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

ANLA webinar now online

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Click here to watch the recording of my latest webinar sponsored by ANLA. Here is the webinar description:

Got Recovery?

In the aftermath of arguably the worst downturn in recent economic history, the economic climate continues to feel sluggish. Though we are in the midst of what the media refers to as a “jobless recovery,” many green industry firms continue to struggle to survive. In this webinar, Dr. Charlie Hall will provide an overview of where do we stand in terms of today’s economy, how far down the path of recovery are we, what is the near-term economic outlook for 2010, and more importantly, what do we do NOW to position ourselves for spring and beyond?

Getting better SLOWLY

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The latest from Bill Conerly, www.ConerlyConsulting.com. Click on each graph below to enlarge.
Charts are in PDF at: http://www.ConerlyConsulting.com

Commentary on last week's market performance

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October is known as a month full of market surprises. For example, the Dow fell 508 points on 10/19/87 (22 years ago today), a record drop of 22.6% for the 30-stock index. The day became known as “Black Monday.” The Dow’s previous worst percentage drop was a 12.8% loss on 10/28/29, generally considered to be the start of the Great Depression. But October 2009, brings a recovery in the stock market? Few analysts can substantiate what is causing this “jobless recovery” amidst record government spending.

Last Wednesday’s close over the arbitrary 10,000 benchmark was greeted with enthusiasm by financial markets nationwide. Time will tell how soon the index will slip back below 10,000 — as it has done 25 times previously. The S&P; 500, the more widely-used benchmark of investment managers, finished last week up +22.8% YTD as corporate earnings results from the 3rd quarter continue to impress market watchers. The significance of the mild inflation number for the country reported on Thursday was not lost on investors, showing that earnings growth has occurred without igniting inflation pressures (source: BTN Research). In the first 9 months of 2009, the total market value of all US stocks increased by $2.0 trillion, reaching $12.6 trillion on 9/30/09. Stock values fell by $7.1 trillion during 2008 (source: Wilshire).

The final results for fiscal year 2009 are in and they are not pretty. $2.1 trillion of tax receipts were not nearly enough to cover $3.5 trillion of government spending. The resulting $1.4 trillion of debt for the entire fiscal year was more than 3 times the previous record ($455 billion) set just last year (source: Treasury Department).

Lastly, the Senate hopes to merge together health care bills from 2 different committees this week, leading the way to floor debate by the full Senate on the issue just a week from today. It’s going to get interesting folks!

Are We Leaving the Recession Behind

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The latest from Robert Barr in the Floral Trend Tracker. He makes a good point about the money that federal, state and local governments are borrowing for their programs.

With a number of economic indicators flashing green over the past couple of months, it sure seems like we’re leaving the recession behind. Even new home sales are rebounding, up 15% in the last three months (May, through July) relative to the three months prior (February through April), even after seasonal adjustment.

But even if we’re in a “statistical” recovery, the economic climate will feel sluggish. Expect to hear a lot about our “jobless” recovery well into 2010, as though that’s a contradiction in terms. It isn’t; the last two recoveries were marked with very low job growth for quite some time. In fact, the jobless recovery of 1992 felt so oppressive that the presidential campaign treated it like a recession: “It’s the economy, stupid!” And 20 months after the recovery began (as was determined later), the poor economy was a key contributor to President George H.W. Bush’s defeat in November 1992.

So it ís not surprising that, even as we get some positive reports, we see that employment is still falling, with the number of payroll jobs 4.2% lower than it was a year ago.

Why such a lackluster recovery? The economy is still making major adjustments to the severe imbalances that created the worst financial crisis since the Great Depression.

Bank lending activity remains low, especially for small business expansion. The willingness of banks to lend to consumers continued its two-year descent during the summer. True, analysts were quick to point out that the declines were less severe than those of a year ago. But still, after the plummet of the past year, we’re still falling to even lower levels today. Bank lending standards across all major loan categories to households and businesses also continued to tighten.

For their part, households are improving their balance sheets ñ saving more and consuming less. Many suggest that this lack of spending is harmful to the economy — as if to be economically beneficial, income should be spent immediately and not saved. But that’s a misconception. It’s easier to see the beneficial effects of immediate spending (Look! They bought cars, homes, and furniture!) but the beneficial effects of saving, while less visible, are nonetheless critical to long-term economic growth and prosperity. More household savings expands the pool of available capital for firms to borrow to expand their business.

That means funding the same level of economic activity will require less borrowing from overseas and lower interest rates in the economy.

Then the issue becomes: if rates are low and funds for lending are available, are businesses willing to borrow and expand production? How confident are they that the economy will be ready to buy their expanded set of products? As always, business confidence and entrepreneurial assurance will need to be in place to generate a sustainable recovery.

