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Pollyanna Creep

Once in a while, I’ll refer to individuals who are overly-optimistic as Pollyannas. The term comes from the 1913 children’s novel Pollyanna, which is about a young girl of the same disposition. You’ll know them when you meet them. Their favorite song is Bobby McFerrin’s “Don’t Worry, Be Happen.” In case you’re still a little hazy about the concept, here’s a good example of a Pollyanna in action. Just last week, when all hell was breaking loose on Wall Street, there was a comment on a Chicago Tribune piece which basically said, “Don’t worry, this will pass, it’s all just part of a cycle, the U.S. economy will soon recover and boom again, yada, yada, yada…” Which sounds great— if you believe in a financial system that is devoid of evolution (or de-evolution, for that matter.)

Now, there are some who believe that the U.S. government suffers from something called “Pollyanna creep.” Richard Siklos of The Globe and Mail (Canada) wrote last week:

That’s the dark thinking behind what is known as “Pollyanna creep,” a phrase coined by an economist named John Williams. Mr. Williams, who lives in California, runs a website called Shadowstats.com that trades in the idea that some key U.S. government statistics have become so optimistically misleading as to become essentially useless…

Over the past few years, some of Mr. Williams’ views on economic indicators - the consumer price index in particular - have been echoed by more well-known investment community figures such as bond investor Bill Gross, strategist Stephen Roach, and James Grant. “The numbers are misleading, and Wall Street uses the numbers to help sell their products,” says Mr. Williams, whose chief bugaboos include GDP and unemployment rates.

“Recently, I’d contend that what we’ve been getting is absolutely junk on the GDP,” he adds, despite recent official figures that GDP grew 3.3 per cent in the second quarter, after a small increase the previous quarter. “There’s no question that we’re in a recession, and probably have been in one since the last quarter of 2006. It didn’t start with the housing mortgage crisis.”

According to Mr. Williams, all the big measures have had their methodologies revised over the past few decades to paint the U.S. economy in the best possible light - and this has occurred regardless of which party was in the White House. However, he says, changes in methodology were always spelled out at the time - with rationales for doing so - so it’s not as though this has gone on in the dark of night.

Williams isn’t coming way out of left-field with his allegations. Back on June 9 Elizabeth MacDonald of FOX Business talked about a new book by Kevin Phillips, a political and economic commentator for more than three decades and onetime Nixon strategist, and wrote:

Monkeying around with government data started in the early ‘60s, Phillips says, during the John F. Kennedy administration. It appointed a committee to weigh changes to unemployment data, at a time when unemployment was soaring.

Out-of-work Americans who had quit searching for jobs–even if this was because none could be found–were then labeled “discouraged workers” and excluded from the ranks of the unemployed, though they were previously classified as such, Phillips notes.

In fiscal year 1969, the Johnson administration, with Congress’s blessing, orchestrated a “unified budget” that chucked in taxpayers’ Social Security funds with the rest of the federal budget, a change that let the government get its mitts on taxpayer Social Security funds for the very first time to use for all sorts of spending programs, including pork barrel projects.

The move, though, masked emerging deficits in Social Security funds, as taxpayer funds that were drawn down were replaced with treasury bonds, essentially more government debt.

Next, President Richard Nixon asked his Federal Reserve chairman Arthur Burns, to concoct a new inflation number that would be split off from traditional headline CPI, dubbed “core” inflation, Phillips says.

This new-fangled “core inflation” would simply knock out, due to nettlesome “volatility,” nettlesome food and energy prices. The new number could be shouted from the hilltops and blasted through newspaper headlines whenever the true CPI number was terrifying. It’s a number the markets are still too obsessed with today, though some seem to be surfacing out of this delusion…

I do go on. Let me continue with the cooked government data story.

In 1983, Phillips says the Reagan administration monkeyed around even more with inflation data, when the Bureau of Labor Statistics (BLS) decided that housing, too, was overstating CPI.

