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

Regional Outlook is Mixed

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If there are strengths in any regional economies, they are largely in two areas emanating from Texas. The first extends to the north all the way to North Dakota. The mid-section of the country is supported by high prices for a broad array of commodities—oil, wheat, corn, and industrial metals, to name a few. There is barely any weakness in any of the large or small metropolitan areas of this region. The second is to the east, extending from Texas to Georgia and the Carolinas. The stability of this area arises from the lack of a housing bubble during past years, which left house prices rather stable and the market less exposed to subprime lending. But in this region, the strength is less uniform. Where considerable investment is taking place, such as in Mobile or Huntsville, AL, or Raleigh, NC, the economies are doing well. Where there is considerable exposure to the manufacture of housing and construction-related materials or to import competition, then it is hard to avoid some weakness. And where there was some overbuilding of housing, as in Atlanta, the economy is more susceptible to a slowdown.

Cracks are widening in some regional labor markets of the West and South. Through February, new claims for unemployment insurance—a proxy measure for layoffs—were rising fastest in those two regions. The rise in new claims in each was about as fast as it was as when the economy entered the 2001 recession. Much of this has to do with both areas’ high exposure to housing-related industries and their weak housing markets. However, with a 20% rise in each region, it seems to be approaching a scale that reaches beyond housing and closely related industries.

Downside risks are prevalent in most regions as consumer spending weakens. This is particularly evident on the West Coast and in Florida, Washington, D.C., and the Northeast, where strong borrowing against home equity in 2005 and 2006 had bolstered spending. The Northeast’s risk is compounded by impending layoffs and weaker income generated by investment banking. Risks will rise more broadly across the country as consumer credit quality falters and other sources of cash for spending disappear. Additionally, if business confidence remains as weak as it is, a falloff in investment spending will hurt the industrial Midwest and centers of tech-producing industries on the coasts and in Texas.

As I have stated in earlier posts, some regions of the country are faring well considering the circumstances. Regardless of what situation you find yourself in, maintain your marketing strategy (or even expand it). Stay the course.

Graphs sources: Moody’s.com

Mother's Day Consumer Intentions

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According to the National Retail Foundation’s 2008 Mother’s Day Consumer Intentions and Actions Survey conducted by BIGresearch, consumers will spend an average of $138.63 this year, compared to $139.14 last year. Total consumer spending is expected to reach $15.8 billion.

When it comes to popular gifts, consumers will shell out nearly $3.0 billion on a special dinner or brunch, $1.2 billion on consumer electronics like digital cameras, digital photo frames and video cameras, $2.0 billion on flowers, $1.4 on clothing and accessories and $1.1 billion on personal service gifts like a trip to a favorite spa or salon. Shoppers will also spend $1.6 billion on gift cards/gift certificates, $696 million on housewares and gardening tools and $672 million on greeting cards.

For the complete survey results, click here.

Mixed news regarding retail sales

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According to the National Retail Federation, retail industry sales for March (which exclude automobiles, gas stations, and restaurants) dipped 0.9 percent unadjusted over last year and were down 0.3 percent from the prior month.

March retail sales released today by the U.S. Commerce Department show total retail sales (which include non-general merchandise categories such as autos, gasoline stations and restaurants) increased 0.2 percent seasonally adjusted from the previous month and increased 0.1 percent unadjusted year-over-year.

“Unseasonably cooler weather created a challenging sales environment for many apparel retailers last month,” said NRF Chief Economist Rosalind Wells. “With the earliest Easter in 95 years, the calendar shift will likely impact April sales as well. In order to get a true picture of retail performance, we will need to look at both March and April sales combined.”

The weak housing market once again had a negative effect on the home furnishing and home improvement categories. Sales at furniture and home furnishing stores decreased 0.3 percent seasonally adjusted from last month and 10.2 percent unadjusted year-over-year. Building material, garden equipment and supplies stores sales decreased 1.6 percent seasonally adjusted from February and 9.6 percent unadjusted from last March.

In spite of the weak selling environment, there were still a few bright spots. Health and personal care stores sales rose 2.8 percent unadjusted from last March but decreased 0.1 percent seasonally adjusted from last month. Sporting goods stores sales also rose 1.5 percent unadjusted year-over-year and 1.4 percent seasonally adjusted month-to-month.

What does this tell us? Consumers will still buy the things that matter most to them! Stay the course. Reports from many parts of the country (undergoing good weather on weekends) points to a favorable spring thus far. Friends in the Northeast do report tougher times however (hurry up spring!).

The results show a cautious household sector, but not one in retreat. Available indexes of consumer attitudes have moved to very low levels — close to or below the lows in the prior two recessions — raising the prospect of a sharp adjustment to consumer spending. However, spending patterns, so far at least, have not softened to the same degree as attitudes.

