Thursday, September 30, 2010

Social Expectations and Housing Market Moves

It is the rare household that chooses a house based mostly on a thorough rational assessment of what kind of living space they need. The selection is likely to be influenced more by self-image and perceived peer pressure. It is hard to buy a much smaller or larger house than everyone says a person like you needs. You are boxed in by a web of social expectations, many of which are media creations, unless you consciously choose to step out of the box.

When there was a trend toward larger houses, a great many people followed that trend, in varying degrees. And now that the trend is toward smaller houses, they will follow that too.

At the least, the social pressure for a million-dollar household (or one of more modest means) to buy an oversized house has all but vanished. People who find themselves living in one of these big houses will make up excuses for the extra rooms. The excuses serve as a way of saying, “We realize this house is too big for us, but we have to settle for what we have.” Some people may make a part of their house disappear by installing a door in front of a section of it and leaving it unheated in winter — or perhaps renting it out, in situations where local laws and lifestyle considerations permit this.

A downsizing trend can never be fully recognized by the mass media, which always seem to favor the larger, brighter, more controversial side of everything. Not many reality TV shows are going to be placed in an average-sized house. Still, the media is fond of trends and has wasted little time pointing out the trend toward smaller houses.

Heating and cooling costs, time pressure, and a new financial realism are three of the primary reasons why house sizes are trending down. Social expectations and media images are secondary reasons, yet they may amplify the trend beyond what anyone is expecting at this point. There are just two more components of the downward pressure on demand for housing.

Wednesday, September 29, 2010

Not Keeping Up With the Joneses

The revelations about the financing of single-family homes that have come out in the last five years, and particularly in 2009, must have changed the cultural meaning of houses in a way that will affect the housing market for the rest of our lifetimes.

To my mind, the gee-whiz statistic about housing in the United States is the one about average home equity. At one point, in 2007 if I remember correctly, the average home equity fell below 50 percent. For all the houses combined, not just the ones that have mortgages, the banks’ share of equity is greater than that of the homeowners. Imagine that homeowners own all the houses west of the Mississippi River, while the banks own all the houses east of the Mississippi — the actual situation is a little bit worse than that.

If that statistic didn’t sink in, the large numbers of foreclosures and short sales surely did, making the same point. Americans, in general, do not really own their houses.

Before the public discussion of the housing market that has taken place since 2005, I have to think that many Americans had a mistaken picture of the financing of houses. Many homeowners, we now realize, had no idea how much they owed on their own houses. But among those who did know how deep in debt they were, they may not have realized how their houses compared to the houses around them, financially speaking. If you owe $395,000 on your $425,000 house, and sometimes have trouble making the payments, it’s easy to feel like an imposter. When you know your own financial situation, but don’t know the details of anyone else’s, you can imagine that most of your neighbors have mostly paid off their homes. How many households were secretly, shamefully in financial distress in 2004 or 2005, thinking that they were the only ones?

Of course, no one could imagine that now. If there is financial distress connected to the mortgage on your house, you now know that it’s not just you. It’s a problem that’s repeated in approximately half of the houses in the country. It isn’t really much comfort to realize that, but it does put the situation in a different light. This change in perspective has to affect people’s future home-buying decisions.

When you look at what might affect the housing market, perhaps the most profound implication is this thought: If I felt pressure to buy a house to keep up with everyone else, I was probably aiming too high. Most of the people I thought I was keeping up with can’t really afford their houses either. The people who are sitting pretty right now are not the people with the biggest or nicest houses, but the ones who have their houses paid for — along with the ones who don’t own a house at all. The next time I buy a house, I’m going to make sure it’s one I can easily afford.

It is not just people who dug themselves into a financial hole who may be reaching this conclusion. Those who considered doing so and decided against it may be even more emphatic about it. The thought might be: It is so much better to looking at ways to pay off a mortgage than it would be to be living in a house with an underwater mortgage and trying to find a way to get back to zero. The next time I buy a house, I hope I don’t have to borrow any money at all.

I have previously mentioned the lifestyle considerations that are leading people to look for smaller houses. Now, here is a separate reason that may be pushing people in the same direction. The result is a lasting, or essentially permanent, reduction in demand for housing. And, as this won’t show up until people move to a new house, it’s an effect that might continue to exert downward pressure on housing for the next 10 to 15 years.