So, the BLS swapped in what it calls an “owner equivalent rent” measurement, what homeowners would pay to live in their homes if they were renters. But that number likely understated housing costs as it is based on overall rent, which stayed flat in most of the country during the housing bubble.

So, the government has cooked up its own housing inflation number that likely understates home prices, Phillips argues, and in turn has understated housing inflation during the recent housing boom by three to four percentage points.

Moreover, Phillips says in the 1990s, the CPI has been subjected to three other adjustments, all delivering a downward bias and all dubious:

*Product substitution: If flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon, he says;
*Geometric weighting: Goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption
*And, most strangely, hedonic adjustment: An unusual bit of monkeyshines by which the government says that product improvements in things like computers, cell phones or television actually amount to a reduction in price, so a $2000 laptop with a built in camera is less expensive than a $1500 laptop without one.

Pollyanna creep in the inflation data continued under the Bush administration. In 2006 it stopped publishing the M-3 money supply numbers, which captured rising inflationary impetus from bank credit activity, Phillips says.

Under the Clintons, Phillips says, the nation’s employment figures were massaged and kneaded too.

In 1994, the Bureau of Labor Statistics redefined the work force to include only that small percentage of what it called “discouraged workers” who had been seeking work for less than a year, Phillips says. The longer-term “discouraged”-some 4m U.S. adults who simply are not working-fell out of the main monthly tally. Some now call them the “hidden unemployed.”

The Clinton administration also dropped the number of households sampled for the data, from 60,000 to 50,000, making the number more rickety.

But a disproportionate number of the dropped households were in the inner cities. So, along with a new adjustment formula that is believed to also have cut black unemployment estimates, poverty figures get to look a lot less worse, Phillips says.

So remember this. The next time you hear some economic numbers that seem too good to be true, that might very well just be the case. And as for Pollyanna? Depending on which version of the story you happen to be reading, in the end Pollyanna is paralyzed either from being hit by a car or falling off a roof.

Sources:

“Lies, damned lies and overly optimistic statistics”
Richard Siklos
The Globe and Mail (Canada), September 22, 2008

“Does the Government Manipulate Economic Data?”
Elizabeth MacDonald
FOX Business, June 9, 2008

Farmers’ Almanac Predicts Cold Winter

Worried about high heating bills this coming winter? Maybe you should be. From The New York Times this Sunday:

People worried about the high cost of keeping warm this winter will draw little comfort from the Farmers’ Almanac, which predicts below-average temperatures for most of the U.S.

“Numb’s the word,” says the 192-year-old publication, which claims an accuracy rate of 80 to 85 percent for its forecasts that are prepared two years in advance.

The almanac’s 2009 edition, which goes on sale Tuesday, says at least two-thirds of the country can expect colder-than-average temperatures this winter, with only the Far West and Southeast in line for near-normal readings.

“This is going to be catastrophic for millions of people,” said almanac editor Peter Geiger.

Carsicles

The Almanac broke their forecast down by region. From the article:

The almanac predicts above-normal snowfall for the Great Lakes and Midwest, especially during January and February, and above-normal precipitation for the Southwest in December and for the Southeast in January and February. The Northeast and Mid-Atlantic regions will likely have an unusually wet or snowy February, the almanac said.

In contrast, the usually wet Pacific Northwest could be a bit drier than normal in February.

Source:

“Winter weather? Almanac says ‘Numb’s the word!’”
Associated Press, August 24, 2008

Why Ethanol Sucks

“So ethanol is bad for taxpayers, bad for consumers, bad for the environment, and bad for the world poor. Does anyone benefit from ethanol?”

Wall Street Journal Online Video Link

Source:

“Ethanol: Silly Senator, Corn Is for Food!”
reason.tv
Wall Street Journal Online, August 14, 2008

Consumer Blues

Who HASN’T noticed escalating prices these days? Judging from recent purchases, from flowers for my girlfriend to car washes to movie tickets, it’s pretty apparent to me, at least, that the cost of living is on the rise. According to Reuters’ Herbert Lash and Richard Leong this morning:

Consumer prices jumped at the sharpest rate in more than a quarter century during June, and consumers coping with soaring costs received their smallest income gain in a year, the government said on Monday.

