Low-Carb Economics The recent proliferation of no or low-carbohydrate foods continues to astound me. Everywhere you look—billboards, TV ads, packaging, and print space—are food companies touting low-carb content. From beer companies to cereal makers to bread bakers, everyone seems to have a carb-benefit angle. The most amazing example I saw recently was a sack of pork rinds (which have virtually no carbohydrates) billed as ”better for you.“ Better than what? Take it from someone who lost 80+ pounds (and has kept it off for almost 8 years) through a sensible diet and exercise, pork rinds are not the magic answer (though I truly wish they were).
As always, the economics of the issue strike me as the most interesting part. (I know, that’s a sad statement.) Here is some food for thought—totally carb free. Consider the issue from the perspective of the companies trying to deal with the fact that virtually overnight, we became a nation that’s carbohydrate obsessed. A decade ago, we were so focused on fat content that all else seemed insignificant. We once had a student employee who was on a diet, and he ate chocolate cookies by the box without a second thought because they were fat free. Now, I guess he’s eating bags of pork rinds.
I’m not debating the merits of reducing carbohydrate intake or if there’s any validity to such a diet. In fact, it does seem to work for some people. Take that success and add a huge dose of marketing, and you have a full-fledged fad. For food companies, this is a virtual nightmare (or dream come true, as the case may be).
Imagine the scrambling going on to bring reduced-carb products to market. Product development is typically a lengthy process, requiring huge investments in research into new ingredients, recipe refinement, testing, packaging design, and marketing. It takes time and money and lots of both. Usually, these expenses are weighed against carefully analyzed projections of likely future sales. Firms allocate resources based on the set of products viewed as maximizing future profits.
A certain degree of variation is, of course, built into any forecast, but introduce a fad, and all bets are off. Suddenly, sales don’t match expectations and firms are either left with a huge capacity to make products no one wants to buy or, if they’re lucky, more orders than they can fill. Neither result is a particularly good thing.
Regardless of how you feel about carbohydrates, chances are you’re more aware of them now than ever before. Believe you me, so are food companies. They’re trying to figure out how long the current obsession will last and whether or not it’s worth pouring additional resources into the war against carbohydrates. They’d like to know how successful such products will be as our national attention either grows, remains fixed, or begins to wane. Most difficult of all, they’d like to see into the future and predict the next wave.
Fads come and they go. The “in” product today may be out tomorrow. This is clearly true for many consumer products, particularly items such as clothing, shoes, and toys. There are also parallels to be drawn in other areas, such as the Internet stock bubble of a few years ago. Trendspotting is a lucrative field, and millions are spent attempting to deal with the ups and downs of consumer sentiment. Even good companies aren’t always successful. (Had a New Coke lately?) I’d advise pork rind sellers to make the most of our focus on carbs; as history tells us, it’s only a matter of time before the carb craze is a thing of the past.
posted @ 01:12 PM CST [link]
Friday, March 19, 2004
Housing Building, purchasing, or refinancing a house can be quite stressful, as most people who have done so would agree. It also can be quite satisfying, especially once you move in and get settled. I have been involved in this process for quite some time, and I look forward to moving day in the not-to-distant future.
Over the past few years, home ownership in the US and Texas has been rising. Currently, nearly two-thirds of the state’s residents own a home. In 2003, a total of 123,848 single-family housing permits were issued in the Lone Star State. The average cost of these dwellings was about $130,700, which was $3,700 more than the previous year.
There were also 213,266 existing houses that were sold by Texas real estate agents in 2003. This amount represents a 6.5% increase over the number of homes sold in 2002.
Prices for existing homes ranged from under $30,000 to several million dollars. Some 24.7% of the houses were purchased for a price between $100,000 and $120,000. Another 26.1% spent between $50,000 and $100,000. About 8.4% of those who bought existing houses paid more than $300,000.
The aggregate dollar value of these houses was $34.09 billion. It took almost six months on average for each of these residences to be selected, prices agreed upon by buyers and sellers, and the necessary processing to be completed.
