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

Middle class expanding — globally, that is.

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While much attention has been placed on the shrinking middle class here in the U.S., Jim O’Neill, chief economist at Goldman Sachs, offers an interesting commentary of the expanding middle class globally in this weeks Financial Times:

In the midst of the current widespread gloom and doom in the west, it is important not to lose sight of the true structural themes shaping our era.

Linked to the current mood, commentators often depict an embattled and shrinking middle class, with sharply rising financial inequality. However, globally, this is simply not true. One of the most startlingly positive phenomena for many generations continues to unfold around the world. We are in the middle of an explosion of the world’s middle class – about 70m people a year globally are entering this wealth group.

The phenomenon may continue for the next 20 years, with this global middle accelerating to 90m a year by 2030. If this happens, an astonishing 2bn people will have joined the ranks of the middle class. This demonstrates that, contrary to widespread opinion, global inequality is declining significantly, not increasing.

It is important for everyone in the so-called developed world to be constantly aware that these powerful shifts in global wealth are good not only for the developing world, but for them too. If you take a look at a chart of recent US export growth, you may well think you are looking at the wrong data series. But you are not. US exports are indeed growing at close to 20 per cent and it is this that is stopping the housing and credit crunch from driving the US into a deep recession. Aspects of the same phenomenon can be seen in Japan, Germany and even the UK.

The new middle-class explosion is going to remain the market opportunity for us all, or certainly for those of us who are prepared to respond to the new realities.

This, of course, makes trade and regulatory policies all the more important for green industry-related imports and exports. The current APHIS Q37 and other free-trade negotiations (e.g. Columbia) have perhaps even more far-reaching implications than we otherwise surmised. I’ll be speaking at a colloquium at the annual meeting of the American Society for Horticultural Sciences this week discussing this issue in more detail.

Click here for the full FT article.
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The Changing Face of the U.S. Consumer

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An excellent article appears in this months Advertising Age (click here) that highlights the changing demographic profile of consumers in the U.S. The following helpful hints were provided for marketers:

1. GENERATION AARP

THE TREND: The average age for a U.S. head of household is 49.5— just six months shy of getting a sign-up pitch from AARP. The first boomers will turn 65 in less than three years.

MARKETING CHALLENGE: Older consumers tend to be more risk-averse and less open to new ideas.

WHAT TO DO: Don’t pander (“60 is the new 40”). Play up messages suggesting advantages such as guarantees, safety and experience.

2. CONSUMER CHASM

THE TREND: The gulf is widening among consumers when it comes to attitudes and behavior. The online- and wireless-centric consumer lives in a different world from the older newspaper reader.

WHAT TO DO: Rethink strategies for target marketing. Put more emphasis on ethnographic research into the culture, beliefs and activities of the target consumer

3. REGIONAL DISCONNECT

THE TREND: One nation, but hardly united or homogeneous. The Northeast is older, largely white with fewer children; the West is younger and more diverse. Two thirds of recent immigrants have settled in the South or West.

WHAT TO DO: For products aimed at older consumers, consider looking north and east. If you want younger consumers, pick your regions and then make sure the message resonates with a multicultural audience.

4. NEW FACES

THE TREND: The median age of U.S. Hispanic women is about 28—14 years younger than the median age for white, non-Hispanic women. Two in five consumers under 45 are Hispanic, Black or Asian (vs. one in five for 65- plus). More than half of household heads in California and Texas are Hispanic, Black, Asian or multiracial.

WHAT TO DO: If you want to be the choice of a new generation, embrace the cultures and voices of that generation.

5. IMMIGRATION IMPERATIVE

THE TREND: In the past seven years, 40% of U.S. population growth has come from immigration. Five big states (New York, New Jersey, Michigan, Illinois and Connecticut) would have seen their work forces and populations shrink were it not for new immigrants.

WHAT TO DO: Marketers need to engage in the national debate about immigration. Immigrants, after all, are a source of labor—and a prime source of new consumers.

Be prepared!

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On Wednesday, at the educational sessions of the Southwest Growers Conference, Dr. Marco Palma gave an excellent presentation on “hiring a legal workforce” for nursery and greenhouse operators. Conference attendees were also presented with their very own copy of the newly revised Immigration and Labor Handbook that is hot off the press (click here).

As part of the discussion, it was was pointed out that increased I-9 and immigration compliance audits of businesses are expected. To prepare, ANLA has revised their employer audit guide (click here). ANLA also reports an increase in DOL wage and hour investigations targeting nursery employers using the H-2A agricultural guest worker program. Auditors are closely scrutinizing job descriptions and performance of non-agricultural work that can result in the loss of the agricultural overtime exemption.

Well put, Bob.

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Robert Barr, an economist in the Washington, D.C. area, and frequent contributor to the SAF Floral Trend Tracker offered the following comment in the latest issue:

These are confusing times for consumers and businesses. Gas prices are way up, home prices in many places are dropping, and employment has shrunk in each of the first five months of the year. If we’re not in a full-blown recession now, we’re just skirting past one.