The Commerce Department said personal incomes edged up 0.1 percent after rising 1.8 percent in May. June’s rise was the smallest since April 2007, when income was flat.

On a year-over-year basis, prices rose 4.1 percent in June, up from 3.5 percent in May, for the biggest annual gain since May 1991.

An inflation gauge tied to consumer spending jumped 0.8 percent in June, its steepest gain since a 1 percent rise more than 27 years ago, in February 1981.

Source: bobmccarty.com

Source:

“June inflation jumps, incomes barely rise”
Herbert Lash, Richard Leong
Reuters, August 4, 2008

Say Goodbye To Your Pay Raise

Think you’re getting a raise in 2009? Think again. According to the Wall Street Journal’s Sarah Needleman last week:

Despite the weak U.S. economy, employers nationwide are expected to raise workers’ salaries next year at the same rate as they did this year, a new survey shows. But the increase may be offset by rising inflation rates and lower 2008 bonuses tied to company performance.

Rank-and-file workers can expect to see their base pay rise by an average of 3.5% in 2009 — the same amount they received this year, reports Watson Wyatt Worldwide Inc., a global human-resources consulting firm. High performers are projected to fare better, gaining an average of 4.4% in base pay, while mediocre performers are likely to see their paychecks increase by 2% or less…

But even with a 3.5% raise, most workers will likely find that extra cash consumed by rising costs for everything from food to gasoline. The latest report from the U.S. Labor Department showed inflation rising at a brisk 5% in June — more than the raise most employees will receive in 2009.

“Inflation has crept up to a pace where even your better-performing employees won’t make up the difference,” says Laury Sejen, global director of strategic rewards consulting at Watson Wyatt. “They’re going to be losing ground relative to inflation.”

Quicksand Scene, “Blazing Saddles” (1974)

The situation looks even worse if you’re like me and don’t buy the government’s inflation data. On May 22, MarketWatch’s Rex Nutting noted that PIMCO’s Bill Gross discussed the flawed data in his June “Investment Outlook” on the PIMCO website. Nutting wrote:

Gross argued that inflation rates in the rest of the world have averaged nearly 7% over the past decade, while the U.S. official inflation rate has averaged 2.6%. “Does it make any sense that we have a 3% to 4% lower rate of inflation than the rest of the world?” Gross wondered…

The consumer price index is being understated by at least 1% per year because of these factors, Gross said. And if inflation is understated by 1%, then gross domestic product has been overstated by that same 1%. Other critics have put the error much higher.

Other critics like John Williams, an economic consultant who publishes the monthly newsletter Shadow Government Statistics. Ted Rall noted in a Yahoo! News piece last week that Williams calculates inflation is actually running at an annualized rate of 9.95%, when you factor out all the tinkering that’s been done to the data over the years.

But what about bonuses? The news isn’t much better. Robert Trumble, professor of management at Virginia Commonwealth University and director of the Virginia Labor Studies Center in Richmond, told the Journal that bonuses tied to company performance will likely be significantly less this year than last. He said:

Bonuses are definitely going to be down. The economy as a whole is down and most [bonuses] are performance-related.

Sources:

“Inflation May Offset Pay Increases in ‘09”
Sarah E. Needleman
Wall Street Journal, July 25, 2008

“U.S. inflation understated, Pimco’s Gross says”
Rex Nutting
MarketWatch, May 22, 2008

“RECESSION, YEAR 8”
Ted Rall
Yahoo! News, July 24, 2008

No Recession? Bunk!

Does anyone still believe in the economic data being churned out by the federal government? From MarketWatch last Thursday:

Brian Pretti, chief investment strategist for East Bay-based Mechanics Bank, has one word for those who keep saying the nation is not yet in a recession: “Bunk.”

