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

Ok, now it's official

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The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, November 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions.

The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

The NBER’s historical business cycle data show that the average economic expansion since WWII lasted 57 months (4 years, 9 months). In that case, the current expansion is more than two years longer than the average expansion, depending on when the NBER decides the next recession starts.

For the complete NBER release, click here.

So the obvious question is…now what? Or maybe…so what?

Well, I think it’s imperative that we keep the announcement in perspective in that it simply confirms what many have been saying/feeling for some time now. It’s just that economists need data to confirm economic phenomena.

Your downturn strategy should remain intact, … what do you mean you don’t have one? Click here to review previous strategy-related posts to get you started.

UPDATE: I was asked this morning: Why did it take so long for the recession to become “official”?

Back in the 1920s, the NBER began a research program into our economic history, resulting in a set of dates of economic peaks and troughs. NBER has continued to update this chronology. NBER is an academic organization, and its business cycle dating program is a service to the scholarly research community. It is not meant to be a current commentary on the economy nor a forecast of future activity.

The committee wrestles with two issues when it sees a decline in economic activity. First, it asks if the downturn we’re seeing will survive the inevitable data revisions. Second, if economic activity turns up tomorrow, will the downturn be significant enough that we will call this event a recession. Although it has seemed obvious to many that this is a recession, that’s because no one expected a sudden turnaround. However, the committee does not use such a forecast in its determination. And being academics, there’s really no hurry.

While wrestling with these two issues, the committee also deals with data that may be telling different stories. One reason it has not been obvious to me that we’re in recession is that first and second quarter GDP growth were positive, with Q2 pretty strong. It’s unusual to see such strong growth in the middle of a recession. However, the monthly data that the committee focuses on all showed pronounced peaks.

UPDATE 2: The next question I was asked was: So, when will the recession end? I could take the easy road out and say “see answer above.” Instead, I’ll opt for the second easiest answer and say that there are: (1) a lot of differing viewpoints out there, and (2) there are a lot of unknowns in the mix, and (3) the range of time frames I am hearing put us in recovery mode anywhere from 2nd quarter 2009 to late 2010. Needless to say, a rocket scientist could probably have figured that out. Personally, I think it’s closer to the former than the latter time period.

Keeping on track during tough times

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In times of economic uncertainty, it can be tempting to become protective, and to expend your energy speculating about what this means for your business, or whether in fact you can expect to grow at all during this time. Fear is a very real emotion, yet it can immobilize your business. It can help to acknowledge that nobody (including the experts) knows exactly what’s going to happen, so you are not alone. When the environment becomes challenging, it is actually an opportune time to think about ways to reinvent your business—to change what might have worked yesterday but may not work tomorrow.

Case in point: Psychologists tell us that when economic times get tough, people rein in spending but still splurge on the occasional luxury. What does this suggest for your business? If you sell to consumers, what might they be willing to give up, and what might they still need or desire that you can provide? If you sell to other businesses, what problems will they still have that you can resolve for them? What is most pressing to your clients, and what is less urgent? Such strategic prioritizing can go a long way to help you plan and manage the current crisis.

As you conserve your own resources, this approach will help you identify where you can focus your marketing and sales efforts for the next three to 12 months. Just as you want to avoid the do-nothing pitfall, avoid the crisis management trap of becoming a moving-target organization where panic dictates changing objectives every week. Instead, analyze as best you can with the limited information available today, pick a direction, and move forward—correcting as you go along and the feedback comes your way. As Will Rogers said, “Even if you get on the right track, you’ll get run over if you just sit there.”

Source: Today’s Tips from BusinessWeek.com

Latest labor stats good or bad?

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Is there anything good to say about yesterday’s report from the Bureau of Labor Statistics that the U.S. unemployment rate jumped up to 6.1% while seasonally adjusted nonfarm payrolls declined by another 84,000 jobs?