So this has been a time of fear and concern. Our economic health is vulnerable, and we know it. But while we batten down the hatches, keep in mind how resilient our economy has been. Economic conditions aren’t as bleak as you probably imagine them to be, or as the popular media usually suggests. Growth was at a low 0.8% annual rate in the six months ending in March, surprising many experts who expected to see an outright contraction. Despite all of the problems and concerns, the economy continues to expand, albeit it mildly.

Naturally, consumers are holding back, as purchases of big-ticket items are being deferred, particularly in real estate and autos. On the other hand, business owners are more encouraged, as durable goods orders outside the auto sector are doing quite well. And, and in a big switch from recent years, net exports are contributing to, not detracting from, economic growth (actually accounting for most of it lately).

Feds to the rescue? One important development in early June suggests that the Federal Reserve will be acting soon to counteract one major economic threat: the weak dollar, as Chairman Bernanke cited the weak dollar as a major culprit in pushing up consumer prices. That’s reassuring, as the Fed needs to reassert itself as an inflation fighter. As discussed in this column in the last issue of the Floral Trend Tracker, a few months ago the Fed was cutting interest rates to help cushion the economy from the fallout from the credit crisis. But those low rates were causing the foreign-exchange value of the dollar to slide. Now, the Fed has signaled no more rate cuts for a while, as it waits both for its previous rate cuts to have their peak impact and for the tax rebates to course their way through the economy.

No short-term solution. A shift to inflation-fighting policies probably won’t have much impact in the short run for consumers and small-business owners, whose day-to-day buying and selling decisions will ultimately determine whether the rest of 2008 is able to improve on the low growth of its opening months.

Part of the answer will lie with oil prices and our adjustment to gasoline at $4 a gallon (as we write this. We hope that price doesn’t sound like a deal as you read this). On the other hand, a recommitment from the Federal Reserve to maintaining price stability could quickly boost financial markets. They would need to realize that the Fed is more satisfied with a smoothly functioning credit market and that its concentration is back on suppressing inflation.

On net, we expect to see sluggish growth in the rest of 2008 and well into 2009. Most of the current problems holding down the economy – residential real estate, high (and rising) energy costs, and the credit crunch – will take time to reverse. Meanwhile, the recessionary feeling of today will probably linger in many big-ticket consumer industries.

I particularly appreciate Bob’s comment regarding the resiliency of the economy and despite how things look, we have managed some growth overall. As I have said before, the impacts of this economic contraction are not universal and are quite worse in some areas of the country than others. The next several months leading into the fall will be interesting to track as far as economic indicators are concerned.

Stay tuned for more commentary about fall marketing strategies in light of these economic trends.

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Better benchmark for gas prices

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Warren Meyer added a twist to Mark Perry’s analysis of what 1,000 gallons of gas costs as a percent of per-capita disposable income (click on graph for larger image). The key for households, Warren maintains, is not how much it costs to buy 1000 gallons, but how much it costs to buy the gas required to drive their typical annual miles. Using 15,000 as an average driving miles per year per person, he gets the result above. So, while I too think paying $4 for gas is not my favorite way to dispose of my income, in terms of average household pain created, gas prices are quite far from their historic highs.

The effect of the media on gas prices

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Harvard economist Martin Feldstein explained in today’s WSJ (click here) that the relationship between future and current spot oil prices (spot price + carrying cost = futures price) implies that an expected change in the future price of oil will have an immediate impact on the current spot price of oil.

When oil producers concluded that the demand for oil in China and some other countries will grow more rapidly in future years than they had previously expected, they inferred that the future price of oil would be higher than they had previously believed. They responded by reducing supply and raising the spot price enough to bring the expected price rise back to its initial rate.

Hence, with no change in the current demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise. Similarly, credible reports about the future decline of oil production in Russia and in Mexico implied a higher future global price of oil – and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil.

Once this relation is understood, it is easy to see how news stories, rumors and industry reports can cause substantial fluctuations in current prices – all without anything happening to current demand or supply.

University of Michigan economist Mark Perry also notes that the spot price of oil will fluctuate even without speculators playing a role. After all, speculators have no control over the global supply of, or global demand for, physical barrels of oil. Speculators respond to market conditions, they don’t create market conditions.

Now here is the good news. Any policy that causes the expected future oil price to fall can cause the current price to fall, or to rise less than it would otherwise do. In other words, it is possible to bring down today’s price of oil with policies that will have their physical impact on oil demand or supply only in the future.

Increasing the expected future supply of oil would reduce today’s price. Any steps that can be taken now to increase the future supply of oil, or reduce the future demand for oil in the U.S. or elsewhere, can therefore lead both to lower prices and increased consumption today.

Home sales increase 2%; inventories decline

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Economists and others weigh in on the 2% increase in existing home sales amid declines in inventories.