“We are still wringing out the excesses of the financial sector,” Pretti says, “and not only is the period of reconciliation–or deleveraging–not over, but we will be living with it for some time to come. We’re in a recession; there’s no other word for it.”

Then why don’t the numbers tell the story?

“Officially, a recession is defined as two consecutive quarters of negative, inflation-adjusted, gross domestic product (GDP) growth. But if you use the wrong inflation assumptions (called the deflator in the GDP reports), the conclusions are wrong, too.”

To illustrate, Pretti points to recent deflator factors used by the Fed to estimate GDP. “For the first quarter 2008, it was 2.7%, for the fourth quarter 2007, 2.4%, and 1% for third quarter 2007,” he says. “Where did the government come up with those numbers that are quite different than the CPI numbers? Since September 2007, the price of crude oil is up 100%; retail gasoline up 69%; natural gas 95%; and the Commodity Research Bureau index for foodstuffs is up 27%. The true nature of inflation in the US has been anywhere between 4-5%, and that means we’ve already been in a recession for a number of quarters.”

The year-over-year inflation as measured by the Consumer Price Index rests at 4.9% as of the June report, which was released yesterday. It highlights Pretti’s point–and calls into question the prior figures that have been used. “No wonder the financial markets aren’t buying the idea that the economy is ‘holding up,’” Pretti says. “Their negative behavior is telling us headline GDP numbers may not exactly be reflecting reality!”

Source:

“Wishful Thinking Aside, It’s a Recession, Folks”
MarketWatch, July 17, 2008

Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending

Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:

He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:

The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.

“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.

“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”

Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.

Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”

Dr. Shilling told Newsmax:

Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….

I look for the biggest decline in consumer spending since the 1930s.

Next up? Phase four, where recession spreads throughout the world.

Oh joy…

Sources:

“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008

“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008

Vacancies Up At Strip Malls, Regional Malls

Because of this blog and other projects I am working on— I don’t get out much these days. But when I do manage to escape the cage, I’ve noticed more and more empty storefronts in business districts, strip malls, and regional malls around the Chicagoland area. It’s not like I specifically look for them either. Even my father noticed it as we drove back from breakfast this morning. “Look at all those empty stores,” he remarked, as we drove through the downtown area of one of the western suburbs.

So I wasn’t too surprised when I came across a piece by Illaina Jonas of Reuters UK, which said the second quarter was the worst quarter for strip malls in 28 years due to store closings and cutbacks. Using data provided by real estate research firm Reis, Jonas wrote this past Monday:

Strip malls, which are usually anchored by grocery or drug stores, saw average vacancies spike 0.5 percentage points to 8.2 percent, a level unseen since 1995, according to the report released on Monday…

For the first time since 1980, more space became available to rent at strip malls than was rented out – about 3.2 million square feet more. Part of the available space came in the form of 5.7 million square feet of new development that came on the market during the quarter.

Looking For A New Hangout?
Jay & Silent Bob From “Clerks 2” (2006)

Jonas talked about the sources of the strip mall woes. She wrote:

A growing list of retailers shuttered stores ahead of lease expirations or chose not to renew leases, and as newly completed space hit the market without signed tenants…

Consumers are constrained by increases in food and energy costs, as well as the cost of servicing debt run up during the housing boom. In addition to cutting back on clothing, jewelry and nonessentials, they have turned to lower-price grocers such as Wal-Mart at the expense of the upper end usually found at strip malls, such as Whole Foods Market Inc., Reis said.

It’s not just the strip malls that are hurting. The Reuters reporter noted:

Vacancies at regional malls rose 0.4 percentage points to 6.3 percent, the highest level since the first quarter of 2002, according to the preliminary results.

The result of growing vacancies, Jonas said, was downward pressure on rents charged by landlords.