Tuesday, September 28, 2010

Hospital Budget Problems Continue

The pattern of hospital budget problems continues. For a supposedly stable industry, there are far more expansions and layoffs than you would expect. Both may occur in succession, sometimes with a bankruptcy mixed in, at the same hospital. In total, hospitals face the same challenge of overbuilding that is affecting the housing sector.

The hospital overbuilding is, perhaps, more understandable. Hospital executives planned capacity based on population projections that have been relatively reliable in the past — and much of this planning has to be done eight years in advance, so it’s not all going to be accurate. In general, though, a 60-year-old baby boomer in 2010 doesn’t have the medical challenges you would expect by looking at the 60-year-olds of 2002, so many of the recently expanded hospitals are having trouble finding customers.

This is a trend that was already seen in 2008 and 2009. The big change this year is that more of the hospitals’ budget problem are being blamed on government programs, particularly Medicare. It’s true enough that Medicare reimbursements are disappointing at times, but the same is true of nearly all medical payment plans. The fundamental revenue problem at hospitals is a shortage of customers, who are not falling ill in the numbers that hospitals had planned on.

Hospitals have been putting the brakes on their spending, so there are not as many hospital bankruptcies now as there were last year. Unfortunately for hospital budgets, the trend toward people being generally healthier, particularly in their 60s, 70s, and 80s, is not likely to suddenly reverse. And there are other trends working against hospital revenue, even before you consider the political risks or the possibility of medical breakthroughs that may simplify the treatment of common illnesses. Many hospitals have taken on so much debt to fund their recent expansions that bankruptcy will end up being the only way out.

Eventually, I trust, hospitals will stop overbuilding, and the current thrashing in the hospital sector can begin to wind down. In the meantime, the sector‘s transition from growing to declining is sure to be awkward.

Newfoundland After Hurricane Igor

A week ago, I was relieved that Hurricane Igor didn’t turn in my direction. It stayed offshore, missing the North American mainland — but not Newfoundland.

The post-tropical remnants of hurricanes often brush by Newfoundland, but Igor was still very much a hurricane when it swept across the island, with 90 mph winds and 12 inches of rain in some areas, causing a surprising amount of damage for an island that is used to stormy weather. More than 100 stretches of road were washed away, including bridges that collapsed when flood waters undercut both banks. There aren’t a lot of extra roads in the hilly terrain of Newfoundland, so some towns are cut off from the rest of the island.

And they may stay that way until spring, authorities are now saying. Bridges can’t be rebuilt between now and winter, and there are too many damaged stretches of road to repair them all in just a few weeks. Rebuilding that can’t be done before the first big snow will resume in the spring. In the meantime, a few towns in Newfoundland may be a little more isolated than usual for the rest of the fall and through the winter.

Monday, September 27, 2010

Cost-Cutting: Corporations Cutting Their Own Throats?

Cost-cutting has become so ingrained in corporate culture since the 1980s that it may ultimately kill off much of the corporate system. Like a patient cut down by blood pressure medication or anti-cancer drugs, a corporation that initially undertakes cost-cutting for its own survival can end up collapsing because of it.

Cost-cutting is a good thing when it enables a business to decrease its losses or increase its profits by eliminating unnecessary work. But corporations under pressure can start making decisions out of fear. Cost-cutting then becomes expensive, as each new change results in more costs, leading to more changes, in a downward spiral. You can find examples of cost-cutting gone too far in every day’s business headlines.

Consider these recent high-profile examples:

