Economic Growth
Although we are not quite ready to use the song-inspired phrase “let the good times roll” when discussing national and global economies, with the ongoing strengthening of the recovery and predictions calling for significant growth in the days ahead, such an expression may become apropos in the not too distant future.
It is probably still a bit premature to declare an end to the recession, but after four consecutive quarters of declines, our economy is on the move again, albeit at a sluggish pace.
Jobs losses, though ongoing, are declining in severity, and while foreclosures remain prevalent, the rate of both existing and new homes sales has quickened significantly. In most directions you look, there is at least a bit of sunshine overhead.
Perhaps the 19th century British poet, Percy Shelley summed the situation up in his famous Ode to the Western Wind, undisputedly one of his greatest. In it, he focused on hope for the future and claimed “if winter comes, can spring be far behind.” If what we have been experiencing the past couple of years can be described as the winter of our economy, then spring is certainly now in the air.
Last week, the International Monetary Fund proclaimed that global growth for this year will likely be more than 4%, a far cry from the negative expansion of last year.
However, just as springtime is often fraught with unpredictable weather patterns, the road to prosperity in the future is still beset with uncertainties. And growth will not be uniform across the world. The revival of economic activity over the coming months will vary and move forward dissimilarly in various parts of the world.
For example, the tempo of economic escalation will likely be faster in China and other emerging countries than in advanced and well established economies. Even among the more sophisticated economies, however, the pace is expected to vary, i.e. the rate of growth of the United States and Canadian economies will likely be faster than the pace in Europe or Japan.
Risks for the future have receded, but there is still substantial work to be done to regain full economic health across the globe. In order for there to be strong, balanced, and sustained economic health, better fiscal policies must be reevaluated, reestablished, and reinforced so that problems such as that which the Greece economy continues to endure, will not be exported to other nations.
Reducing the ratio of gross debt to gross domestic product will greatly diminish vulnerabilities and is clearly a step in the right direction. Additionally, regulations that ensure the safety of financial systems must be balanced with the risks necessary to enhance efficiency and promote innovation. Inappropriate risks, however, undertaken either by major facets of a nation’s economy or by the national leadership have the potential to undermine financial stability and create crises that might provoke new economic challenges and difficulties.
Most economies around the world are doing better now than they were at the end of last year. As proper procedures are put in place and confidence in the future becomes more optimistic, consumer and business spending will likely increase. In light of these circumstances, the outlook for continuing recovery is quite encouraging.
posted @ 07:55 AM CST [link]
Friday, April 23, 2010
Tiny Island, Global Impact
Few, if any, could have imagined before last week that a volcano buried underneath a glacier with an almost unpronounceable name on the tiny island nation of Iceland would cause such consternation from the eastern shores of Canada westward to Russia. Even heads of state and rock stars have had to change their plans, not to mention the hundreds of thousands of travelers stranded around the world.
The 5,466-foot volcano Eyjafjallajokull spewed so much ash in the air that it caused the grounding of airplanes across much of Europe, temporarily preventing people (including more than 40,000 Americans) from reaching their desired destinations. It also stymied air deliveries of services and products ranging from food to flowers, from essentials to electives. Delivery failures negatively impacted businesses not only in Europe, but in countries that ship to and receive from that part of the world on a daily basis. Given the complex interactions of the global economy and modern practices of supply chain and inventory management, a significant disruption anywhere is generally felt everywhere.
Moreover, tens of thousands of people who work at airports cleaning, cooking, refueling aircraft, manning parking areas, etc., also saw their workloads diminish with corollary losses in pay. In other airports, personnel struggled to keep up with the needs of unusual crowds.
As the dilemma grew, travelers in England and several northern European countries spent an exhausting amount of time in long lines at airports until delays turned into cancellations. Hotels and motels then quickly filled to capacity forcing hundreds of people to camp out at airports on cots.
With air service out of commission in so many countries, travelers had to rely on other means of transportation, from railroads to ships to taxis. Sports contests were delayed or rescheduled. A private flotilla braved the waves of the English Channel to help people get back to Britain. This mission was eventually taken over by Britain’s royal navy.
With apology to Winston Churchill, it seemed that never before in human history, had so many people been impacted to such a large degree by a single incident of nature over which no one had control.
Although most airspace bans have now been lifted, the economic toll of this past week of disruption tallies into the hundreds of millions, perhaps even more than a billion dollars, with the majority of it falling on the wings of the airline industry.
So, is it over? No one knows. On Monday, just as many thought the situation might be contained, the volcano woke up and sent new ash toward Europe. The last time Eyjafjallajokull erupted, in December 1821, it continued to “blow its top” for some 13 months. Hopefully, it has chilled a bit since then.
Exploding volcanoes have almost become routine, but in each one lurks unique dangers. During the 1990s, more than 520,000 people were displaced and two cities were completely devastated by various volcanic eruptions around the world. Of course, most volcanoes eventually run out of steam, literally, and thereby allow nature to gradually take its course.