Not a good time to be a mall tycoon…

Source:

“US retail property 2nd-qtr worst in 30 yrs - Report”
Ilaina Jonas
Reuters (UK), July 7, 2008

Quote For The Week

Last Wednesday, the U.S. Department of Labor reported that the consumer price index, or CPI, rose a moderate 0.2% in April. Excluding “volatile” food and energy prices, the “core” consumer price index increased only 0.1%. Over the past 12 months consumer prices are up 3.9%, with “core” inflation running at 2.3%.

In response to this “official” data, Joel Naroff, president of Naroff Economic Advisors Inc., told MarketWatch on May 14:

If you believe that inflation is under control, I have a bridge that spans the East River that I can sell you for a really good price.

Naroff was referring to the Brooklyn Bridge, and the fact that since its opening in 1883 several “salesmen” have attempted to sell the structure even though it has always been the property of the City of New York.

Congress Approves National Colosseum

Not really. But Capitol Hill politicians might as well allocate funds to build one, complete with chariot races and gladiators to keep us happy, considering the way they’re pandering to the masses these days. When Congress only has a 20% approval rating (Gallup), what else would you expect? Something like what happened today. Hoping to sooth the economic pain (and gain the electoral support) of Joe Six-Pack and Suzy Soccer Mom, both the U.S. Senate and House of Representatives, in a direct challenge to President Bush, voted to temporarily halt the shipment of thousands of barrels of oil a day into the government’s emergency reserve. The Strategic Petroleum Reserve, a system of underground salt domes on the Gulf Coast, was created by the U.S. government in the seventies as a precaution against major interruptions of oil supplies. With 701 million barrels in storage, it is currently 97% full, yet the equivalent of only two months of oil imports.

The Senate voted 97 to 1 in favor of suspending the shipments, which average about 70,000 barrels a day, until the end of the 2008. Only Senator Wayne Allard of Colorado voted against the measure. Presidential hopefuls Barack Obama and Hillary Rodham Clinton also voted to halt the shipments as well. John McCain was not present for the vote. Mirroring the same bipartisan support as in the Senate, the House voted 385 to 25 in favor of halting the program.

For some time now, Congress has wanted to tinker with the SPR, jawboning on and on about how curbing deliveries to and/or drawing from the emergency reserve (by the way, what part of “emergency” don’t you get?) can ease tight oil supplies, curb market speculation, and possibly lower crude oil prices. Case in point. MSNBC’s John Schoen wrote back on May 19, 2004 (that’s right, 4 years ago):

With oil prices stuck above $40 a barrel, attention has turned to the U.S. Strategic Petroleum Reserve, a vast stockpile of oil stored underground that the U.S. continues to add to. While Democrats call for releasing some of those reserves to help ease oil prices, President Bush Wednesday repeated his long-standing position that the stockpile should only be used in the event of a critical cutoff of fuel needed to maintain the country’s national defense…

“Since the price of oil is so closely tied to inventory levels, filling the SPR under these market conditions both depletes private sector inventories and pushes up prices for America’s consumers,” said Sen. Carl Levin, D-Mich., in a floor speech in April defending an amendment to defer SPR purchases.

More recently, New York Democratic Sen. Charles Schumer has introduced an amendment to draw 1 million barrels a day from the reserve for the next 30 days.

“Joey, do you like movies about gladiators?”

And Congress’ assertions that curbing shipments to and/or drawing from the SPR could help with our supply problems, dampen speculation, and lower oil prices? Wrong, wrong, and wrong, according to the experts (or, at least, people who know what they’re talking about). Regarding the supply problem, the 70,000 barrels that are being sent to the reserve on a daily basis represents only 0.3% of the 20 million barrels consumed by Americans each and every day. 0.3%? Can anyone tell me how this could possibly help alleviate tight supplies? Regarding the perception that high oil prices are caused by speculators, legendary energy investor T. Boone Pickens told attendees at the Oklahoma State University’s Energy Conference on April 23:

Only 5 percent of oil is in the commodity pool. If you did run it up, it would be briefly. Speculators cannot move it that much.

