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

Higher minimum wage effects

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Teenage unemployment (16-19 years old, seasonally adjusted) for July (20.3%) was at the highest level in more than 15 years. It seems like that would be pretty newsworthy, but it received almost no media attention. Plus, the attention it did receive was mostly off-base, blaming on the country’s “economic malaise” and “economic downturn,” without a single mention of the increase in minimum wage.

The only newspaper report that linked the 20.3% teen unemployment rate to the increase in minimum wage was a story in the LA Times, which quoted David Resler, economist at Nomura Securities:

“The July jump in the federal minimum wage rate appears to have had the predicted impact on teen employment: The higher required rate enticed more teens into the job market to search for a smaller number of jobs on offer.”

Demand curves slope downward, whether it’s the demand for gasoline, the demand for cigarettes, or the demand for unskilled workers. We can argue about price sensitivity, elastic demand vs. inelastic demand, availability of substitutes, etc., but higher prices or wages result in a reduction in the quantity demanded. That is, we can argue about the slope, but the slope of the demand curve is always negative.

The bottom line: higher wages for unskilled workers equates to fewer jobs for unskilled workers which equates to higher unemployment rates for unskilled workers.

Core inflation holding relatively steady

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According to Brian Wesbury and Bob Stein (click here), “Inflation is the leading menace to the economy.” Although I usually agree with their postulate, I don’t see inflation as much of a “menace” right now. The core CPI inflation on an annual basis was 2.5% in July, barely above the 10-year average of 2.21%, below the levels close to 3% between mid-2006 to early 2007, and way below the 4.58% average since 1970 (see graph below).

IMHO, unless and until the core CPI inflation starts to rise, inflation is not a big problem. For example, inflation was a huge problem in the 1970s and early 1980s, but it was when CORE CPI INFLATION was increasing by double-digits, not just oil, energy and food prices. By definition, inflation is a phenomenon when all prices, in general and on average, are rising, not just food and energy. With core inflation so low and stable, I don’t see how inflation can be a menace. And with oil prices plummeting and the dollar soaring, look for August inflation, both overall and core, to moderate.

Location, Location, Location

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This past week I spent time at the Researchers Conference at the SNA (Southern Nursery Association) Trade Show in Atlanta. I talked with a number of growers and retailers and found the conversations similar to those at previously attended conferences — some folks have really struggled this year, some have held even, and others have done “quite well” having both increased their prices and experienced increased sales.

It certainly causes one to reflect on the reasons why this diversity in business experiences have occurred this year. There are several factors, as we have discussed previously within these blog pages. Some are pertinent to the individual firms themselves (e.g. a well-grounded differentiation strategy for instance) and other factors are purely external to the firms strategy (e.g. the effects of a down economy).

I pondered another possible external factor that we have often referred to a “location, location, location” as I read this week’s BusinessWeek. It has an interesting slide show and article about the “Real Estate Boom and Bust in the Same Metro Areas” (article here) which looks at the best and worst-performing zip codes in the 20 largest metro areas. EconomicPicData blog summarizes the BusinessWeek data in the chart below.

For example, in Dallas’ Preston Hollow area (75220 zip code) there has been a +33% increase in asking price over the last year, with a median list price of $310,564 and average marketing time of 125 days. In the Fort Worth area (76110 zip code) of the Dallas metro area, asking price has decreased by -19%, with a median list price of $104,538 and average 118 days on the market.

The bottom line — There is no “national real estate market,” it’s thousands and thousands of local real estate markets. As these data show, there’s not even a single “local real estate market” by metro area, it all comes down to zip code areas. Since there are about 43,000 zip codes in the U.S., that ‘s probably an approximation of the minimum number of local real estate markets, and many local markets probably vary within a zip code. So where you live and operate your business certainly affects business performance.

Dollar is rebounding

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The U.S. Dollar index for major currencies reached its highest level this year, and is at the highest level since December 21, 2007 (see chart below). Oil fell yesterday by almost $5 per barrel in the spot market to $112.43 (brent spot) and $115.20 (WTI) and below $115 in the futures market. The stock market rose by +300 points.

These are the good old days…

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Interesting commentary from Jeff Jacoby in yesterday’s Boston Globe (click here). Goes back to the adage of whether you consider the glass half full or empty, or just another thing to wash!