· Sales have now been on net about unchanged and have shown little month-to-month volatility over the past six months, further indicating that high levels of housing affordability are stabilizing demand. This has also been seen in recent months in the new home sales figures. Inventories of unsold homes remain extremely high, but if sales continue to show stability and starts come down substantially further, a more balanced market could be achieved by the first part of next year. –Ted Wieseman, Morgan Stanley

· In what should be the best month of the traditional summer buying season the market observed a modest increase of 2.0%. The fall in prices did facilitate a decline in inventories, which provided a rare bit of sunshine in the market. However, at this juncture the conditions for a bottom to form in the housing sector are not ripe. Long-term rates have reassumed an upward trend and it is still quite difficult to obtain a non-conforming jumbo loan. While there are some good bargains for cash buyers and those that have information on prime foreclosures, the market is extremely fragile and has many more months of difficulty in front of it. –Joseph Brusuelas, Merk Investments

· Since October, existing home sales have been in a narrow range from 4.89 million to 5.06 million, suggesting that we could be near a bottom in the resales market… The months’ supply figure stood at 10.8 months in May, down marginally from 11.2 in April but still the second-highest level on record (the series began in 1999). Thus, although the resale market is showing some signs of stabilization in demand, there is still a glut of inventory that could take at least another year to work off. –Omair Sharif, RBS Greenwich Capital

· The real story in the monthly home sales data lies in the details on inventories and prices, and the bottom line to this story is that inventories remain at levels that suggest further significant declines in prices in the months ahead, particularly as the demand-side drivers of home sales continue to soften. There are some signs that sales of existing homes are forming a bottom, as suggested by the behavior of the six-month moving average of sales shown in the first chart below. –Richard F. Moody, Mission Residential

· We do think sales are approaching a bottom, as improved affordability has likely stimulated demand. In addition, an increase in foreclosure sales has likely contributed to the leveling off in sales. Foreclosures typically sell quicker than regular sales since lenders are motivated to clear the stock of foreclosures. As such, they often sell at a discount, which puts downward pressure on home prices. The existing home market is still very much out of balance, with 10.8 months of supply on the market. We expect the market to remain out of balance this year and most of next year as foreclosures add to inventory and sales remain sluggish. –Michelle Meyer, Lehman Brothers

· Existing home sales peaked during the summer of 2005 and have fallen steadily ever since. However, the pace of contraction has slowed in recent months with gains in 2 of the last 4 months. Nevertheless, the inventory of unsold homes remains very high, putting downward pressure on both new construction and particularly home prices. Home prices have been falling on a year-on-year basis for almost 2 years and, in recent months, the price declines have accelerated. Home sales will fall as long as home prices are falling, continuing to create turmoil in mortgage-related finance. –Stephen A. Wood, Insight Economics

In my earlier post, I noted the recent increase in median home prices which is positively correlated with the increase in home sales. Have we bottomed out? Personally, I think we’re there or real close. Now for the LONG climb back…

Lawns offer positive carbon footprint

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Sustainability is a major topic of discussion these days, particularly at the recent Seeley Conference. It may not seem like it, but ultimately sustainability IS an economically-based subject whether you view it from a short-run or long-run perspective. The more the Green Industry can demonstrate its sustainable practices (and mitigate those that aren’t), the better off economically the industry will be.

Several folks in the media and otherwise have articulated the need for our industry to be proactive in demonstrating its “sustainableness.” Project Evergreen, America in Bloom, Arbor Day Foundation are examples of just that.

Research is desperately needed to document the carbon offset, or better yet, the “oxygen credit” that is provided by our industry’s products. One such piece of research recently released is a study that documents the fact that healthy turfgrass can capture as much as four times more carbon from the air than is produced by lawnmower engines.

See http://www.opei.org/carbonreport/ for the full report.

Other university studies are underway, but it will take some time because life cycle analysis is far from an exact science at this point. But in the historic words of Larry the Cable Guy, let’s “Git-R-Done!”

Glass is half full…

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The WSJ reports:

“Home resales rose to a 4.99 million annual rate, a 2.0% increase from April’s unrevised 4.89 million annual pace, the National Association of Realtors said Thursday. The median home price was $208,600 in May, down 6.3% from $222,700 in May 2007. The median price in April this year was $201,200 (see chart above).

High inventories have exerted downward pressure on prices. The decline has kept would-be buyers from signing off on property as they wait for still-lower price tags.”

Reuters reports that:

“The housing market has been shaken for months by a credit crunch and a wave of failing home loans that have spooked lenders and prospective buyers.

The disappointing new homes data is nonetheless in line with the pace of the last eight months, which have seen sales hover around the 5 million level, said Paul Bishop, a senior economist with the National Association of Realtors.”

Aren’t these reports missing the following seemingly good news: After declining for 7 out of the last 8 months, median home prices have increased for 3 months in a row, and the median price of $208,600 in May was 6.65% above the $195,600 level in February?