Looking long-term, the massive increase in government debt will offset the progress households are making in correcting their debt imbalances. The deficit-to-GDP ratio in 2008 was 3.2%; in 2009 it’s expected to be 11.2%, and the administration ís ten-year forecast projects that the U.S. will exceed $9 trillion in total deficits just over the next ten years. That’s in addition to the $5.8 trillion national debt we’ve already accumulated.

Why is that important for future economic growth? Because the money that federal, state and local governments borrow for their programs can’t be lent to businesses to fund private-sector projects. Consequently, the more we allow the government to borrow, the less we have to channel toward productive investment.

Inflation fears calmed…for now.

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I received an interesting question from a green industry grower this morning:

I appreciate your informative blog. Thanks. In the January conference we heard that on the rebound inflation will devalue dollars and we should convert cash to inventory as goods will increase in value. We also were advised to convert to fixed rates on loans. Our banker is unsure if we will see this inflation as we have in exiting past recessions. It seems that spending will continue to be weak for several years and commodities which were falsely valued high by traders are still in oversupply and profitable with foreign oil still draining too many dollars from the US at a healthy profit to producers and suppliers. Do you have any thoughts on this now you could post?

I think the best way to attack this question is by examining the usual components of inflation — that is, trends in the producer price index and the consumer price index.

In their report released on Aug 18, the BLS reported that wholesale prices in the U.S. fell more than forecast in July as energy costs receded, capping the biggest 12-month drop on record and showing inflation will not be an immediate concern for Federal Reserve policy makers.

The 0.9 percent decrease in prices paid to factories, farmers and other producers followed a 1.8 percent gain in June. Excluding food and fuel, so-called core prices unexpectedly fell 0.1 percent.

A record amount of excess capacity will prevent production bottlenecks from developing, indicating wholesale prices will be slow to recover even as the economy improves. A lack of inflation was one reason Fed policy makers last week reiterated a pledge to keep the benchmark interest low for an “extended period.”

On the consumer side of things,

U.S. consumer prices fell last month at their fastest annual pace since 1950, an indication that inflation isn’t a threat to the economy or the Federal Reserve. The consumer price index was unchanged on a monthly basis in July from June, the Labor Department said Friday, matching economist expectations, according to a Dow Jones Newswires survey.

The core CPI, which excludes food and energy prices, rose 0.1%, which was also in line with expectations. Unrounded, the CPI posted no change last month. The core CPI advanced 0.091% unrounded.

Consumer prices plunged 2.1% compared to one year ago, the largest 12-month decline since January 1950. Most Fed officials think a positive inflation rate around 2% is consistent with their dual mandate of price stability and maximum employment.

Even regarding inflationary pressures from an increase in the money supply, most economists now (in 2009) feel less inflationary pressures are likely. For example, Mark Perry reports:

There are some economists who are concerned about future inflation because of the loose, expansionary monetary policy in 2008. I don’t think inflation will be a problem, and here’s why:

The chart above shows the annual growth rate in the M2 money supply (percent change from the same month in the previous year, data here) monthly from January 1960 to July 2009. Notice that:

1. There was sustained double-digit money growth in two periods in the 1970s, and that is what generated the high double-digit inflation in that decade. There was double-digit M2 growth for 29 consecutive months from March 1971 to July 1973 (and nine straight months above 13%), and then again for 30 consecutive months from July 1975 to December 1977, with a high of almost 14% growth in early 1972 (see chart above).

2. There was double-digit M2 growth in 1983, but only for 12 months from January to December of 1983, and this monetary expansion wasn’t enough to cause inflation (see chart below). Inflation never rose above 5% for many years after the double-digit money growth of 1983.

3. There was double-digit money growth in September, November and December of 2001, but inflation in subsequent years never got above 5% (see chart below).

4. The peak monetary expansion of M2 in 2008 was below the peaks in 1971-1972, 1976-1977, 1983 and 2001 (see chart above), and during the recent monetary expansion there has been only one month of double-digit money growth, and that was the peak of 10% in January 2009.

Bottom Line: Without sustained double-digit M2 growth, we won’t have anything close to double-digit inflation. And the historical evidence during the two most recent experiences of double-digit money growth in 1983 and 2001 demonstrates that short periods of double-digit money growth aren’t enough to bring about inflationary pressures. And since recent M2 growth during the “loose” monetary policy of 2008 is actually lower than in 1983 and 2001, there probably can’t be any inflationary pressures that will lead to problems with future inflation. In other words, a single month of double-digit M2 growth in January 2009 isn’t expansionary enough to create inflation.
Hope this helps, Mr. Grower.

From the latest SAF Trend Tracker

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From Robert Barr…

Has the economic storm passed? The trashing of the wind and rain has settled down significantly, and perhaps it’s time for consumers and business to come up out of their shelters, look around, start removing debris, and start the economic recovery.