In January 2004, there were approximately 106,150 houses on the market across the state, about 4.8% more than were available for the same month last year. Nearly 11,900 of these dwellings were sold in January at an average price of $150,800.
In Texas, the median price of a single-family home last year was $127,900. It is currently estimated that about 54% of Texans have sufficient income and available funds for a down payment to be able to afford a median-priced home, based on a 30-year mortgage.
Nationwide, the median price is expected to rise about 4.6% this year. As the economy continues to expand and job growth improves, household incomes will climb, adding fuel to the desire and affordability of many families for a new house.
In some areas of Texas, there is the potential that demand could outpace the supply of homes available for sale. Such a situation might drive prices up, which in turn could reduce the capacity of middle-income families to purchase their first choice in homes.
For those who own houses, refinancing remains attractive. Mortgage rates continue to hover around 6%, some even dropping to near 5%, depending on the length of the loan. During the first week of this month, weekly mortgage activity pace picked up 1.2%, and the requests for loans to buy new homes climbed 1.4%.
With the Fed’s recent decision to keep interest rates at their 45-year lows, at least for a while, owning a home or upgrading to a better one remains of great interest. Many real estate specialists are predicting that March will be a banner month for mortgage lending. Repeat homebuyers are expected to be a prime moving force as they roll their equity gains on the sale of their current residences into subsequent home purchases, which usually will be at higher prices.
posted @ 01:11 PM CST [link]
Friday, March 12, 2004
Spring Break Visitors Increase Economic Opportunities Every year about this time, hundreds of thousands of high school and college students take breaks from their academic pursuits and participate in pilgrimages to beaches, ski resorts, and other places of entertainment in order to relax, have fun, and enjoy new and exciting kinds of experiences.
Some say this yearly spring rite is a throwback to the time when winter loosened its hold on the lives of the ancient Greeks thereby allowing their thoughts to turn to regeneration, rejuvenation, and new birth. Others believe the annual festivities trace their history to the period shortly after the Great Depression when Americans sought refuge in diversionary feel-good activities.
Regardless of its origin, Spring Break is now an enduring part of Americana. Its popularity has steadily increased since the 1960s along with the variety of destinations available in the US, Mexico, and the Caribbean. Students, as well as family groups, travel by airplane, bus, and automobile to take advantage of the opportunities being hawked by the various locations. And, while the visitors enjoy themselves, businesses reap financial rewards.
Florida beaches are the most popular hotspots, but during the past couple of decades, South Texas has become a major March draw, particularly in the area between Port Isabel and Port Aransas. Brownsville also benefits from the thousands of adventurers on their way to and from Mexico. Over a period of three to four weeks, the South Texas economy is boosted by some $200 million, almost all of which is provided by the young people who have journeyed from throughout Texas and across the country seeking thrills and relaxation. Many small businesses depend on spring breakers to keep their operations in the black.
The Spring Break holiday results in the creation of several thousand jobs in the Lone Star State. In addition to the immediate economic ripple effect caused by the influx of out-of-towners into the area, there are also long-term benefits as temporary jobs can sometimes lead to permanent employment.
Last year’s turnout of spring breakers was down slightly across South Texas due in part to uncertainty about the economy, the looming war, higher gasoline prices, increased competition from other sites, and stricter law enforcement. This year, although similar situations exist, upwards of 150,000-175,000 visitors are expected.
The most well-known site in Texas for March vacationers, of course, is South Padre Island, which the Travel Channel named as the third best beach in the US and the fourth top Spring Break holiday destination in the world. Students from more than 100 US colleges and universities located in some 25 states already have made accommodation reservations on the island, and double that number of schools will likely be represented by the end of the month. Most of the educational institutions are in the South, Southwest, and Midwest, though there is a sprinkling of Ivy League institutions mixed in.
Tour companies offer bus trips and other amenities to get the travelers’ business. While a large number of students use travel agencies to make their arrangements, because of students’ increasing Internet savvy, many of them rely on their own skills to plan their trips. The number of those who just show up and hope for the best is rapidly dwindling.