He would know. Finally, a number of politicians believe (or want us to believe) that halting shipments and even drawing from the SPR will somehow lower oil prices. CNN Money’s Steve Hargreaves wrote today:

A statement from Speaker of the House Nancy Pelosi, D-Calif., said it could bring down gas prices by as much as 24 cents a gallon.

Or so she claims. The CNN Money staff writer also wrote:

The U.S. Energy Information Administration predicts oil prices would fall by only about $2 a barrel - or shave 4 to 5 cents a gallon off the price of gas - if the president suspended deliveries to the SPR.

“It’s a very small amount” of oil going into the reserve, said EIA oil market analyst Doug MacIntyre. “And it’s very transparent to the market.”

Should I believe House Speaker Pelosi or the EIA? Tough call, right?

Here’s something to think about. A possible explanation for the high price of crude oil is that global demand is running at 87 million barrels per day, while the global oil supply is at 85 million barrels per day. Furthermore, while older oil fields are starting to go dry, no suitable replacements are being found. Finally, even though the U.S. economy is slowing, for every 1 barrel of reduced American demand there are 14 barrels of increased demand from developing countries like China, India, and Brazil.

Oh, but this just in…

“Middle East Oil Cut Off By Coordinated Attacks Throughout Region” and “Gulf Oil Infrastructure Destroyed By Category 5 Hurricane”

Well done. Thanks for saving me that nickel.

Sources:

“Senate votes to halt oil reserve shipments”
H. Josef Hebert
Associated Press, May 13, 2008

“House votes to stop adding to oil stockpile”
Tom Doggett
Reuters (UK), May 13, 2008

“Debate flares over strategic oil stockpiles”
John W. Schoen
MSNBC, May 19, 2004

“Oil stockpile a drop in the bucket”
Steve Hargreaves
CNN Money, May 13, 2008

“Pickens: Oil to go to $150 a barrel”
Jerry Shottenkirk
Journal Record, April 24, 2008

Consumers Buying What They Need, Not What They Want

This afternoon I read an interesting article by the Associated Press’ Jeannine Aversa about consumer spending at a time when the U.S. economy is slowing and prices for items such as food and gas are rising. According to a recent government report on retail sales, clothing stores, furniture and home furnishing retailers, electronics and appliance stores, building materials and garden supply places, and health and beauty shops were among those merchants who saw their sales drop last month. Sales at bars and restaurants posted a modest increase from the previous month, as did sporting goods, hobby, book and music stores.

Aversa noted how consumers are changing their spending habits:

• 60% of the American public say they are now less comfortable buying a big-ticket item, such as a home or a car, than they were just 6 months ago, according to the RBC Cash poll conducted by Ipsos, an international polling firm, earlier this month. 12 months ago, 48% said they were less comfortable about making a major purchase.
• 53.6% of people surveyed focused more on what they needed, rather than what they wanted, when they went shopping over the last 6 months, according to BIGresearch, a firm that tracks consumer behavior. Pam Goodfellow, a senior analyst at BIGresearch, says the focus is more on smart shopping and bargain hunting.
• Because declining home prices and rising prices at the pump cannot be controlled, consumers are “controlling the little things… filling up the cart and putting things back at the check out,” said Candace Corlett, principal at consulting firm WSL Strategic Retail. She warned, “They are learning restraint and that is deadly for commerce.” Although, most Americans aren’t giving up things like medications, cell phones, and cable TV.

Photo by Ruth Elkin, stock.xchng

The research firms pointed out specific areas that were suffering from the pullback in consumer spending. 35.2% of people polled were scaling back vacation plans, according to BIGresearch. WSL Strategic Retail said fashion accessories, home decor items, premium brands of food and specialty coffees, eating at restaurants and take-out foods, and tickets to entertainment, are the top areas where consumers are cutting back.

Marshal Cohen, chief retail analyst at consumer and retail research firm NPD Group said video games, toys, and skin care products are the three areas he believes are least likely to see spending cuts.

