Always In Perspective
If I hadn’t been an economist, I might have been a songwriter. I don’t have much talent, but who knows?
When listening to some of the music now available on the airwaves, many of us have probably thought to ourselves, “I can do better than that.” Because of my great interest in baseball, maybe I ought to consider a composition with a theme relating to America’s favorite pastime, but then again, “Peanuts and Crackerjack” has already been done.
So, since Plan A has been taken, I guess I might consider taking up Plan B. And a possible subject for that tune could be high energy prices which are something that millions of Americans might be saying are always on their minds. With the cost of gasoline increasing faster than we can pump it into our vehicles, a lot of folks are singing the blues.
My contribution to the music industry should not be confused with the “Always On My Mind” made popular by Elvis during his latter days or Willie Nelson in his 1990 release. In fact, to avoid any similarity, I might entitle my forthcoming hit, “Always In Perspective.” A title like that ought to really have the iPods popping.
It may be hard to believe, but when inflation is added to the mix (keeping the buying power of the dollar constant), the high prices at the pump today are less than Americans spent in 1918. If that’s so long ago that only your grandparents could remember, then consider the fact that the same thing is true for the early 1980s.
When the percentage of increase in the price of gasoline is compared with the hike in other consumer items from 1982-84 (a common base period for the consumer price index) to today, gasoline actually has one of the lowest rates of gain—66.8%. Over those two decades or so, the cost of food has gone up about 88.7%, and housing has risen some 93.0%.
Consumer items that have increased by more than 100% include personal care services, 102.9%; motor vehicle maintenance and repair, 103.5%; rent of primary residence, 114.8%; and fruits and vegetables, 134.2%. Many others have jumped at an even greater pace, i.e., medical care, 218.7%; educational books and supplies, 257.0%; and smoking products, 396.1%.
The cost of gasoline rises almost every spring (21 out of the past 22 years). Still, 2006 is one of the worst in recent years. Over the past couple of weeks, the average US retail price at the pump has surged about 9%. The primary reasons for this year’s hike, of course, relate to the higher cost for crude oil, the continuing growth in demand, even more uncertainty and unrest in oil producing regions than before, and the requirements for ethanol blending as an additive.
Initially, the higher prices did not seem to have much impact on American motorists’ driving patterns. The constant soaring, however, has caused many to cut back on their gasoline use and has even motivated growing numbers to begin considering car pooling or public transportation. Though recent increases in the use of public transit systems cannot be directly linked with the shock and awe drivers are receiving at the pump, cost is undoubtedly playing some role.
Last week, the rail system in Washington, DC experienced two of the busiest days in its history. Riders who completed surveys admitted that the price of fuel is one of the determinants in their use of public transportation. Concern over the availability of gasoline may also be having an impact as several cities have experienced temporary shutdowns of stations that ran out of product.
This is Economics 101 at work: the higher gasoline prices rise, the more people will look for ways to use less of it. As they use less, overall amount demanded will fall, the amount produced will rise, and price relief will follow. As these patterns persist, the speculators who drive prices up are likely to calm down a bit. This is a far better outcome than some artificial price control measure which would do little more than cause shortages. (Remember those lines at the pump and even-and-odd-day rationing?) Other proposals to distort the market include a “windfall” profits tax on oil, which would only reduce incentives to find solutions and end up costing us more.
The US is not alone with the high costs. Gasoline is going up around the world. In many industrialized nations, consumers pay a lot more than we do to fill their gasoline tanks. Currently, a gallon costs about $6.73 in The Netherlands. Of that amount, $4.12 is tax. By comparison, the tax on fuel in America (about 15%) is the lowest of any industrialized country. Federal and state taxes on gasoline in Texas run about 38.4 cents per gallon.
Estimates indicate that US drivers will likely pay about 11% more for gasoline this summer as compared to the same period in 2005. By the time the weather gets hotter and the summer driving season hits its peak in late August, prices may drop slightly. Still, the costs will probably remain elevated.
Knowing that high gasoline prices will be with us for some time is certainly not welcome. However, realizing the increase experienced over the years is less from a percentage standpoint than gains in many other vital products may at least help us keep what we face at the pump in perspective.
posted @ 08:33 AM CST [link]
Friday, April 21, 2006
At the Top of the List
America loves lists. You can find one on virtually any subject and they are part of our everyday vocabulary. There are so many kinds of them that there are even books that simply list the lists.
As an economist and a businessman, I find some lists very interesting and useful in my work. One of my favorite lists is the Fortune 500 which lists the 500 largest companies in the US. This grouping (I’m trying to avoid using “list” too many times) is compiled by the financial magazine Fortune.