That’s the subject of Jim Hamilton’s post over on Econbrowser in which he says the economy is now in recession. I’m hesitant to do the same just yet, given my recent concerns with the way we tend to interpret the BLS data and the rising unemployment of unskilled workers due to the recent minimum wage increase. But nonetheless, it is another indicator that conditions are not rosy.

Another unsettling report came just last week, when the Census Bureau released its annual study of household incomes, poverty and health insurance — often called the nation’s “economic report card.” Its hard numbers seemed to confirm how many Americans feel. Sure, we’re prosperous, but prosperity is fraying. Except for the rich, living standards are stagnant. Poverty is up; health insurance coverage is down. Naturally, both Barack Obama and John McCain seized upon the report to claim that their policies would restore progress.

Superficially, the conventional wisdom seems convincing. The Census Bureau found that median household income in 2007 was $50,233. Though up 1.3 percent from 2006, that was still less than the peak of $50,641 in 1999 (all figures are in inflation-adjusted 2007 dollars). Meanwhile, the share of people below the government’s poverty line — about $21,000 for a family of four — was 12.5 percent, up from 11.3 percent in 2000. Finally, the ranks of the uninsured have increased in six of the past eight years. They’re now about 15 percent of the population. Case closed right? Not exactly.

A previous Mark Perry post pointed out one of the problems with historical median household income from the Census Bureau income data is that it doesn’t adjust the declining household size over time. After adjusting for household size, real median income is at an all-time high.

Robert Samuelson points out three more problems with poverty and income data from the Census Bureau: (1) comparing real household income or poverty rates in 2007 to the year 2000 is unfair because 2000 was an artificially high benchmark because of the “tech bubble,” (2) immigration distorts commonly cited statistics for both poverty and income, and (3) Census figures understate income gains by not counting fringe benefits.

Greg Mankiw cites yet another problem with Census income data, citing the NY Times, which reported that “The current poverty measure only counts cash as income, and doesn’t include government assistance like food stamps, housing subsidies and tax credits. Such aid has been devised to help support the poor, but its impact is not calculated by the current measure.”

There you have it — a mixed bag of apples and oranges. “Lies, darn lies, and statistics” as the old saying goes. What’s the bottom line? Whether you call it a recession or not, times are tough; not all over and not to the same extent, but we have more work ahead of us to weather this storm. We have serious problems and its going to take some serious people to lead us through them.

But regardless of who is in national leadership positions, Green Industry businesses must be proactive about conserving cash and emphasizing perceived value in the minds of customers. We must make our products and services more inelastic among our consumers or we will fall the way of other luxury goods in tight times.

Tired of doom and gloom? Part 2

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Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers September 1974. In addition, this algorithm indicates that the data through June 2008 do not yet exceed the recession threshold, and will do so only if things get much worse.

Abstract from “What’s a Recession, Anyway?” by UCLA Professor Edward E. Leamer, NBER Working Paper, August 2008

Coping with a down economy

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As promised, here are a few strategies to consider for coping with a down economy. Some of these steps are radical, while others are a more milder form of defense. Implement them according to the conditions you experience in your market area.

  1. Conserve your cash. Don’t spend a dime on anything that isn’t absolutely necessary to your operation. Examine every personal expense you have to find alternatives to any spending patterns.
  2. Refinance anything and everything you can. Stretch out the payments because getting cash later on will be difficult as more people will apply for loans and banks will become very picky.
  3. Work out a worst-case scenario cash flow projection that projects your company having a decrease in sales. As part of this, determine what expenses will be unavoidable. Look through your cash disbursements. Pre-plan a less expensive alternative to any expense category that you can.
  4. Know your costs well because poor pricing can put you out of business faster. Assume that cost-side pressures caused by a recession will last about two years after a recession is over.
  5. Beef up your advertising/marketing. Everyone else is cutting back. Now is the time to gain “mind share.”
  6. Slowdowns mean layoffs. Therefore, new hires become available and are sometimes available at a lower rate of pay than your current rate. Take advantage of that fact.
  7. If part of your fleet is going to be idle for some time, try to store unused vehicles and get a reduced rate of insurance due to non-use.
  8. Selling off assets during a recession is difficult. Nevertheless, selling off unused equipment reduces insurance and registration costs and property taxes. Convert anything you don’t need into cash well ahead of any signals that your area will be hard hit.
  9. Apply for credit long before you need it. You may have to “borrow” your future, and banks will raise interest rates on high-risk loans as conditions worsen.
  10. Look deeper in your own markets. Can you offer your current customer base a more diversified line of products and/or services?
  11. Review your business insurance to make sure your premiums have been adjusted for the depreciated value of your vehicles and equipment.
  12. Take a look at your estimated tax payments made to the IRS. Decreased earnings call for decreased estimated tax payments.

