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

It still comes down to local economic (and weather) influences

by

I’ve reported in a lot of seemingly negative economic news lately, but it remains unclear whether the current state of affairs meets the economists’ definition of a recession (a widespread decline in economic activity lasting more than two consecutive months). But, to take a line from the political world, all economics is local.

For example, there are a few economic pundits who proclaim that we are already in recession. Others counter with other data & statistics to the contrary. One thing is for sure, some states have most certainly experienced a period of contraction. But this has been far from uniform with a dozen or so states experiencing severe contraction while others have experienced some expansion (according some economic indicators) in recent weeks.

While Green Industry business owners and workers in certain parts of the country have weathered recession-like conditions for months (e.g. job losses, home foreclosures, declining consumer confidence, lower business spending), others that I have talked to have been doing ok. So it seems to me that [as in the past] some areas are likely to feel less of an effect from the crawling economy than others.

The main reason? Obviously some areas are experiencing more of a housing “bust” because they first experienced more of a housing “boom.” Those communities who learned hard lessons from recessions past and have diversified their local economies will obviously fair better than those who tend to rely on a small set of local enterprises.

What does this have to do with you? First of all, it is way to early to throw in the towel! Second, even the shrewdest of pundits are not able to predict the weather patterns in your area, which has almost as much impact as local economic conditions — maybe even more in some years. As my friend Bill Gouldin of Strange’s Florists, Greenhouses, and Garden Centers in Virginia puts it: “Economic downturns are like getting the flu; rainy weekends in the spring are like pneumonia; and drought on top of that is cardiac arrest!“

So continue to put your best differentiated foot forward, exceed customer expectations, and keep spreading the message about the healthful aspects of fresh flowers, the positive ROI that landscaping adds to curb appeal and home values, and how we were “green” before green was cool (to quote Tony Avent of Plant Delights Nursery)!

The Home Depot "Index"

by

Home Depot Inc. said Tuesday that fourth-quarter profit fell a sharper-than-expected 27% after the declining housing market hurt demand for its building and home goods supplies and the outlook for 2008 remains “challenging.”

Declining housing and credit markets have hurt consumers’ appetite for home supplies provided by Home Depot and rival Lowe’s, which said Monday that profit dropped 33%, with sales at stores open at least a year declining 7.6%.

To reduce costs, Home Depot said in January it would cut 10% of its headquarters staff, following moves to slow the pace of its stock buybacks and advertising-spending growth. The company, however, said it remains committed to $2.3 billion in capital spending this year. Home Depot has spent money on projects to make stores cleaner and brighter and improve customers’ experience after it lost market share to Lowe’s and other competitors.

What to make of this?

  • DIY retail sales will most likely continue to crawl. Of course, this is no surprise since lawn & landscape services have increased in recent years to offset declining DIY sales due to more DIFM (do-it-for-me) purchases.
  • Growers who sell to Home Depot and Lowe’s will still need to offer differentiated programs as usual — and pay particular attention to shrinkage and gross margin on a store-by-store basis.
  • Landscape service firms need to ratchet up the marketing efforts — especially emphasizing the return on investment from lawn & landscape improvements (see earlier posts).

Pay me now or pay me later

by

An insightful commentary from Robert Samuelson yesterday provided an excellent perspective to the recent discussions regarding recession and stagflation. For example:

Naturally, no politician acknowledges the self-evident implication: that recessions, though unwanted and hurtful to many, are not just inevitable; sometimes they’re also necessary to prevent the larger and longer-lasting harm that would result from resurgent inflation. Interestingly, many academic and business economists who have more freedom to speak their minds suffer the same deficiency. They treat every potential recession as a policy failure when it is often simply part of the business cycle. They thus contribute to a political climate that, focused on avoiding or minimizing any recession, may perversely aggravate inflation and lead to much harsher recessions later.

For the rest of this insightful dialogue, click here.

Another interesting treatise on how current monetary policy is not addressing the real issue is provided by Allan Meltzer, the eminent economist and monetary historian, who thinks the Fed is repeating the mistakes of the 1970s. Click here.