Fortune, founded by Henry R. Luce, hit the newsstands in February 1930, barely four months after the traumatic stock market crash of 1929. Although some of his friends thought a magazine devoted entirely to business would be boring, Luce persisted and the initial list of subscribers totaled more than 30,000. In 1937, the magazine made almost a half million dollars with 460,000 subscribers. Within a decade after the stock market crash, Fortune was almost required reading for US businessmen.
In 1955, the magazine published a list that served as a register of the top-ranking US industrial companies. Known as the Fortune 500, firms were named to the list on the basis of total revenues for the previous year with ranking placement determined by amounts. The next year another list was compiled that included the top non-industrial companies. This second category grew to 500 over the next couple of decades and became known as the Fortune Service 500.
In the 1990s, with industrial companies receiving a significant portion of their revenues from service businesses, it proved difficult identifying whether a corporation was industrial or service. Therefore, in 1995, the listings were combined.
Nowadays, the Fortune 500 not only names the companies with the largest gross revenues, but the list also provides annual performance of the companies in 11 categories, including areas such as profits, assets, growth in earnings, and returns to investors.
Earlier this month, the 2006 Fortune 500 was released based on last year’s revenues. At the top of the list was ExxonMobil which earned its ranking by taking in some $340 billion in revenue.
Many people credit skyrocketing energy prices for ExxonMobil displacing Wal-Mart and earning the top honor. Wal-Mart took the lead in 2002 on revenues of $219.8 billion, and held that position for four consecutive years. While high energy prices are certainly a contributing factor to ExxonMobil’s $36.1 billion in profits, the most ever by any US company, it was not the first time the oil company headed the list.
In fact, in the 51 years since the first Fortune 500 was printed, only three companies have held the top spot. General Motors, the first to hold the honor with $9.82 billion in revenues, has been ranked first 37 times, most recently in 2000 with $189.06 billion in revenues.
ExxonMobil took second place in the 1955 listing behind General Motors with $5.6 billion in revenues. (If you want to get technical about it, it was the Exxon part that actually ranked second, then known as Standard Oil of New Jersey. Mobil, the outgrowth of the old Standard Oil of New York, was also ranked in the top ten. The creation of ExxonMobil a few years ago brought two big pieces of the original Rockefeller company back together.) Since then, the corporation has been runner-up 28 other years. In 1975, ExxonMobil gained the top spot with $42.1 billion (the old Mobil was fifth). It earned this position nine additional times in subsequent years prior to its jump back to number one this year.
While the Fortune 500 is certainly interesting and informative in itself, to me it’s a valuable barometer of the state of the economy for certain periods of time and an excellent tool of measurement of the American entrepreneurial spirit. The entry and exit of firms is a signal of what is advancing and what is declining in our ever-so-dynamic economy.
Last year, our nation faced numerous difficulties including war, high energy costs, monetary uncertainty, global downturn, growing trade imbalance, and budget deficit, plus unprecedented natural disasters. Despite all of these challenges, the “500” was bigger than ever by almost every barometer. You can debate the merits of such lists for hours, but perusing its machinations over the years provides a remarkable perspective on the paths and patterns of the American dream.
posted @ 08:16 AM CST [link]
Friday, April 14, 2006
Success of Competition in Retail Market for Electricity Continues
A little more than four years has passed since competition was introduced into the retail market for electricity. Although the process of opening electric markets to competition has faced challenges in some states, Texas has avoided the most serious of these kinds of problems.
Senate Bill 7 was passed by the Texas Legislature in 1999; it authorized electric competition in the retail segment beginning on January 1, 2002. Recently, my colleagues and I at The Perryman Group analyzed the economic benefits resulting from this transition. We found a lot of positives for the Lone Star State.
For example, market forces are having the desired effects of providing consumers with greater control and more choices at prices lower than they would have been under regulation. From January 2002 until now, more than two million electricity customer switches have been completed.
Competition has also led to increased interest in alternative electric generation processes. As a result, 1,900 megawatts of electric capacity have been added by wind-power generation plants over the past four years. Moreover, the amount of metric tons of emissions from electric utility facilities has dropped dramatically.
The impact of cost savings from retail competition on business activity has provided an annual stimulus to the state’s economy of some $9.73 billion in total expenditures, $4.64 billion in gross product, and almost 47,800 permanent jobs. This stimulus, especially in terms of employment, is highly important to the Texas economy.