  • BP made zero progress on capping its out-of-control oil well as long as its CEO was personally taking charge of the operation. Within days after the CEO was removed, the oil mostly stopped flowing. That happened, I believe, because the CEO had been making engineering decisions based on the fear of the costs the company might face. When engineers took over the engineering decisions, and made them out of a basic sense of problem-solving responsibility, things started to work. (A parliamentary committee this month was not entirely convinced when the CEO testified that the oil well’s problems were the result of bad luck rather than cutting corners.)
  • GMAC Bank, Fannie Mae, and probably other major institutions in the mortgage business are in big trouble after it emerged that many foreclosure affidavits filed with courts in foreclosure proceedings were signed by workers who did nothing but sign affidavits all day. Two officers in particular are said to have signed nearly 10,000 foreclosure documents per month, or about one per minute, indicating that they could not have known what documents they were signing, never mind reading and verifying each one. This shortcut approach saved the companies millions of dollars, but now they face embarrassing questions and tens of billions in new expenses, as lawyers file motions to withdraw the erroneous documents, and some past foreclosures are sure to be overturned. Ally Financial, the parent company of GMAC Bank, has been forced to suspend foreclosure evictions in half the country while it checks its paperwork, a process that may take months, and Fannie Mae may be facing a similar delay.
  • Wall Street companies that rushed to sell mortgages to investors in 2007, before the market collapsed, made similar shortcuts in paperwork, and as a result, neglected to tell investors of the deficiencies in the mortgages. If this can be shown in court, the Wall Street companies could be forced to take the mortgages back and refund investors’ money, and this could easily lead to the bankruptcy of half of Wall Street.
  • Documents turned over to Congressional investigators in the Johnson & Johnson case paint a picture of a drug-manufacturing executive obsessed with cost-cutting, to the point of authorizing a “phantom recall” of defective drugs that a contractor purchased from store shelves so that J&J could avoid the expenses involved in notifying the public, something required by law and a necessary step in any product recall. J&J initially claimed that the phantom recall had never taken place. Abandoning that story, its new story is that the phantom recall was authorized by the FDA. Investigators could not find any evidence to support that story, however, and the FDA does not even have the statutory authority to authorize a phantom recall. The cost-cutting obsession may also explain the hundreds of manufacturing lapses that led to moldy Tylenol being sold for more than a year, and eventually prompted hundreds of recalls and the closing of the factory involved. The cost to Johnson & Johnson: the reputation of Tylenol and other brand names may have been permanently damaged.
  • PG&E had budgeted money in 2007, from a rate increase approved that year, to replace the pipeline that spectacularly exploded south of San Francisco this month, but postponed the project several times, finally scheduling it for 2013. The company pocketed the money in the meantime, according to critics. State regulators now are likely to order PG&E to accelerate its neglected maintenance, which will cost the company far more in the short run than the roughly $5 million it was keeping in the bank for the pipeline project.

It is normal for large corporations to shrink. Established corporations, in total, shed enough jobs every year to put the U.S. economy into a recession, if new companies didn’t pick up the slack. In an aging corporation, however, if cost-cutting moves create large new expenses, this can put a business into a downward spiral in which no amount of cost-cutting can restore the company to financial health. This is the position General Motors finds itself in after failing to significantly restructure itself in bankruptcy, and you could make the case that half of the conglomerates in the United States are perilously close to that same predicament. But large corporations depend on each other to a significant extent, so the failure of some large corporations could lead, in a domino effect, to the decline and eventual failure of others. Corporations could, in theory, avoid this outcome by being more selective with their cost-cutting moves, but with cost-cutting so much a part of the corporate psyche now, I am not sure that is possible in practice.

Sunday, September 26, 2010

Ice, Freight, and a Sailboat on the Arctic Ocean

The Northern Passage has succeeded in its goal of sailing through the Northeast and Northwest Passages in the same summer season. The trip took a few days longer than planned, but reached Baffin Bay with at least two weeks to spare, as Arctic ice extent is almost the lowest it has ever been.

The journey is not over for the Northern Passage. It will be dodging icebergs for the next three days at it sails the length of Baffin Bay. It may then face the largest waves of its journey as it crosses from Greenland to Iceland and from there to the North Sea. This part of the trip may require quite a bit of sailing skill, but it is at least familiar territory for sailors.

The fall equinox happened a few days ago, and with it comes much shorter days and longer nights, which will eventually lead to new ice cover forming across the Arctic Ocean. First, though, the surface water temperatures have to decline. At this point, ice forms at night, but melts out completely during the day, at least on the warmer days. The melting process cools the ocean. Eventually, the daylight will not last long enough to melt the ice that forms at night, but with warmer ocean water, this may happen later this year than ever before.

This year’s summer ice extent was similar to the pattern of 2007, when the record low occurred, and 2008. The ice was thinner to begin with this season, and there was favorable weather for ice melt in the late spring. In particular, winds pushed most of the thickest ice toward the southernmost areas of the Arctic Ocean, near Alaska and Chukotka, where it melted out despite its thickness. This also means that next spring’s melt may again start with unusually thin ice. Large areas of the ocean were ice-free all summer, and surface water temperatures warmed to Pacific-like temperatures. This suggests that the Arctic Ocean stays cold in summer only because of melting ice, so that after the ice disappears, the ocean can take on properties similar to the neighboring areas of the Pacific Ocean.