Cash is “king” during economic slowdowns no matter how mild or severe. Expect your customers to also feel the effect, which means they will pay you at a much slower rate than during the good times. That’s precisely the reason that you’ll need additional working capital to finance your receivables if nothing else.

Run a cash flow working capital projection using 60 days, 90 days, 120 days and even up to six months to be paid from some of your customers. How much cash do you need to survive? Find the answer to that question. Prepare and save for that eventuality and you’ll be ready for a downturn.

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…

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?

Seeley Conference Delivers!

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Wow!

It’s been 48 hours since we closed to door on this year’s Seeley Conference and I am still chewing on some of the stellar presentations that were made.

Jim Marstiller kicked off the conference in good fashion. He is Senior Vice-President of Consulting Services for TNS Retail Forward, a leading management consulting and market research firm specializing in consumer behavior and its impact on retailers, those that supply retailers, and the economy. He is also the author of The Power to Innovate. Jim’s talk focused on growth strategies, category reinvention, brand development, and innovative merchandising solutions. For a publication that provides much of his discussion, click here.

I followed Jim on the program (not an easy task I might add) with a discussion I called Industry 2015, which focused on the driving forces and historical trends of the green industry. For an overview of that talk, click here.

That evening, Bill Lipinski, Chief Executive Officer, First Pioneer Farm Credit discussed the difficulties that many businesses had had in expanding while adjusting to the ever-changing business climate. Very few firms have done this successfully for several reasons: (1) the leap from hands-on management to delegating is difficult; (2) there is often a disconnect between strategy creation and strategy execution; (3) there is a hesitancy to change business strategy to the changes going on; (4) a lack of management systems and information; and (5) a lack of an ability to lead.

I opened the Monday morning session with a discussion of the economic drivers underlying differentiation strategies, particularly addressing the nature of perceived value on the part of our customers. Click here for more on this discussion. You can also click on the “differentiation” label on the right hand side of this blog page for more posts regarding this strategy.

The rest of the day highlighted a series of case studies illustrating firms who have been successful in differentiating themselves in the marketplace including Brian Minter of Country Garden and Minter Garden Center, who has one of the premier gardens & garden centers in the Northern hemisphere.

He was followed by Gary Mangum of Bell Nursery, who has been featured in several trade journals articles (click here). Gary discussed the Bell Nursery model and the unique and innovative ways they carry out their own differentiation strategy in servicing Home Depot.

Ball Publishing’s Jennifer Duffield White finished off the day by asking whether sustainability in floriculture is a tipping point for producers, retailers and consumers. The last morning of the conference, Peter Moran, Executive Vice President/CEO of the Society of American Florists (SAF), concluded the conference with a discussion of the draft sustainable standards for agriculture currently being proposed by SCS, the firm who is behind the Veriflora certification.

Needless to say, it was a busy 2.5 days but well worth it. If you missed the conference, the only respite you have is that your brain probably hurts less than mine right now.

Phantom recession???

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“A funny thing happened on the way to the most predicted recession in US history: it didn’t happen.” I’m not fulling embracing this quotation just yet, but it is interesting commentary by Wesbury and Stein. Click here for their full elucidation.