In addition, over $11.0 billion has been invested in new plant facilities with approximately $12.5 billion in potential capacity now in various phases of implementation. This investment in generation facilities helps ensure sufficient additions to capacity to meet future requirements of the state’s expanding population and growing economy.
The total economic impact of facility construction across Texas since the introduction of competition is $42.39 billion in total expenditures and nearly $20.57 billion in gross state product. Some $14.04 billion has also accumulated in personal income, with $5.38 billion gained in retail sales over the period. Moreover, 342,015 person-years of employment resulted during the construction phases.
The impact of facility construction for 2005 alone was almost $0.75 billion in total expenditures; $0.36 billion in gross state product; $0.25 billion in personal income; $0.095 billion in retail sales, and 6,022 person-years of employment.
Because Texas power plants are predominantly fired by natural gas, the price of electricity in the state is closely correlated to the price of natural gas. This has led to electricity price increases in Texas compared with those areas less oriented toward natural gas. Even so, competitive electricity prices have risen more slowly, and are well below estimated prices if the regulated market environment remained in the relevant areas. In fact, economic studies on the restructuring of the electrical power industry indicate that electricity rates are lower for most customers than if the industry had remained regulated.
Because of the enactment of Senate Bill 7, residential customers in the state’s competitive markets continue to have many choices of electricity providers, including at least one renewable product. While electric rates vary across areas of the state depending on fuel costs, capital costs, and numerous factors, the success of the decision to permit competition in retail markets is evident as prices are lower and choices are far greater than they would have been in the absence of competition.
Based on that standard, Texas has the most successful program in electric retail competition in the United States.
posted @ 07:35 AM CST [link]
Friday, April 7, 2006
Class of 2006 Employment Looks Bright
Alfred Lord Tennyson’s poem “Locksley Hall” is often brought to mind during this time of the year because of the verse “In the Spring, a young man’s fancy lightly turns to thoughts of love.”
While this may be true today just as it was in 1842 when first penned by the famous Victorian poet, nowadays, there are also quite a number of other subjects to which young men (and women) often turn their thoughts. This is especially true for those who are anticipating graduating from college this spring.
Among the top items that most members of the Class of 2006 fancy is employment. After four or more years preparing to make a living and a life, college seniors are probably glad to hear that prospects for finding work are good, and entry-level salaries are rising.
Recent surveys indicate that US employers are expecting to hire 14.5% more graduates than they did last year. The job market for new college graduates dropped dramatically in 2002, but it has been climbing steadily ever since. This year marks the third consecutive spring in which prospects for jobs have risen.
The scarcity of jobs in 2002 led to an increase in students continuing their education in graduate programs. That move may have proven beneficial as the expected average annual salary for those with a master’s degree this year is up some 4%. For those with an undergraduate degree, starting salaries are expected to be about 3.7% higher than last year.
According to the National Association of Colleges and Employers (NACE), there will be a lot of job fairs held on college campuses this year as employers compete for the best students, particularly those with training and experience in engineering, business, and computer-related fields.
Although mechanical engineering majors will lead the pack among the most sought after graduates, their average starting salaries ($50,672) are not expected to be the highest among the new hires. That honor will likely go to students who studied chemical engineering. The average beginning salary offer to this group will be around $55,900. Annual average starting pay for computer engineering and electrical/electronics and communications engineering graduates is forecast to fall between those levels.
Other fields of study by the Class of 2006 which are projected to be in the top 10 annual entry salaries include computer science, accounting, economics/finance and banking, civil engineering, business administration/management, and marketing/marketing management/marketing research. The expected yearly pay for these groups will vary from around $36,260 for those with marketing degrees to $50,000 for computer science graduates.
In some cases, signing bonuses will be awarded. They will range from about $2,500 to $3,900 for business, computer science, and engineering graduates. The average signing bonus for those with a Master of Business Administration degree is forecast to be approximately $6,100.
Just having a degree in a particular field, of course, will not guarantee employment or the greatest amount of remuneration.
Graduates need to have a variety of talents. Among the traits considered highly valuable by most employers are communication, leadership, and analytical skills along with self-confidence, integrity, strong work ethic, tactfulness, and creativity. In most cases, employers rank these attributes higher than a graduate’s grade point average.
There are approximately 1.19 million students now enrolled in the 143 institutions of higher education in Texas. Although educational pursuits beyond high school might not be appropriate for everyone, as the economic advantages of earning a degree continue to improve, increasing college attendance and retention is critical to our success as individuals and as a state seeking to be a leader in emerging growth sectors.
posted @ 08:14 AM CST [link]