Employment down: Does this spell recession?

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he unemployment rate rose from 4.8 to 5.1 percent in March, and nonfarm payroll employment continued to trend down (-80,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported Friday. Over the past 3 months, payroll employment has declined by 232,000.

In March, employment continued to fall in construction, manufacturing, and employment services, while health care, food services, and mining added jobs. Average hourly earnings rose by 5 cents, or 0.3 percent, over the month.

The number of unemployed persons increased by 434,000 to 7.8 million in March, and the unemployment rate rose by 0.3 percentage point to 5.1 percent. Since March 2007, the number of unemployed persons has increased by 1.1 million, and the unemployment rate has risen by 0.7 percentage point.

So that’s the bad news. Now for some perspective. The magnitude of the employment decline is pretty small: less than 2/10s of one percent from the peak in December through March. So don’t think of massive layoffs; think of minor adjustment. (I know that to people who have lost their jobs, it feels pretty massive.)

The Wall Street Journal was more inane than usual. They noted the 80,000 decline in jobs and said, “Had it not been for a rise in government jobs last month, payrolls would have fallen by around 100,000.” Let me add that had it not been for the drop in construction employment, payrolls would only have fallen by 29,000. Did you learn anything from this? I didn’t think so.

How should business plans be adjusted now?

Now that you’ve looked at the forest, spend more time with your trees. Look at your own sales by segment and geography. Watch your customers’ sales closely. There’s plenty of variety of there; you need to know whether you are in the happy side of the economy (and there certainly is one) or the sad side.

So does this spell recession? I can only say at this point…maybe. Next month we could (not likely, but possible) see an expansion of employment, followed by nothing but expansion for the rest of the year. If that happens, then we’ll look at these three months of decline and say “blip” rather than “recession.” So anyone who says that we are definitely in a recession now is making a forecast about the next few months. They are probably right, but bear in mind they’re making a forecast, not reading hard data.

How not to save housing…

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I have pontificated previously regarding the value that landscaping provides in increasing perceived home values by enhancing curb appeal, etc. (see value of landscaping in the sidebar). In recent months, I have also reported on the record decline in home values. Intuitively, those who have landscaped their homes “properly” may have offset the devaluation of their home to some degree.

But several Congressional proposals seek to adjust home values artificially by authorizing the Federal Housing Administration (FHA) to guarantee $300 billion of new home loans to strapped homeowners, allowing them to refinance their existing mortgages at lower rates and lower outstanding amounts. Under it, homeowners who borrowed from Jan. 1, 2005 to July 1, 2007 would be eligible for new loans if their monthly payments of interest and principal exceeded 40 percent of their income, well above a more prudent level of 30 percent.

Everyone wins from this arrangement, say its supporters. Homeowners (some perhaps victims of deceptive lending practices) stay in their houses. Neighborhoods don’t suffer the potential blight of numerous foreclosures. Housing prices don’t go into a free fall, depressed by an avalanche of foreclosures. Although lenders take a loss, the losses are lower than they would be if homes went into foreclosure.

But Bob Samuelson provides a differing perspective, saying not only does not make good moral sense, but less economic sense:

About 50 million homeowners have mortgages. Who wouldn’t like the government to cut their monthly payments by 20 percent or 30 percent? But Frank’s plan reserves that privilege for an estimated 1 million to 2 million homeowners who are the weakest and most careless borrowers. With the FHA now authorized to lend up to $729,750 in high-cost areas, some beneficiaries could be fairly wealthy. By contrast, people who made larger down payments or kept their monthly payments at manageable levels would be made relatively worse off. Government punishes prudence and rewards irresponsibility. Inevitably, there would be resentment and pressures to extend relief to other “needy” homeowners.

The justification is to prevent an uncontrolled collapse of home prices that would inflict more losses on lenders — aggravating the “credit crunch” — and postpone a revival in home buying and building. This gets the economics backwards. From 2000 to 2006, home prices rose by 50 percent or more by various measures. Housing affordability deteriorated, with home buying sustained only by a parallel deterioration of lending standards. With credit standards now tightened, home prices should fall to bring buyers back into the market and to reassure lenders that they’re not lending on inflated properties.

If rescuing distressed homeowners delays this process, the aid and comfort that government gives some individuals will be offset by the adverse effects on would-be homebuyers and overall housing construction. Of course, there are other ways for the economy to come to terms with today’s high housing prices: a general inflation, which would lift nominal (but not “real”) incomes; or mass subsidies for home buying. Neither is desirable.

