. It is usually prepared twice a year, as documentation for meetings of the International Monetary and Financial Committee, and forms the main instrument of the IMF’s global surveillance activities.

Click here for the executive summary and here for the full document.

Jobless claims continue to fall

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WALL STREET JOURNAL — In a positive sign for the labor market, the number of U.S. workers filing new claims for jobless benefits decreased more than economists expected last week. Initial claims for jobless benefits fell by 33,000 to 521,000 in the week ended Oct. 3, the U.S. Labor Department said in its weekly report. The last time initial claims were this low was on January 3.

The four-week moving average of new claims, which aims to smooth volatility in the data, also fell by 9,000 to 539,750 from the previous week’s revised figure of 548,750. The last time the four-week moving average was this low was on January 17.

Economists at JP Morgan Chase & Co. wrote in an economic analysis last week that claims generally appear to be on a downward trend, but the pace at which they are falling is a bit sluggish. “The drop has been somewhat slow relative to other large recessions,” the economists wrote last week. “Initial jobless claims have fallen 18% in the 26 weeks since they peaked. In the same time span, jobless claims fell by 23% after the 1975 recession, 33% after the 1980 recession, and 29% after the 1982 recession. Claims are usually a good predictor of employment, and the slowness of their decline could indicate a sluggish recovery in the labor market.”

Mark Perry provides commentary regarding his chart below: From the early April peak of 658,750, jobless claims (four-week average) have fallen by 119,000 (-18%), and that measure of jobless claims has fallen in 20 out of the last 26 weeks. It’s also interesting that in the WSJ article above, the Chase economists didn’t mention the two most recent recessions of 1990-1991 and 2001. During those two recessions, jobless claims fell by a comparable amount, by -15% from the March 1991 peak and by -19% from the October 2001 peak.It’s the pace and strength of the recovery that matter now, particularly whether improvements in gross domestic product translate into increased employment. Until businesses start adding to their payrolls — probably not until next year — indicators tracking the consumer (retail sales) and manufacturers (durable goods orders) will likely remain unsteady. Housing sales (another consumer indicator) have been doing well this year, having gotten a boost from Uncle Sam in the form of the $8,000 federal income tax credit for new home buyers.

Staycation makes the dictionary

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Obviously the green industry was partially sustained this year by the staycation phenomena. In spite of Much Ado having been made in the trade press over this term, I actually talked with someone at an industry conference tonight who had not heard of it so I thought I might provide further commentary. Wikipedia provides this definition:

A staycation (also spelled stay-cation, stacation, or staykation) is a neologism for a period of time in which an individual or family stays at home and relaxes at home or takes day trips from their home to area attractions. Staycations have achieved high popularity in the US during the financial crisis of 2007–2009 in which unemployment levels and gas prices are high. Staycations also became a popular phenomenon in the UK in 2009 as a weak pound made overseas holidays significantly more expensive.

Interestingly, the term was added to the 2009 version of the Merriam-Webster’s Collegiate Dictionary. Proof of the staycation phenomenon can also be illustrated graphically:

Protectionism, part 2

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Based on my earlier post, Anonymous makes the following comment:

Since you are an economist I would have expected your title to this entry to read “Depending on Where You Sit, Protectionsim Doesn’t Work Folks”. The tire retailers will sell tires no matter who makes them, China, Taliban or Americans. American tire makers do care. I would rather read your list of solutions for fair trade between nations instead and maybe find out the extent that Chinese tire manufacturers are competing on an even playing field their US counter parts. By the way, you need to update this entry because the Major Indicies ended up today, I guess on news of US China trade disputes? Come on Charlie, lets leave the politics out of economics.

First, I am delighted to receive the comment (we bloggers really appreciate them) and I can also appreciate the sentiment/perspective that Anonymous provides. I will be the first to admit that I am sometimes too transparent in my political leanings, but I have always encouraged readers to “understand where folks are coming from when we read or listen to them. To me, it is important to know enough to know the difference.” (click here for citation)

But I think, in this case, the economics underlying these types of scenarios does point out the shortcomings of such a protectionist strategy.

For example, let’s use the graph above (HT: Mark Perry) to demonstrate the probable effects of the tariffs on consumer and producer surplus, where:

Pw is the tire price in the U.S. before the tariff and Pw+t is the higher tire price after the tariff. As a direct result of the tariff protection for inefficient domestic producers, their output expands from Q1 to Q3, and imported tires decrease from Q2 to Q4.

As a result of higher tire prices and fewer tires purchased, American consumers as a group will be worse off by the area (-a, -b, -c, and -d), which represents the loss of “consumer surplus” from the tire tariff.

American tire manufacturers will be better off by an amount represented by the area +a, because they have both increased sales (to Q3) and raised prices (to Pw+t) as a result of their protection from more efficient Chinese tire producers.

The U.S. government will collect tariff (tax) revenue on imported Chinese tires by an amount represented by the area c, which is the product of tire imports (Q4-Q3) times the tariff (t). If we can assume that the tariff revenue in area c will be redistributed efficiently to the economy, we can treat that as a net gain to the economy (this could obviously be argued by supporters of the tariff).

But when you add it all up, considering the costs of the tire tariffs, American consumers are made worse by the area (-a + -b + -c + -d). (Note: This area could be quantified as a specific dollar amount if we had information about the supply and demand for tires.)

When we consider the benefits of the tire tariffs, U.S. producers are better off by area +a, and the government is better off by area +c.

So there is a net loss to the system in that the costs of the tire tariff (-a + -b + -c + -d) are greater than the benefits of the tire tariff (+a + +c), for a net welfare loss of (-b + -d), which will be the “deadweight loss” of the tire tariff (costs to the economy that are not offset by benefits).

One can only conclude therefore that America will be worse off with the tire tariff, not better, and we (collectively) will suffer from higher tire prices, a net loss of jobs, lower economic growth, and a reduction in our country’s standard of living.

That is why economists almost universally support free trade and oppose tariffs and trade protection – economic analysis and empirical evidence clearly show that there are always net welfare losses from tariffs. Therefore, politics aside, it will be Americans in the end who will be punished with the punitive tire tariffs.