How to combat falling consumer confidence

by

The University of Michigan’s consumer sentiment index tumbled to 69.6 in its preliminary February reading from 78.4 last month, marking its lowest point since February 1992 when the economy was emerging from a recession. The component of the index that gauges consumers’ expectations — a possible sign of their willingness to spend — dropped to to 59.4 from 68.1. Time will tell whether the infusion of stimulus rebate checks will counter this trend. Regardless, now is the time for the industry to promote the value that landscaping provides in increasing perceived real estate values. A recent study by the S-1021 Multi-state research committee provided key findings regarding the effects that landscape design sophistication, plant size, and diversity of plant material has on consumer perceptions of home value.

Design sophistication accounted for 42% of the value added to the home, so clearly doing more than foundation plantings yields a greater return.

Plant size accounted for 36% of the value added to the home, so larger plantings translate into greater value.

Diverse plant material accounted for 22% of value of the value added to the home, so it appears that having many large numbers of different plants was not as important.

Adding one or two island beds (increasing design sophistication) can alone add 2% to the perceived value of the home.

Although a small investment (less than $250), colorful annuals and perennials added nearly $1000 to home value; returning 400% on the investment.

Moving from the least valued landscape to the most valued landscape, perceived home value increased, on average, 8.6% across all states included in the study.

A landscape is a good investment, yielding a greater than $1 return in home value for every $1 invested in the landscape.

Landscapes are one of the only home improvements that increases in value (and size) over time. Other renovations (e.g. bathroom, kitchen) typically yield less of a return than the amount invested.

Clearly, installing more than foundation plantings yields a greater return for consumers. Curvilinear beds are effective design elements in adding value to the home.

Obviously, this is vital information for landscape firms and retail garden centers to include in their marketing and sales literature. To view more details of this study, click here.

Weak dollar affects flower imports

by

A recent article in the Houston Chronicle recently highlighted the plight of the Columbian flower industry in the wake of the devaluation of the dollar in the U.S. Since 6 of every 10 flowers sold in the U.S. hails from Columbia, Columbian flower profitability is extremely sensitive to demand impacts caused by the economic slowdown stateside. As a result, the income (in pesos) of Columbian growers has plummeted in spite of their worldwide exports increasing to $1 billion last year. About a dozen large Columbian flower farms have closed in the past 3 years, eliminating about 15,000 jobs. For the complete story, click here.

Effect of Stimulus on Green Industry

by

To combat the recent slowing of the U.S. economy, Congress is currently working to develop a fiscal-oriented stimulus package. The House has approved its version and the Senate is currently attempting to do the same.

The House plan would send rebates of $600-$1,200 to about 111 million Americans who receive paychecks of $3,000 or more, plus an additional $300 per child, with less available to individuals with income in excess of $75,000 and couples making more than $150,000. The Senate version has checks of $500-$1,000 for a broader group that includes 20 million seniors and 250,000 disabled veterans, and taxpayers making up to $150,000 — or $300,000 for individuals. The Senate package also includes a $14.5 billion unemployment extension for those whose benefits have run out, $1 billion in heating aid for the poor — a program that enjoys broad bipartisan support — and a tax break that allows businesses suffering losses to reclaim previously paid taxes. It includes $10 billion in mortgage bonds to help homeowners refinance their loans and several tax breaks for renewable energy. – Houston Chronicle, 2/06/08.

Recent debate over the ability of the $148-$157 billion stimulus package being considered by Congress to actually bolster the domestic economy begs the obvious question: What will be the potential impact of said stimulus on the economy and how much of it will translate into sales of green industry products and services? Not an easy question to address, but perhaps we can glean from the experience of the 2001 stimulus package to draw some conclusions.