There are a lot of comparisons in the media of today’s economic conditions to the inflationary 1970s and even the Great Depression and the 1930s (see shaded areas below). The chart below shows the annual Misery Index from 1930 to 2008, calculated as the sum of a) the CPI inflation rate and b) the unemployment rate.

Notice that today’s single-digit Misery Index of 9.7% isn’t anywhere near to the double-digit levels throughout both the 1930s and the 1970s, with peaks around 20% in both decades. The Misery Index is also lower today than during most of the 1980s.

Not to dismiss the current economic contraction, but a long-term perspective on the part of green industry managers is needed. This is the 11th “recessionary” time period over the last 60 years. My point — it is not the first, nor will it be the last — on average they occur every 6 years.

We could even go so far to say they are a part of normal business cycles. A clear-minded, deterministic, strategically visionary mindset will probably be the only thing separating those who survive and those who don’t. Stay tuned to future posts on specific strategies to compete in a down economy!

Yet another successful OFA!

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In spite of current economic conditions, attitudes were fairly positive at OFA this week. Several conversations with greenhouse growers across the country once again confirmed the fact that those employing differentiation strategies are holding their own. A few reported anecdotally of sales increases this spring [one said ~20%), with strong carryover into June.

If you missed it, check out the new OFA blog entitled “On Location At Short Course” from the staffs of Greenhouse Grower magazine and Today’s Garden Center magazine.

Click here to view.

Middle class expanding — globally, that is.

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While much attention has been placed on the shrinking middle class here in the U.S., Jim O’Neill, chief economist at Goldman Sachs, offers an interesting commentary of the expanding middle class globally in this weeks Financial Times:

In the midst of the current widespread gloom and doom in the west, it is important not to lose sight of the true structural themes shaping our era.

Linked to the current mood, commentators often depict an embattled and shrinking middle class, with sharply rising financial inequality. However, globally, this is simply not true. One of the most startlingly positive phenomena for many generations continues to unfold around the world. We are in the middle of an explosion of the world’s middle class – about 70m people a year globally are entering this wealth group.

The phenomenon may continue for the next 20 years, with this global middle accelerating to 90m a year by 2030. If this happens, an astonishing 2bn people will have joined the ranks of the middle class. This demonstrates that, contrary to widespread opinion, global inequality is declining significantly, not increasing.

It is important for everyone in the so-called developed world to be constantly aware that these powerful shifts in global wealth are good not only for the developing world, but for them too. If you take a look at a chart of recent US export growth, you may well think you are looking at the wrong data series. But you are not. US exports are indeed growing at close to 20 per cent and it is this that is stopping the housing and credit crunch from driving the US into a deep recession. Aspects of the same phenomenon can be seen in Japan, Germany and even the UK.

The new middle-class explosion is going to remain the market opportunity for us all, or certainly for those of us who are prepared to respond to the new realities.

This, of course, makes trade and regulatory policies all the more important for green industry-related imports and exports. The current APHIS Q37 and other free-trade negotiations (e.g. Columbia) have perhaps even more far-reaching implications than we otherwise surmised. I’ll be speaking at a colloquium at the annual meeting of the American Society for Horticultural Sciences this week discussing this issue in more detail.

Click here for the full FT article.
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The Changing Face of the U.S. Consumer

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An excellent article appears in this months Advertising Age (click here) that highlights the changing demographic profile of consumers in the U.S. The following helpful hints were provided for marketers:

1. GENERATION AARP

THE TREND: The average age for a U.S. head of household is 49.5— just six months shy of getting a sign-up pitch from AARP. The first boomers will turn 65 in less than three years.

MARKETING CHALLENGE: Older consumers tend to be more risk-averse and less open to new ideas.

WHAT TO DO: Don’t pander (“60 is the new 40”). Play up messages suggesting advantages such as guarantees, safety and experience.

2. CONSUMER CHASM

THE TREND: The gulf is widening among consumers when it comes to attitudes and behavior. The online- and wireless-centric consumer lives in a different world from the older newspaper reader.