None of this means that lenders and borrowers shouldn’t voluntarily agree to loan modifications that serve the interests of both. Foreclosure is a bad place for most creditors or debtors. Although the process is messy, promising to lubricate it with massive federal assistance may retard it as both wait to see if they can get a better deal from Washington, which would then assume the risk for future losses.

Latest Floral Trend Tracker

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SAF’s Spring 2008 Floral Trend Tracker was released yesterday (see http://news.safnow.org/saftt/issues/2008-03-20/index.html). Some of the highlights included:

  • “During hard economic times consumers might not want to buy a BMW or other luxury items, but there are still people getting married, babies born and funerals to service,” she says. “There is always a need for flowers.”
  • “Flowers and plants are a terrific, cost-effective way to express human emotion across all life occasions,” Williams says. “As business owners, we need to promote that.”
  • Businesses in all industries are beholden to what’s known as a value proposition — the reason, or reasons, a customer should buy your goods and services and not someone else’s.
  • Surviving during an economic slowdown might also entail acquiring the customer base of recently defunct local florist business to help support existing overhead expenses.
  • “Recessions can cause a lot of financial pain. The quicker you can react, the better. Monitor your sales monthly compared to the previous year. Whatever trend you see, project that into the future and make staffing adjustments accordingly. Keep marketing and promoting, but be realistic about what is happening that is out of your control.”
  • Exchange rates influence the trade balance by changing the demand for domestically produced and imported goods and services. A strong dollar will lead to an increase in the trade deficit, because it lowers the price of imports and makes domestic consumers more willing to buy goods from overseas. It also will make U.S. goods more expensive in overseas markets and therefore export growth will be weak. By contrast, a weak dollar will raise the price of imported goods and consumer demand for those goods will fall. U.S. exports abroad will increase since the weak dollar lowers the prices of U.S. goods in foreign markets.
  • A weak dollar makes it more expensive for U.S. consumers and producers to buy foreign goods and services so some will shift to buying domestically produced products instead, which are now relatively more affordable. This increases demand, which is good, but can also lead to an increase in inflation, which is bad. Nor does this increased consumption help every industry, since many service industries see little competition from overseas and will therefore see little change when the dollar depreciates, or falls in value relative to other currencies. Also, companies that depend heavily on foreign markets for their inputs also will suffer from higher import prices, since they increase the cost of production.
  • This economic softness, which many expect will evolve into a recession, is different than the last two recessions, which were both relatively mild and brief. The 1991 and 2001 recessions came about as the Federal Reserve tried to put a lid on rising inflation. It pushed rates high enough to cause the slowdown that it believed would reverse the inflationary trends. With a slowdown in evidence, it changed course and allowed rates to decline, initiating the economic recoveries. But that’s not today’s story. Rates were already low when trouble became evident last year, as housing prices began to decline and mortgage financing tightened up. Lower interest rates from the Federal Reserve can’t directly solve the problem of falling asset prices, but it can provide some cushion.
  • Over the past year, inflation has jumped. In the past twelve months, the Consumer Price Index is up 4.3%. Those are the kinds of readings that should ring alarm bells, on Wall Street and in the Federal Reserve boardroom.
  • On the positive side, we started this re-evaluation of real estate in a fairly healthy economic environment. The unemployment rate has been low, though it’s inching up of late, standing today at 4.9%. Meanwhile, export growth (thanks to the low value of the dollar) and business spending are robust, although weakening credit conditions suggest that business spending in the months ahead will be more restrained.

The "Unambiguous" Recession Won't Hold Me Back!

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The United States is “unambiguously” in a recession, a New York-based forecasting group said on Thursday [3/20/08], citing a nine-month decline in its weekly measure of the economy. The Economic Cycle Research Institute, which correctly predicted the 2001 recession at a time when many on Wall Street still maintained a rosy outlook, said their numbers indicate the economic contraction is already under way.

The recession call puts ECRI in line with a growing number of economists who believe the U.S. is already in recession, with some citing December as the likely start date of the downturn. Martin Feldstein, who heads the highly-regarded National Bureau of Economic Research, has said not only that contraction is under way but also that it could be severe.

And yet, spring is in the air, at least in the South. One step out the front door, putting aside the glare of the computer screen for a moment, elicits an anticipation of buds blooming, birds and butterflies arriving, and cash registers ringing at the local garden center. My box of wildflower seed has arrived, my wish list of plants is nearly finished, and I have big plans for a landscape that has way too much grass. Recession or not, I am about to spend some big bucks transforming the cookie cutter landscape around my new home into my own ‘America in Bloom’ project!