Source:

“People’s decisions to cut back add up to weaker economy”
Jeannine Aversa
Associated Press, April 25, 2008

Signs Of The Time, Part 13

Remember those days when you would go to a local eatery like Chili’s or Applebee’s, and leave feeling like Violet from Willy Wonka & The Chocolate Factory? They may be gone for quite some time. David Segal of the Washington Post wrote Sunday:

Pinched by soaring food costs on the one hand and a recession-fearing public on the other, the restaurant industry is getting crafty. Chefs are tinkering with recipes, swapping out expensive ingredients for cheaper ones. Managers are using behavioral science research to retool menus—putting high-profit items in the top right-hand corner, for instance, where diners tend to look first.

And many restaurants are putting the great American portion—a monstrosity by international standards—on a diet, as surreptitiously as possible. Many restaurants are buying smaller plates to make the reduced servings look just as large, or lighter silverware so that even if there are fewer bites per serving, each bite feels heavier than usual on the fork. A la carte portions of high-priced dishes are getting pared back and surrounded by low-cost starches and vegetables.

Segal explained that restaurants aren’t doing this on behalf of their patrons’ health. Rather, they’re cost-cutting measures. He wrote:

There is little risk that portion shrinkage will cause anyone to lose weight any time soon. That’s because the point isn’t to slim us down or lower our cholesterol. It’s to save money in a business that many think is already in recession. A recent National Restaurant Association survey found that 46 percent of members reported declines in traffic in February over the previous month, not to mention “a record-low reading in restaurant operators’ outlook and expectations.”

Great. I hate waiting to be seated anyway…

“How much for one rib?”
YouTube Video Link

Source:

“Using portions to keep control of bottom line”
David Segal
Washington Post, April 20, 2008

Who’s To Blame For The High Price Of Oil?

I read the following the other day in a grocery store publication on Chicago’s northwest side. Regarding the high cost of oil and gasoline, the bureau chief of the paper wrote:

Whew! What is the answer? I think we should contact our elected officials, both state and national, and let them know we, the taxpayers, need some relief. Yes, I know about Bush’s economic stimulus package that is on the way- but I don’t want to put it all in my gas tank.

There’s no use arguing with most Americans over who’s to blame for high oil and gasoline prices. In their minds, “Big Oil” is the culprit, with a dash of President Bush, his oil buddies, and every level of government sprinkled in for good measure. But before you forward on that e-mail about a “gas station holiday” to five of your friends, consider this: Could it be possible that the high price of crude oil is mainly due to the basic principle of supply-and-demand? Just a thought. Bloomberg’s Mark Shenk wrote today:

China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year, an increase of 4.4 percent, according to the International Energy Agency in Paris.

And here in the good old US of A?

U.S. demand will contract 2 percent to 20.38 million barrels daily, the IEA says.

Shenk noted that economic growth in China and India of more than 8%, coupled with increasing car ownership among the countries’ combined populations of 2.45 billion people, will more than compensate for declining demand in the United States. According to the IEA, global oil use will increase 2% this year largely because of emerging market growth.

Regarding the topic of car ownership, China’s passenger car sales jumped 22% to 6.3 million units sold last year. Reuters’ Joe Mcdonald reported on the Chinese auto sector today, and wrote:

Auto sales in China are booming, with analysts and automakers forecasting growth at 15-20 percent this year. But demand for the biggest vehicles is even stronger, with sales of luxury cars and SUVs expected to surge by 40-45 percent…

“Chinese buyers typically like bigger cars and they have the resources to go for them,” said Tim Dunne, J.D. Power’s director of Asia-Pacific market intelligence.

Source: China Daily

Mike Wittner, head of oil research at Societe Generale SA in London, told Bloomberg:

Does the U.S. matter anymore? Has the U.S. mattered for the last few years? It is debatable. As far as the oil market is concerned, demand growth is going to be continued to be driven by China and the Middle East.

Still feel like contacting your elected officials?