One interesting thing to note is that this year’s September ice map has been more favorable for shipping than the record low extent map of September 2007. Indeed, the Northeast Passage was comfortably open for most of August and all of September this year, and freight traffic passed through routinely, though I don’t know how much cargo was carried. The Northwest Passage has been similarly open for about a month. Both passages are apparently still navigable for heavy ships. The scarcity of September ice in the southern Arctic could indicate that it is not so easy for the thinner ice now on the Arctic Ocean to drift south and clog shipping lanes.

Saturday, September 25, 2010

Confusion Over Wheat Supplies

The summer fires that burned up areas of Russia’s farmlands are extinguished, and the summer heat is fading, but the wheat crop may not be recovering quickly. Local estimates are that about half of the winter wheat crop has been lost to dry weather. With only sporadic rains, only half of the wheat that was planted has grown fast enough that it can survive the winter freezes. Large areas in Russia also have not been planted because of the drought. Meanwhile, in Canada, heavy rains appear to have diminished that country’s wheat harvest. Pakistan too has been hit with bad weather, with floods ruining perhaps a tenth of the wheat crop there.

People in Europe seem to be pointing to the ban on Russian wheat exports as the cause of higher prices for grains, yet the only place where a shortage looms is in Russia. Russia normally exports about a fourth of its wheat crop, but some experts believe even with an export ban in place, Russia could use up its stockpiles by March. The government believes the stockpiles will be sufficient until June, when new harvests begin.

Similar confusion is found worldwide in projecting wheat supplies. The Canadian Wheat Board is projecting the largest worldwide wheat harvest ever next year. In Europe, though, economists are worried about shortages that might last through most of next year, and the United Nations is holding an emergency meeting to address the possibility of grain shortages.

Amid all this confusion, there is little chance of a repeat of the problems of 2007. Then, speculators created spot shortages of rice and other grains in major cities, leading to hoarding that created more spot shortages. Commodities speculators are no longer sufficiently funded to pull off a repeat of that turmoil, even if they were to attempt it.

Friday, September 24, 2010

This Week in Bank Failures

Elizabeth Warren was appointed to build the Consumer Financial Protection Bureau (CFPB). This new agency will be the first federal agency charged with protecting consumers from the predatory practices of banks, lenders, and other financial institutions, so it’s appropriate that it won’t be put together by someone with a profits-first Wall Street mentality.

Warren has already made it clear that she is not a fan of the “gotcha” approach to banking. In an interview this week, she suggested that credit card agreements could be shortened to two pages, and be made simple enough that ordinary consumers can do cost comparisons between them. Currently, most credit card agreements are about 5,000 words in length.

The NCUA tonight put three corporate credit unions into receivership. Members United Corporate Federal Credit Union, Southwest Corporate Federal Credit Union, and Constitution Corporate Federal Credit Union owned so many problematic mortgage-backed securities that they no longer had a significant level of operating capital. The two largest corporate credit unions were put into receivership last year. With tonight’s action, the NCUA controls two thirds of the corporate credit union market.

Corporate credit unions provide banking-like services to credit unions. Their financial difficulties, though, resulted from securities transactions, mostly involving mortgage-backed securities.

A bank failure tonight on each coast:

  • Haven Trust Bank Florida, with $133 million in deposits and two locations on the northeast coast of Florida. Florida-based First Southern Bank is taking over the deposits and purchasing the assets.
  • North County Bank, with four locations north of Seattle and $276 million in deposits. Another local bank, Whidbey Island Bank, is taking over the deposits and purchasing the assets.

Thursday, September 23, 2010

Blockbuster Bankruptcy: External Forces at Work

The bankruptcy of movie-rental mainstay Blockbuster has been blamed on its competitors in the movie rental business. That’s an interpretation that probably comes mostly from Blockbuster itself, as it puts a favorable light on the company’s ability to continue to operate after reorganizing.

But other external factors are also at work. The recession has put new pressure on consumers, leaving them with little time to watch long-form movies. Technological advances that make it easier than ever to make movies, but not much easier to distribute them, means there are more high-quality free movies than ever. Hollywood has done poorly since the end of the Lord of the Rings series in making movies that grab people’s attention.

There is not much a video-rental business can do to bring customers into the store. Lowering prices may not help in a business where prices are already low. Loyalty programs risk adding pressure to already frazzled consumers. And when time is tight, the movie rental is one of the first things people cut.

