MAKING CENTS — There and Back Again
As I am writing this, I am still coming off the endorphins generated from an invigorating tour of nursery and greenhouse growers in Germany and the Netherlands, as well as taking in the massive IPM show in Essen.
During my trip, there were many things to see, think about, and possibly emulate or improve upon.
Traveling internationally always provides a chance to see how others accomplish the task of producing and marketing flowers, shrubs and trees.
But it also provides a unique opportunity to talk international economics with colleagues abroad.
The Word in Europe
European Central Bank chief Mario Draghi has been talking about implementing quantitative easing for some time and now he is finally going to do it. The surprise is that it has had little impact and Europe remains on the brink of recession.
I believe that the slowdown in Germany, resulting partly from diminished Russian trade, will have an impact on the rest of Europe and that the European stock market will be down in 2015.
The big topic was Greece and the surprising result of its elections. I myself assumed the prevailing austerity party would win, given the polls were calling for a landslide victory. So much for polls, given that the left-wing, anti-austerity party Syriza is now in control.
But the weird thing about Greece’s debt is that it doesn’t really matter. Greece owes 317 billion, or 175 percent of its GDP, but that might as well be eleventy billion kajillion euros it’s about as meaningful and likely to be paid back.
Why? Well, the first thing you should know about Greece’s debt is that 75 percent of it is held by the “official sector.” That’s an alphabet soup of lenders that includes the IMF, ECB, EFSF and European governments and unlike private sector lenders, they don’t care about maximizing their returns, but rather looking like they’re maximizing their returns.
That means that under no circumstance will they reduce the face value of what they are owed, but they will reduce interest rates to almost zero and extend maturities to infinity and beyond.
The good news is that Greece’s debt payments have already been cut a lot. The bad news, though, is that Greece’s debt payments have already been cut a lotso there’s not much left to do to ease the situation.
If Greece were to leave the Eurozone, the probability of an extreme market dislocation in Europe is lower today than it was three years ago.
There are now institutions in place to help prevent contagion spilling over to other countries.
Meanwhile in the U.S.
Back to domestic issues, I am still bullish regarding the performance of our economy in 2015. As expected, the latest GDP report reflected a strong quarter for consumer spending (despite evidence of a “soft” December) and a relatively soft quarter for business fixed investment.
Inventories rose sharply, leading to concerns that we’ll see a moderate correction in 1Q15 (that is, less production). The trade deficit was much wider
than anticipated.
Of course, a strong dollar and soft global growth should lead to a wider deficit. Domestic Final Sales (GDP less net exports and the change in inventories), a measure of underlying domestic demand, rose at a 2.8 percent pace, but would have been closer to 3.4 percent if not for a drop in defense spending.
Somebody please tell me why we should focus on the headline GDP figure (hint: it sells newspapers).
The Impact of Fuel Prices
The drop in gasoline prices is expected to provide important support for consumers and small businesses in 2015.
It’s estimated that the typical household will save an average of about $750 this year on gasoline expenditures.
For the middle class, this extra cash is very likely to be spent, and that spending is someone else’s income (in other words, there will be a significant multiplier effect). Businesses will save on lower transportation costs and lower commodity prices.
So how long can a strengthening U.S. economy go on? Measuring the precise amount of slack
is difficult.
However, despite the strong job growth in 2014, many labor market measures suggest that there is still a large amount remaining. That means the economy can grow above trend (which may be seen as somewhere between 2.0 to 2.5 percent, reflecting about 1 percent labor growth plus 1.0 to 1.5 percent productivity growth).
We could easily grow at 3% per year for two or three years without generating much upward pressure on wages and prices.
The Fed can still be expected to begin raising rates later this year, but only to begin a long, gradual trudge toward normal, not to take away the punchbowl as the party gets going.
What About Consumers?
Finally, let me offer an additional note on consumers. In early February reports said that consumer spending fell in December by the most in five years in spite of lower gas prices at the pump.
Cause for alarm? In a word, no. The 0.3 percent drop in spending in the final month of 2014 mainly reflects lower energy costs for U.S. households.
Americans spent far less to fill up at the gas pump and they also had smaller electric and natural-gas bills. That’s a great thing for consumers. Gas purchases fell by an estimated $32 billion in December, according to the Commerce Department. And households spent about $22 billion less on electricity and natural gas.
The combined $54 billion decline in energy costs helps to explain why overall consumer spending fell by $40 billion in December.
However, the news wasn’t all good. Americans also spent less on autos, clothing, recreational goods, home furnishings and electronics such as TVs and computers.
That might reflect discounting by retailers faced with price-conscious consumers. Spending at grocery stores also fell, though Americans relied on takeout and went out to eat more during the holiday season.
Household savings from lower energy costs, meanwhile, were partly offset in December by higher spending on drugs, health care and housing. These expenses continue to eat up a large portion of American incomes.
So what do we make of consumer behavior? Consumers are more optimistic about the economy, but they still aren’t about to throw caution to the wind and dig deep into their wallets.
But when they do, we need to make sure we have the exact offerings of green industry goods to satisfy them!
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