Brief disruptions to personal pocketbooks and national economies such as the one that has impacted much of the world over the past several days are normally manageable, though unpleasant. If the Icelandic ash were to continue to spew forth for a lengthy period, however, the economic impact would begin to compound. Though the greatest damage would likely be felt in Europe, today’s interconnected economy means that no country would be exempt. Let’s hope for a quick cooling period of a few centuries.
posted @ 08:10 AM CST [link]
Friday, April 16, 2010
At Least It’s Not $5 Trillion
About 18 months ago, when the idea of the Troubled Asset Relief Program (TARP) was being bantered about, anticipated aggregate costs to fix the flailing economy ranged as high as $5 trillion. That amount, of course, included practically every avenue of relief imagined by government officials. Times were serious, and the situation was scary (more so from the inside than out).
This week, the Treasury Department announced that after analyzing the progress being made in the rescue of teetering companies and financial markets, taxpayers will likely have to pay some $89 billion for the government’s intervention programs (aka bailout) for the nation’s most recent financial dilemma. A year ago, the Congressional Budget Office (CBO) indicated that the bailout rescue would cost around $250 billion.
The $89 billion tab, or about $3,000 per every man, woman, and child in the US, includes TARP, funds provided Fannie Mae and Freddie Mac, and the Federal Housing Administration loan guarantees, as well as the Federal Reserve’s purchase of mortgage-backed securities and support endeavors to strengthen the commercial-paper market.
It is projected that the total bailout will likely be less than 1% of the US gross domestic product (GDP) and be smaller than what it took to steady the ship of state during the savings and loan debacles in the 1980s and early 1990s. The price tag for that solution ran about 3.2% of the GDP.
It has been the successful stabilization of financial markets which has enabled the companies that received government support to be able to pay back much of their grants, thereby reducing the overall costs to the taxpayers. In some cases, the government is even making money through interest payments, dividends, and other income approaches.
Of the approximately $245 billion the Treasury provided various US banks, $169 billion has so far been returned. Among that amount is a profit of $8 billion for the government. By February, dividend, interest, and other income totaling $13.7 billion had been put in the US coffers and some $4 billion had been added in warrant proceeds.
The smaller-than-originally-estimated price tag for the bailout of the financial markets is based on several factors, none of which are set in concrete, but which at this time appear to be sound. The final total cost will be determined primarily by the extent of the improvement over time along with the future health of the housing market, which plays such a significant role in the wellbeing of our nation’s economy.
While the reduced amount of $89 billion is certainly good news, it does not reveal the entire story. For example, the CBO puts the combined losses in the investment portfolios of Fannie Mae and Freddie Mac at approximately $370 billion over the next decade. Of course, that amount will fluctuate depending upon the status of the housing market recovery. The reason the portfolios are not included in the evaluation of the bailout costs is that these entities are considered private, even though American taxpayers ultimately will be liable for their losses.
Moreover, according to the Real Economy Project of the Center for Media and Democracy (CMD), while much of the public attention is and has been on the TARP monies, an additional $4.6 trillion has been disbursed through multiple federal bodies to shore up ailing Wall Street. The Federal Reserve has provided most of this bailout through loans totaling $3.8 trillion. These trillions, of course, are expected to be recouped, with interest, over time, but they probably should be included when calculating the use of taxpayer funds to solve the financial crisis that has permeated our economy over the past couple of years.
It is clearly evident that the price to put the US economy back on solid footing has been expensive, though not nearly as much as originally estimated. Even so, whatever the total of these expenditures, it will prove to be far more economical than the cost to the economy had no action been taken. Like I said before, we were teetering on the edge of something very unpleasant, and it was scary.
posted @ 08:01 AM CST [link]
Friday, April 9, 2010
Canton Trade Days – A Lesson in Small Town Economics
Like the proverb “from an acorn a mighty oak grows,” what started shortly before the Civil War as a local trading center about 60 miles east of Dallas has gradually grown to become one of the largest flea markets in the world.
Known today as the First Monday Trade Days in Canton, Texas, the four-day monthly event is a highly popular shopping destination for people in surrounding urban communities and even beyond the state.
Tradition claims the event was a regular occurrence when people would come to the Van Zandt County seat to watch the proceedings of the district court and while there engage in various trading and shopping activities. The shopping gatherings gradually became a monthly tradition and were scheduled on the weekend before the first Monday of the month – hence the “First Monday” moniker.
As Canton became known for its unique commerce opportunities, the crowds grew so large that additional space had to be provided beyond the original area near the city square. Expansion has continued over the years and today, there are several hundred acres available for the thousands of people who flood into Canton and Van Zandt County once a month for Thursday through Sunday “shop ’til you drop” activities. Up to 7,000 vendors are scattered over the miles of paths, aisles, and walkways offering items ranging from traditional “garage sale” stuff to objects considered “treasured” and “can’t live without” finds.
During these monthly occasions, hotels, motels, and bed and breakfast inns in Canton and for miles around fill up with visitors from a broad geographic area. Not only do they shop for bargains, many also come for the unique experiences afforded by the Trade Days.
About 1.3 million person-days of shopping occur in the area annually. Given that many patrons shop less than a full day, it is likely that approximately 2 million “appearances” (a person participating for some part of a day) occur each year.