I wonder, just wonder, if there might be other ‘recession resistant’ spenders like me out there? Yes, I know, I have pontificated on this subject before (go to the sidebar of this blog page and click on ‘recession’). But it’s time to put every bit of marketing savy you can muster into motion this spring and test the theory once more. And with a little rain in the right places at the right times (on weekdays please), we might just live to garden another day.

The Fed Did What???

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This will be a long post. In an unprecedented move over the weekend, the Fed bailed out the 5th largest investment bank, Bear Stearns, by providing backing for its sale to JPMorgan Chase. This action is particularly unusual given that a single firm is the target of this bailout strategy, something that hasn’t happened since the Great Depression.

There are only two times that I can recall in recent history that the Fed has intervened in a psuedo-similar fashion and in neither case was a single entity involved. Interestingly, while most economists and politicians loathe public bailouts, in both cases the federal government ulitimately made money on them.

The first was during the 1995 peso crisis, when the Clinton administration offered Mexico $20 billion in loans, with the country’s oil revenues as security. The International Monetary Fund offered another $18 billion. Critics condemned the loans as a bailout. However, in the end, Mexico did not require the entire amount, the country’s finances recovered, and the U.S. ended up making a profit on the interest payments.

The other situation of similar intervention came when the government turned a profit from the Air Transportation Stabilization Board, an entity set up after the 9/11 attacks to support the airline industry. The board utlimately provided a total of $1.56 billion in loan guarantees to six carriers. The government earned just under $350 million from fees and stock sales, according to the Treasury Department.

So what was special about this situation? How did the situation get this bad? John Waggoner and David Lynch offer this succinct explanation:

Bear Stearns failed because its investors no longer believed it could repay its loans — even its short-term, overnight loans. Even worse, investors concluded the bank no longer could stand behind the complex agreements it had with other financial institutions. And Bear Stearns had a web of intertwined agreements with other banks, investment houses and corporations.

So while its demise could send ripples through the economy, its significance helped lead the Federal Reserve to support JPMorgan Chase’s offer for Bear Stearns. As part of the deal, the Fed agreed to fund $30 billion of Bear Stearns assets that would be difficult to sell quickly, raising the possibility that taxpayers could be on the hook for part of the bailout.

The road to Bear Stearns’ collapse — and the Federal Reserve’s response to it — began with the housing bubble. As home prices soared to economically unsustainable levels, fewer people could afford to buy. In response, banks and other lenders created new types of mortgages, which made loans affordable to people who normally wouldn’t qualify for a conventional 30-year mortgage.

The beauty of these subprime mortgages, at least from a mortgage broker’s point of view, was this: Banks and brokers collected fees for closing the deals but faced no risk once they sold the loans to Wall Street.

Wall Street was eager to buy subprime loans, mix them with other types of debt, package them into complex securities and sell them to other investors. As long as housing prices continued to soar, everything seemed fine. Borrowers in shaky loans could refinance their loans or sell their homes for big gains. Investors in the new securities that Wall Street created could enjoy rich interest payments.

Once the housing market started to fall, though, borrowers started to default on mortgages. As defaults piled up, the complex securities Wall Street had created from those mortgages began to crumble. More and more lenders grew wary of making loans, especially if the collateral was mortgage-backed securities.

Bear Stearns was one of the biggest underwriters of complex investments linked to mortgages. Two of its hedge funds, heavily invested in subprime mortgages, folded in July. Bear’s investors became increasingly reluctant to do business with the company. Despite the company’s assurances that it had plenty of cash on hand to continue operations, it collapsed Friday.

The story of Bear Stearns isn’t just a saga of a spectacular Wall Street failure. The company’s failure signals far deeper problems with the nation’s economy and raises questions about the consequences of Bear Stearns’ problems for ordinary Americans.

So how will all of this affect you???

The yields on money market mutual funds and bank deposits will fall, as the Fed continues to cut interest rates. Stock prices will continue to be extremely volatile. The good news is that financial markets have not collapsed. The stock market bounced back on Tuesday, with the benchmark S&P; 500 experiencing its best day since October 2002.

The value of the U.S. dollar will continue to sag, thanks to lower interest rates. As interest rates here fall, global investors sell their dollar holdings to find investments with higher returns. That pushes the dollar’s value lower — meaning Americans face higher prices.

Notable quotes that I think reflect the underlying current of these recent events:

“Recessions are almost always crisis of confidence, and that’s what we’re having right now” — David Wyss, chief economist at Standard & Poor’s.

“The market was being run by mathematicians that didn’t know financial markets. And you keep hearing… ‘that event should only happen once every hundred years, according to my model’. But those every hundred years events are coming along every two or three years, which should raise some questions.” — Former Federal Reserve Chairman Paul Volcker.