Wednesday, September 22, 2010

The Bounce of Summers

It’s official: the summertime bounce in the U.S. economy that everyone observed between June and September 2009 was large enough and lasted long enough to count as an economic expansion. The previous contraction ended and an economic expansion began in June 2009. I prefer to look at it as a combination of two summertime bounces joined by a mistaken build-up in inventories, but even a mistake can count as an expansion if it lasts long enough.

The report of the end of the recession was followed by the report of economic adviser Larry Summers’ pending departure from the White House. I am certain this simultaneous news is not a coincidence, and it may be even better news for the economy. Summers is reputed to be the White House insider who has been giving President Obama such bad advice on the economy, helping to form policies based on propping up the financial system and housing market while leaving the broader economy and the job market to fend for itself.

Summers is not leaving immediately, but the announcement allows Obama to start to chart a course for the economy if he chooses. In other words, it is a chance for Obama to transform himself from the Hoover of our time to a kind of Roosevelt — from a tinkerer to an economic leader. It would be a mistake, though, to wait and see what Obama decides. The federal government is not as influential now as it was in 1933, and it more likely that the U.S. economy can rescue the federal government next year than the reverse.

In the meantime, summer is over and fall is here. The burst of summertime activity is fading, and so are most of the government’s various initiatives to support the economy. Spending from last year’s economic recovery package is fading. The mortgage-modification and other housing market programs are foundering and all but forgotten. The FDIC is again one extra-large bank failure away from needing emergency funding. General Motors is preparing for its public stock offering in November or December, which may well prove to be its last hurrah.

But at the grass roots level, the news is better. I do not know anyone who is simply staying home feeling sorry for themselves. One friend, unemployed for two years, is on the verge of earning a master’s degree. Others have successfully changed jobs, some of them multiple times. And others, fearing layoffs, are diligently using their spare moments to advance themselves in various ways that they think will help them if they should lose their jobs or their health coverage.

People are paying down their debts, losing weight, giving away excess possessions. All these things put individuals in a stronger position. At the same time, this kind of individual action puts the economy in a position where it is more able to respond to whatever surprise comes next.

People’s fears of layoffs are hardly frivolous. Especially in the large corporate sector, large layoffs will continue for years after the rest of the economy recovers. The corporate layoffs of the 1980s helped pave the way for the economic expansion of the 1990s, and similarly, today’s layoffs are helping to make room for the more dynamic areas of the economy that will lead us forward over the next 15 years or so.

Tuesday, September 21, 2010

Book Release Today: Professional SAS Programming Secrets

I’ve been occupied lately with the release of my book, Professional SAS Programming Secrets, 3rd edition, which is shipping today. If you’ve always wanted to be a skilled SAS programmer please take a look. I hope to be back to my usual commentary on our economic lives tomorrow.

Saturday, September 18, 2010

Replacing Fashion Models With Avatars

In electronic media, it is getting harder and harder to separate reality and fantasy. This overlap is about to hit fashion photography in a big way.

For a few years, clothing catalogs have had the options of showing actual photographs of people wearing clothing items and using video-game technology to generate images that resemble photographs. Video-game technology has improved and avatars look more and more like people, often like specific people. It is now possible to take a two-dimensional photograph and convert it to a three-dimensional scene, and then the person in the photograph can be modified or replaced with an avatar. This makes it possible to show an actual photograph of clothing, but with an digitally generated avatar wearing the clothing.

And the reason to do this is not necessarily to create a fantasy image. A more prosaic reason to use 3-D technology to touch up fashion photographs is to smooth over skin blemishes or flaws. The model can have digitally perfect skin, and this includes the advantage of better image compression, especially in the common JPEG file format used for nearly all photographs online. This makes such a large difference in the quality of JPEG compression that within a few years, skin smoothing and body hair deletion will surely become standard options in JPEG compression programs used for photos of people. And then, what is a “true” image when image compression and 3-D imaging overlap to that extent?

At this point, I can still tell which models have merely been touched up and which have been replaced with avatars. At least I think I can. Within two years, though, no one will be able to pick out the difference. Does the picture show a model, a mathematically streamlined image of a model, a model replaced with an avatar of the model, a model replaced with a completely different avatar, a mannequin replaced with an avatar, a digitally generated image, or something in between? You won’t be able to tell, at least not at a glance. Even the person in a photo won’t be able to tell how much the image was changed.