In a recent study by my firm, The Perryman Group, it was determined that the economic impact generated by retail and vendor and tourist activities in the Canton area is around $340.7 million in total annual spending. In addition, the shopping generates $221.4 million in gross product (output) and creates the equivalent of 3,611 permanent jobs in the area.
Not only is First Monday Trade Days an important component of the life of Canton and a significant contributor to the local economy, it also has substantial spillover effects throughout the region and generates opportunities to leverage its success in other directions.
Moreover, the impact of the thousands of shoppers who participate in the Canton monthly experiences extends well beyond the area and is a notable contributor to the entire tourism industry of a large segment of East Texas and a catalyst to collateral activity. It is also a stellar example of how travel can be a basic industry to an area (one that brings in dollars from outside the immediate community) as substantial as even a large manufacturing facility.
Thus, the overall Lone Star State benefits (including those in the Canton/Van Zandt County area) are larger, with annual totals of $549.7 million in spending, $309.5 million in output (gross product), and 4,550 jobs.
As a result of the Trade Days, the Canton area has a larger concentration of other retail and related activity than other areas of comparable size. Retail trade is by far the most important industry in the city, employing 16% of its workforce (a total that does not include the vendors who sell products several days a month). In addition, about 30% of the city workforce is employed in sales and office occupations.
Despite its small population and relatively low median household income, the Texas Comptroller’s Office reported that the city’s 2009 sales tax allocations were about $2.8 million, a value far above many similar-sized cities in the area.
As is clearly evident, the 19th century neighborhood trading event centered in Canton has expanded into an unparalleled 21st century retail phenomenon.
posted @ 08:10 AM CST [link]
Friday, April 2, 2010
Securing Social Security
When President Franklin D. Roosevelt signed the Social Security Act (SSA) in 1935, the concept was considered by some as overly aggressive and perhaps even somewhat grandiose. Some viewed it as akin to a giant pyramid scheme with an unlimited and unending balance of collections and distributions. Others praised it for its innovativeness and far-reaching positive impacts.
While it has not always worked exactly as envisioned, Social Security has certainly been helpful to American families by providing retirement, disability, and survivor benefits through the years. As the SSA 75th anniversary is observed this summer, more than 50 million folks will be counted as recipients of Social Security benefits.
Initially, the program provided a monthly stipend to individuals age 65 and older who were no longer employed. The benefit was based on the individual’s payroll tax contributions, although there was never an initial fund. While it was often marketed as “insurance” and to this day you can get a summary of your “account,” it has always been a case of the current workforce making payments for the retirees. The SSA also made funds available for unemployment insurance, assistance to dependent children, and to states for medical care.
Over the years, there has been quite a bit of tinkering with Social Security by Congress and monies are now available to spouses and minor children of retired workers, as well as others who qualify under particular circumstances. Retirement ages have been lowered, cost of living adjustments have been institutionalized, and other modifications have expanded the system.
Although Social Security was never intended to be the main source of income for retirees, it now comprises about half the revenue for more than 60% of its beneficiaries. For approximately 30%, Social Security accounts for over 90% of their total income. Through the years, in spite of droughts, wars, and economic booms and busts, Social Security has been like a most reliable friend—always there, no matter what.
For the first few years after the program got underway, it appeared that everything was working and would continue to be satisfactory. In 1950, there were, on average, 16 workers paying into Social Security for every individual drawing benefits. Life expectancies were much shorter at that time, and the whole thing functioned on a “biological rate of interest.” Because of increasing longevity, the aging of the baby boomers, and slower workforce growth, the ratio has now dropped to about three workers per beneficiary, and the trend continues.
Today’s current situation, of course, is not the first time alarm bells have gone off regarding the program. Back in 1975, the Treasury Department reported that Social Security was becoming extremely fragile. In 1983, President Ronald Reagan signed into law a measure strengthening the program by taxing various benefits and expanding the number of people required to pay into it. The health of Social Security was also a key priority in President George W. Bush’s second term.
Still, the picture painted of Social Security in early 2005 was fairly grim. Within three years of that time, contributions were expected to peak and then begin to decline based on the changing ratio of workers to recipients. Predictions varied among analysts as to when Social Security would actually go broke, but most reports indicated that later in this decade (around 2016 to 2020), the government would begin paying out more than it receives in payroll taxes, a situation that is understandably unsustainable.
However, with the challenges the economy has been experiencing lately and with the tenuous employment situation facing many Americans, Social Security payments have increased more than expected. Simultaneously, lower-than-projected national earnings have sharply decreased the program’s revenue, pushing the program into deficit this year. The system is forecast to continue in a deficit for the next several years. While a temporary surplus is expected after 2014, it will be short lived, as underlying patterns (mainly the retirement of the baby boom generation) come back into play.
For years, recommendations for fixing the program have been bounced around Washington, DC. They have ranged from increasing taxes and reducing spending to decreasing the benefit amounts and raising the retirement age. In reality, however, change is very difficult. As the dollars and number of recipients have expanded, so has the political muscle of the retiree constituency. There is, however, a day of reckoning ahead.
posted @ 07:59 AM CST [link]