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

Increase marketing now!

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It really has been an interesting week of economic news:

  • Real GDP growth has been better than expected (good).
  • Real personal disposable income grew at highest rate in months in April (good).
  • Consumer confidence dropped for a fourth-straight month to 59.8, the lowest since 1980 (bad).
  • Unemployment’s only running at 5% while interest rates are quite low (good).
  • One-year inflation expectations grew to 5.2% (bad).
  • Falling housing prices continue to be a significant source of down-side risk to the economy (bad).
  • The EIA is forecasting gas prices below $3.50 by the end of this year, and below $3.00 by the end of next year (good).

Bottom line for green industry firms: As I have said many times, stay the course. Also consider increasing your marketing expenses. Yes, you read that correctly. Increase your spending on marketing right now! As others are making cutbacks (and marketing is usually the first thing to go during hard times), increase your marketing efforts to gain increased “mindshare.” While you should be spending 3-5% of gross sales on marketing normally, consider increasing this to 5-8%.

Speak when others are quiet and even a whisper can be heard. Imagine if you shout.

Recent GDP Growth

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Revised real GDP estimates were released yesterday. Data are on an annual percent change basis from a year ago and the shaded area represents the 2001 recession. Talk about a picture being worth a thousand words…click on the graph to enlarge.

Latest labor data doesn't support recession scenario

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From today’s BLS employment report, here’s what probably won’t get reported. According to the more comprehensive Household Survey Data (which unlike the establishment data, includes the self-employed, unpaid family workers, agricultural workers, and private household workers), there were 146.331 million Americans employed in April (see chart below), which is 618,000 higher than April of last year (145.733 million jobs) and 362,000 higher than March of 2008 (145.969 million). Note also what happened to employment levels for both measures during the 2001 recession. Much different than 2008. Hmmmm.

Also, in case you’re wondering. Neither the establishment nor household survey is designed to identify the legal status of workers. Thus, while it is likely that both surveys include at least some undocumented immigrants, it is not possible to determine how many are counted in either survey.

Yet another 1/4 point

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The Federal Reserve lowered the benchmark U.S. interest rate by a quarter point to 2 percent and indicated it’s ready to pause after seven cuts since September. It said that “economic activity remains weak,” but added that its measures “should help to promote moderate growth over time.”

The action came just hours after the Commerce Department reported that gross domestic product GREW in the first quarter. The increase was a meager 0.6%, the same as in the fourth quarter of 2007, but it was still above zero. It may be semantics, but just the same, don’t count on any official recession announcement any time soon!

We economists sifted the Fed’s statement for hints of whether the Fed was done cutting but there were no obvious clues, indicating that the Fed doesn’t want to paint itself into a corner on future actions.

Also noticeably absent was any mention of recession. It said, “Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.” On inflation, the Fed said it “expects inflation to moderate in coming quarters.”

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.

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.

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

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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"

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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).