In the summer of 2001, the government mailed a total of $38 billion in $300/$600 one-time rebate checks to two-thirds of U.S. households. A 2004 study by U.S. Labor Dept. economists, Princeton University, and the Univ. of Pennsylvania estimated that the rebates increased aggregate consumption expenditures by about 0.8% in the 3rd quarter of 2001 and 0.6% in the 4th quarter. Two University of Michigan economists found that the tax incentive added 100-200,000 jobs and increased GDP by a scant 0.1 to 0.2%. – WSJ, 1/19-20/08, p.A6. One other [debatable] point is that University of Michigan economists estimated that only 20 percent of the 2001 stimulus rebate check injection was actually spent on consumer goods. The rest was used to either pay down debt or put into savings. — Austin American Statesman, 1/19/08, p.A17.

Interestingly, this time around, according to Jason Furman at the Brookings Institute, as many as 57 million households (37% of total households) would receive no benefit under the plan as currently structured.

Of the households that may indeed receive rebate checks this year, the timing of their receipt may have an influence on whether any expenditures are made on lawn and garden products and services. If checks are received by mid-to-late May or early June, there may be opportunity for such spending to occur in lawn and garden retail outlets. Otherwise, the vast majority of purchases may end up on ‘unnecessary plastic objects’ from offshore manufacturers (e.g. China) thereby being a primary stimulus for economies other than ours!

Another point to consider is that rebate checks (by themselves) are not likely to spur any lifestyle changes or fund any major asset purchases. This is in keeping with the late economist Milton Friedman’s “permanent income hypothesis” which said that people do not change their spending habits based on small blips in their income. In short, you can’t fool people into thinking they are richer than they really are.

State of the Union

by

Early in his SOTU speech, President Bush highlighted two hot-button issues on the Hill — the economic stimulus package and earmark reform. “The temptation will be to load up the bill,” Bush said of the stimulus plan. “That would delay it or derail it, and neither option is acceptable.” Those lines drew applause from the GOP side of the aisle, but not from Democrats. It’s worth noting what Bush didn’t say — that he would veto the package if the Senate tinkers with it too much. For the complete transcript, click here.

Economic Outlook for 2008

by

Robert Barr, an economist in Washigton, D.C. says we’re in for more rough sledding well into 2008. Even the chairman of the Federal Reserve has announced that he expects the economy to “slow noticeably.” Still, it doesn’t appear that we’ll skid into a recession in the coming six to nine months as the economy continues to go through some critical realignments, but the mood will likely hang heavy until at least next summer. Let’s take a look at what the economy is having to battle.

  • High oil prices. With prices nearing $100 a barrel as of mid-November 2007, consumers are seeing higher prices at the pump, and $4 per gallon during 2008 isn’t out of the question. For consumers, the higher price acts like a tax hike, leaving less to spend elsewhere.

  • Housing market problems. Home values are in retreat after many years of forceful increases. The most adversely affected may be those homebuyers of the past couple of years who really couldn’t afford the loan’s terms and were counting on higher home prices to help them refinance when it came time for the monthly payments to readjust. Oops. Foreclosures are up dramatically, especially on exotic loans to borrowers without strong credit records. Still, the problem is relatively contained – if you don’t need to sell or refinance your home over the next year, any declines are only on paper (and, for the most part, follow years of strong gains).

  • Credit market recalibration. The credit markets are now trying to determine just what the right price is for a given pool of underperforming mortgage loans. With appraisals in question and foreclosures on the way up, these loans are far riskier than Wall Street had previously reckoned. The uncertainty has endangered many home lenders and mortgage investors in general. Wall Street is working through a credit realignment that will take several more quarters to resolve.

  • Low dollar. The dollar has weakened significantly, which is driving up the cost of imports. This is good news, generally, for American domestic manufacturers and the domestic tourist industry (American tours are cheaper for overseas visitors). Floral buyers who purchase foreign-grown flowers will likely find little relief from the low dollar this year.

  • Falling stock market. Equity values are struggling, having given up a lot of ground in November 2007. Consumers feeling less wealthy because of shrinking investment portfolio values and declining property prices can’t be expected to keep spending at the rates seen during the last several years.

So, why not a recession in 2008? Because the economy remains fundamentally strong. Productivity growth toward the end of 2007 was strong, and employment growth remains decent. The Fed loosened monetary policy in the fall of 2007 and is expected to make more significant easing moves during the first half of 2008. This will make the high-profile economic realignments easier to manage.