Someday there may be a scandal in which we find out that a famous model didn’t personally appear in the photo-quality images of clothing seen in a magazine or catalog. We may have to be careful of catalogs that use imaging software to make their fabrics look better than they actually are.

And beyond that, at some point, photographs will lose their reality value. Barely a generation ago, if you saw something in a photograph, it implied that the scene really happened, in a way that a sketch or verbal description would not. This is changing. Already, photographs are not admissible as evidence in court unless someone can testify as to how the photographs came about. That testimony will become more important. And already, you cannot always tell the photos from the avatars in the small, 48-pixel photos that may accompany people’s online comments. Imagine how things will change when you cannot tell reality from fantasy in any of a person’s photos online, or when avatars can have vacation slideshows that look every bit as real as your own. When photographic images can be generated on a whim, will they become more important in conveying ideas online, or will they start to disappear?

Friday, September 17, 2010

This Week in Bank Failures

The case against former Countrywide executives will go to trial, a judge ruled yesterday. A jury will decide whether the defendants misled stockholders or profited from inside information. The executives made more than $100 million from stock transactions between 2005 and 2007 while the company was staggering toward financial collapse from poor-quality mortgage loans.

Under new rules approved by the SEC today, banks will have to work harder to disguise the distressed assets on their balance sheets. The new rules will require banks to disclose short-term borrowing activity as part of their quarterly financial statements.

New global rules that increase capital requirements for large banks, agreed to at a Sunday meeting, will be phased in over the coming decade. It is hoped that the higher levels of capital will permit banks to weather minor crises without government assistance. The new capital requirements are being phased in slowly to avoid having any sudden impact on liquidity, which is already impaired under the current guidelines at many banks.

A Philadelphia-area bank failed tonight, ISN Bank, with a single location in Cherry Hill, New Jersey. From everything I know, the failure was the result of a weak mortgage loan portfolio, but ISN Bank did not have the common risk factors for heavy mortgage losses. It was not on the edge of a metropolitan area, it did not go into business or expand aggressively in 2005 (but it started in 2001), and real estate values in the Philadelphia metro area have not declined by much. There are no indications I could find that the bank was badly mismanaged, that it took inordinate risks, or that it took large losses in securities. The three banks that have previously had to be rescued in the Philadelphia area had histories of large-scale management mistakes, but ISN Bank seemingly just had bad market positioning and bad luck. The news of its failure is taking away some of the “can’t happen here” attitude that was previously seen in banking in the Philadelphia area.

ISN Bank had $80 million in deposits, down by more than a third from its peak. The deposits are being transferred to New Century Bank, a bank based in the far corner of the Philadelphia suburbs which earlier this year had amassed a war chest for acquisitions. This acquisition will provide New Century Bank its first branch in New Jersey. The bank failure was the first in New Jersey in over a year.

Peoples Bank, in Winder, Georgia, was one of three Georgia banks to fail tonight. Like the many other Georgia banks that have failed, it had a concentration in real estate loans that proved problematic over the last five years. It had $400 million in deposits and 14 locations. Community & Southern Bank is taking over the deposits and purchasing the assets. Peoples Bank is not connected to four other banks in Georgia with similar names.

Four other bank closings were reported tonight, of small banks with between $40 and $250 million in deposits:

  • Bank of Ellijay, in far northern Georgia.
  • First Commerce Community Bank, in the Atlanta suburbs. The successor for these two Georgia banks is also Community & Southern Bank.
  • Bramble Savings Bank, Milford, Ohio. The successor is Cincinnati-based Foundation Bank.
  • Maritime Savings Bank, southeastern Wisconsin. North Shore Bank is the successor.

Thursday, September 16, 2010

Freight Cutbacks: Fewer Products

The new round of FedEx layoffs are worrisome to stock traders, not so much because of the 1,700 jobs lost at FedEx, but because of the reason FedEx feels it needs fewer workers carrying freight for it. It’s because the volume of freight is declining.

In economic terms, freight isn’t just heavy boxes going from one city to another. It’s a sign that companies are manufacturing things and that other companies are buying them. When freight shrinks, it means the part of the economy that deals with physical products is also shrinking.

Part of this is just the shrinking size of physical products, a trend that goes back to 1970. There are no more truckloads of telephones because telephones aren’t as large as they used to be, but people are still using as many telephones as ever. In some years, the general expansion of the economy is enough to keep freight volumes growing or holding steady. But that’s not happening between this year and next, the way FedEx sees it. That’s why there was such a large stock market reaction to the FedEx announcement.