WHAT TO DO: Rethink strategies for target marketing. Put more emphasis on ethnographic research into the culture, beliefs and activities of the target consumer

3. REGIONAL DISCONNECT

THE TREND: One nation, but hardly united or homogeneous. The Northeast is older, largely white with fewer children; the West is younger and more diverse. Two thirds of recent immigrants have settled in the South or West.

WHAT TO DO: For products aimed at older consumers, consider looking north and east. If you want younger consumers, pick your regions and then make sure the message resonates with a multicultural audience.

4. NEW FACES

THE TREND: The median age of U.S. Hispanic women is about 28—14 years younger than the median age for white, non-Hispanic women. Two in five consumers under 45 are Hispanic, Black or Asian (vs. one in five for 65- plus). More than half of household heads in California and Texas are Hispanic, Black, Asian or multiracial.

WHAT TO DO: If you want to be the choice of a new generation, embrace the cultures and voices of that generation.

5. IMMIGRATION IMPERATIVE

THE TREND: In the past seven years, 40% of U.S. population growth has come from immigration. Five big states (New York, New Jersey, Michigan, Illinois and Connecticut) would have seen their work forces and populations shrink were it not for new immigrants.

WHAT TO DO: Marketers need to engage in the national debate about immigration. Immigrants, after all, are a source of labor—and a prime source of new consumers.

Well put, Bob.

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Robert Barr, an economist in the Washington, D.C. area, and frequent contributor to the SAF Floral Trend Tracker offered the following comment in the latest issue:

These are confusing times for consumers and businesses. Gas prices are way up, home prices in many places are dropping, and employment has shrunk in each of the first five months of the year. If we’re not in a full-blown recession now, we’re just skirting past one.

So this has been a time of fear and concern. Our economic health is vulnerable, and we know it. But while we batten down the hatches, keep in mind how resilient our economy has been. Economic conditions aren’t as bleak as you probably imagine them to be, or as the popular media usually suggests. Growth was at a low 0.8% annual rate in the six months ending in March, surprising many experts who expected to see an outright contraction. Despite all of the problems and concerns, the economy continues to expand, albeit it mildly.

Naturally, consumers are holding back, as purchases of big-ticket items are being deferred, particularly in real estate and autos. On the other hand, business owners are more encouraged, as durable goods orders outside the auto sector are doing quite well. And, and in a big switch from recent years, net exports are contributing to, not detracting from, economic growth (actually accounting for most of it lately).

Feds to the rescue? One important development in early June suggests that the Federal Reserve will be acting soon to counteract one major economic threat: the weak dollar, as Chairman Bernanke cited the weak dollar as a major culprit in pushing up consumer prices. That’s reassuring, as the Fed needs to reassert itself as an inflation fighter. As discussed in this column in the last issue of the Floral Trend Tracker, a few months ago the Fed was cutting interest rates to help cushion the economy from the fallout from the credit crisis. But those low rates were causing the foreign-exchange value of the dollar to slide. Now, the Fed has signaled no more rate cuts for a while, as it waits both for its previous rate cuts to have their peak impact and for the tax rebates to course their way through the economy.

No short-term solution. A shift to inflation-fighting policies probably won’t have much impact in the short run for consumers and small-business owners, whose day-to-day buying and selling decisions will ultimately determine whether the rest of 2008 is able to improve on the low growth of its opening months.

Part of the answer will lie with oil prices and our adjustment to gasoline at $4 a gallon (as we write this. We hope that price doesn’t sound like a deal as you read this). On the other hand, a recommitment from the Federal Reserve to maintaining price stability could quickly boost financial markets. They would need to realize that the Fed is more satisfied with a smoothly functioning credit market and that its concentration is back on suppressing inflation.

On net, we expect to see sluggish growth in the rest of 2008 and well into 2009. Most of the current problems holding down the economy – residential real estate, high (and rising) energy costs, and the credit crunch – will take time to reverse. Meanwhile, the recessionary feeling of today will probably linger in many big-ticket consumer industries.

I particularly appreciate Bob’s comment regarding the resiliency of the economy and despite how things look, we have managed some growth overall. As I have said before, the impacts of this economic contraction are not universal and are quite worse in some areas of the country than others. The next several months leading into the fall will be interesting to track as far as economic indicators are concerned.

Stay tuned for more commentary about fall marketing strategies in light of these economic trends.

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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…