Sources:

“Emerging Market Oil Use Exceeds U.S. as Prices Rise (Update2)”
Mark Shenk
Bloomberg, April 21, 2008

“Gas guzzlers a hit in China, where car sales are booming”
Joe Mcdonald
Reuters, April 21, 2008

Are Americans Bio-Fools?

Anyone read Time? I have a gift subscription, and while my first choice of reading material these days is predominantly financial, when I saw the cover of the latest issue I felt compelled to pick up the magazine and take a closer look. On the cover, an ear of corn is pictured with leaves that have been replaced by $100 bills. The accompanying headline reads “The Clean Energy Myth.” Time’s Michael Grunwald states at the outset:

The Clean Energy Scam. Hyped as an eco-friendly fuel, ethanol increases global warming, destroys forests and inflates food prices. So why are we subsidizing it?

Ouch! The U.S. farm lobby must be going bananas right now. Grunwald explained the drawbacks of ethanol, whose viability as an alternative fuel is being increasingly questioned:

But several new studies show the biofuel boom is doing exactly the opposite of what its proponents intended: it’s dramatically accelerating global warming, imperiling the planet in the name of saving it. Corn ethanol, always environmentally suspect, turns out to be environmentally disastrous. Even cellulosic ethanol made from switchgrass, which has been promoted by eco-activists and eco-investors as well as by President Bush as the fuel of the future, looks less green than oil-derived gasoline.

Meanwhile, by diverting grain and oilseed crops from dinner plates to fuel tanks, biofuels are jacking up world food prices and endangering the hungry. The grain it takes to fill an SUV tank with ethanol could feed a person for a year. Harvests are being plucked to fuel our cars instead of ourselves. The U.N.’s World Food Program says it needs $500 million in additional funding and supplies, calling the rising costs for food nothing less than a global emergency. Soaring corn prices have sparked tortilla riots in Mexico City, and skyrocketing flour prices have destabilized Pakistan, which wasn’t exactly tranquil when flour was affordable…

But the basic problem with most biofuels is amazingly simple, given that researchers have ignored it until now: using land to grow fuel leads to the destruction of forests, wetlands and grasslands that store enormous amounts of carbon.

Deforestation accounts for 20% of all current carbon emissions. Grunwald used the example of the Amazon in Brazil. He wrote:

U.S. farmers are selling one-fifth of their corn to ethanol production, so U.S. soybean farmers are switching to corn, so Brazilian soybean farmers are expanding into cattle pastures, so Brazilian cattlemen are displaced to the Amazon…

…resulting in Paulo Bunyan

Apparently, there is hard science to back up Grunwald’s claims that biofuels are harmful. He wrote:

The environmental cost of this cropland creep is now becoming apparent. One groundbreaking new study in Science concluded that when this deforestation effect is taken into account, corn ethanol and soy biodiesel produce about twice the emissions of gasoline…

“People don’t want to believe renewable fuels could be bad,” says the lead author, Tim Searchinger, a Princeton scholar and former Environmental Defense attorney. “But when you realize we’re tearing down rain forests that store loads of carbon to grow crops that store much less carbon, it becomes obvious.”

Knowing all this, we must return to the question of why we are subsidizing it. The answer? Biofuels are politically-popular. Grunwald wrote:

Members of Congress love biofuels too, not only because so many dream about future Iowa caucuses but also because so few want to offend the farm lobby, the most powerful force behind biofuels on Capitol Hill. Ethanol isn’t about just Iowa or even the Midwest anymore. Plants are under construction in New York, Georgia, Oregon and Texas, and the ethanol boom’s effect on prices has helped lift farm incomes to record levels nationwide.

Someone is paying to support these environmentally questionable industries: you. In December, President Bush signed a bipartisan energy bill that will dramatically increase support to the industry while mandating 36 billion gal. (136 billion L) of biofuel by 2022. This will provide a huge boost to grain markets…

… and, quite possibly, global warming, the destruction of forests, and food prices as well.

Source:

“The Clean Energy Scam”
Michael Grunwald
Time, March 27, 2008