That’s one way to think about the economic conditions today — but a more appropriate analogy is that the relative calm we’ve seen during the late spring and early summer is only the eye of a passing hurricane. We’ve gone through great economic tumult, especially since September 2008, but there’s still more economic adjustment yet to come.

Two areas of particular concern that haven’t yet grabbed the headlines in the same way that residential real estate has are commercial real estate, where refinancing maturing loans is becoming more and more difficult, and consumer credit cards, which will probably face huge write-offs in the coming few years.

And we’re still facing an adjustable-rate mortgage reset problem, as the popular five-year ARMs taken out in 2005-06 go through the same initial reset phase we saw in subprime mortgages (which generally reset after the first two or three years). One mitigating factor is that today’s lower interest rates mean that the new, reset rates won’t generate the same amount of payment shock seen with the subprime mortgages.

Meanwhile, consumers aren’t spending in the same way they had a few years ago, pushing the consumer savings rate from about zero a few years ago to almost 7% of GDP this spring. That’s prudent, of course, and good news for the long-term health of the economy. Consumers know that jobs are being cut and that the soaring government deficit will have to result in higher taxes down the road. Baby boomers, seeing the devastation in their 401(k) accounts just as their oldest members reach retirement, know they need to save more today to ensure a financially secure tomorrow. All of this is keeping consumers from reaching for their wallets, and it amounts to another difficult economic adjustment.

Meanwhile, in addition to grappling with the recession, businesses face a couple of critical unknowns in how they will be able to operate within the next few years. Whether or not you support national healthcare or the cap-and-trade energy legislation working its way through Congress, there’s great uncertainty about how this will play out in two to five years from now. Sound long-term investment decisions are difficult to make when the rules of the game are subject to such significant change – even apart from whether the changes actually support or harm the business climate. Even if the recovery does take hold, expect another “jobless” recovery as businesses bide their time to sort out the ramifications of what the federal government decides to impose.

Meanwhile, the rate of economic contraction in the global economy accelerated during the first half of 2009, and that of course will harm our exporting industries.

What to make of all this? Despite the media reports of the “green shoots” of economic recovery, we still have many difficult economic adjustments ahead of us that will keep any recovery subdued for some time. And that timetable is subject to whatever comes out of Washington, DC – not a good position for private businesses looking to rebuild after the destruction of the storm of the past couple of years.

Leading indicators show continued improvement

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The Conference Board’s index of leading indicators rose by 0.7% in June after gaining 1.3% in May. This index is comprised of the top 10 economic indicators such as unemployment claims, building permits, and stock prices. In past recessions, sharp increases like the index has experienced over the last 3 months have indicated that recovery was underway.

More light….

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From the Chicago Fed President, Charles Evans:

… there have been some favorable developments of late, and the possibility that the economy is closer to a turning point is stronger now than just three months ago. Although the data have been uneven, our reading of the recent indicators is that the pace of contraction is slowing and that activity is bottoming out. We expect modest increases in output in the second half of this year followed by somewhat stronger growth in 2010.

So what are these signs of improvement that underlie this forecast? First, financial market conditions have improved, with credit spreads and other measures of market stress much lower than they were in late 2008 and early 2009.

Consumer spending, which had dropped sharply since the second half of last year, has been roughly flat so far in 2009. Housing markets, after more than three years of decline, have also shown some signs of stabilizing. Sales of both new and existing homes have appeared to flatten out in recent months, though both remain at very low levels. Meanwhile, homebuilders have reduced their backlog of unsold new homes—a precondition for any recovery in homebuilding. But the backlog of unsold existing homes remains high, and delinquency and foreclosure rates continue to be a substantial risk to the housing market recovery.

Labor markets remain weak, but there has been a (somewhat uneven) decline in the pace of job losses. The May and June average of monthly declines in employment was about half the rate of contraction as the beginning of this year, and newly filed jobless claims seem to have peaked in late March. However, firms are still reluctant to hire, and the unemployment rate reached 9-1/2 percent in June and will likely further increase through the remainder of the year before it flattens out in 2010.

The industrial side of the economy has been especially hard hit this year, but there are signs that the worst of the decline in the sector is in the past. Business fixed investment remains weak, but the decline is getting shallower. Steep inventory liquidations made significant negative contributions to output growth in late 2008 and early 2009. But this means that inventories are in better alignment with sales, so we expect to see less dramatic liquidation in the months ahead. In turn, the smaller declines translate into a net positive for GDP growth. Finally, in the coming months, the fiscal stimulus will continue to have positive influences on the economy.

Currently, core inflation is near 2 percent, a level I generally find acceptable. In the near term, I think the downward forces on inflation will be greater than the upward forces, and we could see some declines in core inflation. But over the medium term I see the risks to the inflation forecast as being more balanced.