Wednesday, September 15, 2010

Tea Party Near 5 Percent in Delaware

The Tea Party movement had what political commentators are calling its biggest success to date in a primary win in Delaware. The Christine O’Donnell campaign defied the skeptics and produced an enormous turnout for the Republican Senate primary. O’Donnell ended up with 30,000 votes, defeating the establishment candidate by a margin of 53-47.

But even in a state like Delaware, 30,000 voters is a small group, just under 5 percent of registered voters. It’s a long way from there to the roughly 210,000 votes needed to win a statewide general election. O’Donnell will try to broaden her appeal to win over more Republicans and at least a fourth of the Democrats (there aren’t so many independents in Delaware), but for her to accomplish that in seven weeks is hard to imagine at this point.

The various minor electoral successes of the Tea Party are as much a measure of the decline of the Republican Party. When Republican voters have voted out incumbents, it has had a lot to do with the incumbents’ seedy backgrounds and their ties to the Republican Party machine. The Republican Party has shrunk so much that a splinter group has a chance to make a splash. For her part, O’Donnell cannot entirely attribute her success to the Tea Party. She has run for U.S. Senate, with similar success, before.

Still, drawing 5 percent of registered voters is nothing to sneeze at. It is similar to what Ralph Nader did at his peak, and verging on major-party significance.

Tuesday, September 14, 2010

Waiting for Better Prices

According to economic theory, one of the ways an economy in recession can right itself is by people buying things at discount prices, even if they can’t use them right away. That works to an extent, but sometimes it works in reverse. When prices are noticeably higher during a slowdown, people are better off postponing purchases if they can, hoping to get the lower prices that come with boom times. Two current examples are computers and book printing.

Book printing prices have increased noticeably during the recession, in spite of the lower prices for paper. The reason? Book printing plants have large fixed costs that they have to cover, even though fewer books are being printed. That means that each customer has to provide a larger share of the fixed costs than usual. It’s reasonable for a book publisher to guess that book printing prices may fall again when the economy picks up — all the more reason not to print extra books right now. This could change if many book printing plants shut down, but that’s not expected, and it would occur only with a proportionate loss to lenders or investors — not a scenario that benefits the economy as a whole.

The last five years have seen only marginal technological advances in the world of computers. Selling fewer computers, computer manufacturers have less money to spend on the research and development that creates the new technology that keeps driving computer prices down. People who can wait are assured of lower computer prices after the industry’s fortunes improve.

In these two areas, and in countless others, the bad times of a slow economy also make it a bad time to buy. We can’t look to these areas to fuel an economic recovery.

Monday, September 13, 2010

Optimistic Wholesalers Increase Inventories

Inventories keep increasing, anticipating a recovery in consumer spending that isn’t on its way. In July, wholesale sales went up 0.6 percent, possibly an encouraging sign. Inventories rose twice as fast, though. Inventories have been larger than any economy justifiable level for at least the last three years, so any increase at this point is a sign of the economy’s persistent sluggishness. Inventories increase when spending is going slower than manufacturing, so an increase in inventories is often an early sign of a slowing economy.

In this case, it is not that the economy is about to slow down suddenly, but an optimism on the part of wholesalers as they anticipate faster sales in the months ahead. If the sales materialize, of course, that’s a good thing. But if sales slow or hold steady, it can force manufacturing to slow down to get things back in sync.

Another possible explanation for the increase in inventories is that they represent a hedge against inflation. If price increases are expected, it makes sense to take deliveries sooner, to beat the price increases. Increases in the prices of manufactured goods themselves are not expected in most cases, but an increase in the cost of delivering them is not at all unlikely, with energy prices showing signs of creeping up. This alone, in a time when there is not much else going on, could be enough to speed up orders and increase inventories. But if this is the case, the implications for the broader economy are no more encouraging than if inventories are increasing because of errors in sales forecasting.

To try to clarify this, these are examples of “good” and “bad” increases in inventory that happened this summer:

  • “Good”: A new consumer electronics retailer is opening locations in some of the stores vacated by the failed Circuit City chain. The new stores could lead to an increase in sales.
  • “Bad”: Some of the excess supply of milk, produced after government forecasts called for an increase in milk demand when demand was actually declining, is being made into cheese and ice cream. Inventories of cheese and ice cream are possibly the highest they have ever been. Milk production will have to decline to bring inventories (and prices) back into balance.