Approximately three-fourths of the overall economic boon to South Texas is centered on the island where shouts of “Let’s Padre” can be heard all along the 30-mile coastline. Most of the sounds and activities are focused on a crowded five-mile by one-half-mile stretch. Estimates suggest that the average visitor to South Padre spends over $800 during their Spring Break stay.
There are many people who consider Spring Break just a trivial occurrence and a time of non-stop partying for young people, some of whom wind up with fines or overnight lodging in accommodations not of their choosing and lacking the amenities of a beach front resort . However, many college-age students from other states are first introduced to Texas during their March holiday, and 75% of them say they are likely to return in the near future, either during another break in their schoolwork or for a family vacation. Thus, the annual invasion of South Texas for “fun in the sun” seekers can have significant economic benefits for the state—both short term and long term.
posted @ 01:10 PM CST [link]
Friday, March 5, 2004
Stock Market Growth I’m frequently asked the same question when I address economic conferences or make special presentations to groups of CEOs or financial analysts. The question is, “What is your prediction regarding the stock market?”
My normal reply is, “It will fluctuate”! While this response usually draws some chuckles and nodding agreements from members of the audience, it’s usually not enough of an answer. Therefore, I follow up that statement with an explanation of the reasons for the volatility of the market and then conclude with a discussion of some of the things that traditionally drive it.
To understand the stock market, it is necessary to recognize that it is a reactor. Among the various matters to which it reacts are such things as world events, political activities, corporate scandals, and earnings reports. Most of all, the market is an indicator of investors’ opinions about the future. For example, if a company misses by just a penny per share the expected quarterly earnings level, some potential investors believe the company might be in trouble, when in reality it may still be very healthy.
If investors perceive the general economy is headed south in a hand basket, fears about tomorrow may cause them to seek to enhance their financial resources through means other than the stock market. If they believe the light at the end of the tunnel is going to get bigger and brighter, they are more willing to get on the train headed for greater opportunities.
That said, what does the picture look like right now? How are investors viewing the possibilities for tomorrow? What has developed to expand the current interest in the stock market? What are the forces driving it?
Investors have entered the market this month fueled by the continually improving economic picture. The nation is now in its 30th month of recovery. One of the motivators for expanding investor participation in the market is the expectation that interest rates will likely remain low. High interest rates tend to cause people to keep their money in banks where they can earn a good return on bonds and CDs and avoid the risk of the market. Low interest rates result in smaller returns from banks and bonds, so the desire for greater profit generally leads to a rise in participation in the market. Lower interest rates also spark people into making loans to buy goods and services with a corresponding expansion of the economy.
Interest rates play an important role in business operations because they influence corporate borrowing, which, in turn, affects corporate profits and prospects.
Although there is an underlying anticipation that interest rates will eventually experience an increase, many investors are not overly concerned right now because they see the hike not occurring until job growth advances significantly. For some, that time is expected to be much later in the year, or perhaps even in early 2005.
While inflation is always waiting in the wings, as long as the economy keeps growing around the 4% level, investors are betting that inflation won’t get much of an opportunity to advance to center stage.
Another force that is driving the interest in the stock market is consumer spending. In January, consumers opened their pocketbooks and wallets sufficiently wide to enable spending to climb a solid 0.4%, thus helping to keep the recovery moving along a positive line. Consumer spending, of course, is responsible for about two-thirds of all economic activity in the US. Thus, as spending increases, the economy correspondingly benefits. With tax refunds hitting the mailboxes soon, expectations are that spending will continue at a solid pace.
Businesses are also contributing to the advancement of the stock market by boosting capital spending, and manufacturing is beginning to replenish supplies and products that have diminished as a result of consumer purchases and prolong skittishness. Broader job creation is now eagerly anticipated.
The upward swing of the stock market today is reflective of the brightness of the economy, which is expected to continue to strengthen and expand over the immediate future. While specific sectors may move ahead or fall back to varying degrees (a subject for a future column), the over-riding sentiment at the moment is positive. As long as that remains the case, we’ll continue to see growth in the market.
posted @ 01:09 PM CST [link]