Increases in inventories are the main thing that has stabilized the economy over the past year, but inventories cannot continue to increase indefinitely. Something else has to occur to make the economy expand, or financial pressures will start to push inventory levels down again.

Sunday, September 12, 2010

Taking Pipelines for Granted

A series of energy-related failures and disasters this month points to a pattern of neglect in energy infrastructure. Thursday, in San Bruno, California, a natural gas pipeline leak created an explosion large enough to leave a crater and flatten nearby houses. The same day, an oil pipeline in Illinois was shut down after it began leaking, interrupting the flow of oil from Canada to U.S. refineries. The pipeline owner has started to excavate the damaged pipe, which continues to leak oil. A week earlier, of course, there was the offshore oil platform explosion, which led to a minor leak and corresponding coverup.

When money is tight, businesses tend to slow down maintenance activities, which can make failures happen more frequently. This could especially happen in the energy sector, where there is a strong tendency to take the energy infrastructure for granted — to imagine that a pipeline or other installation will simply stay put. Energy companies, for their part, insist that they are not cutting corners. Yet they find themselves cleaning up after failures that they would rather have avoided.

Saturday, September 11, 2010

A Look Back at the “Hard-Core Unemployed” Myth

In all U.S. post-depression economic recoveries, the housing sector recovered before the economy recovered. Currently, there is such an oversupply of housing, in a time of diminishing demand for housing, that the housing sector may not recover for 10 to 15 years. Therefore, the U.S. economy is in for a long pause, perhaps a whole “lost decade,” before any noticeable recovery occurs.

Well, not so fast. The lost decade scenario is certainly a reputable view among economists, but the U.S. economy is nothing if not adaptable. To illustrate this, I want to look back at another prediction that supposedly would doom the U.S. economy. The theory, circa 1991, was that many people were just not employable. They couldn’t read, they lacked skills, they were too undisciplined and disorganized to hold a job.

It was a theory at least as reputable as the theory about the housing sector. And it wasn’t true at all. When the jobs appeared, the workers were ready to take them. They learned to read and write, learned specialized skills, bought clock radios, and showed up for work.

In the current decade, the economy will adjust to the declining interest in housing. A house can be a huge purchase, but it doesn’t follow that if people aren’t buying houses, there will be nothing for workers to do. Even at this point, it is safe to say that people aren’t just sitting around.

Friday, September 10, 2010

This Week in Bank Failures

The buyers of the FDIC’s mortgage portfolios — loan portfolios assembled from failed banks — tend to be real estate investors rather than financial investors. This is a sign that observers expect the failure rate of the mortgage loans to increase in the next few years. Real estate investors have an advantage over financial investors in that scenario, with more skill and experience in selling off or managing the foreclosed real estate. Of course, if more foreclosures are on the way in loans that come from failed banks, the same is likely also true for loans owned by banks that are still operating.

In the debate over how much the government can do to support the housing market, no one seems to agree on what a normal state for the housing market would look like. Some economists expect a rapid return to the conditions of the 1990s, for example, while others worry about a decade-long deleveraging process akin to Japan’s recent experience. The truth is probably not somewhere in between, but a new pattern for which there is no such handy historical reference point.

This brings up questions about what new risks banks are getting themselves into by making new home mortgages. Banks routinely make 30-year loans to support a real estate market that has been turned on its head twice in the last 20 years — crossing their fingers and hoping they’re not painting themselves into a corner with the two or three upheavals that may come along before the loans mature. This creates such uncertainty for the banking system that I believe there ought to be rules limiting any one bank’s long-term exposure to the real estate market. Currently, there are still banks that brag about having a loan portfolio that consists of more than 90 percent real estate loans, but that’s a practice that ought to be banned, not just to protect the future of the economy, but to protect the future of those specific banks.

One small bank in Florida failed tonight. State banking officials closed Horizon Bank of Bradenton, Florida, which had four branches and $165 million in deposits. The deposits and assets are being transferred to Arkansas-based Bank of the Ozarks.

Thursday, September 9, 2010

Sailing Around the Arctic Ocean

Explorer Børge Ousland is leading an attempt to sail around the Arctic Ocean this summer. His crew, on the Northern Passage, have crossed path a couple of times with another expedition, on the Peter I, attempting the same thing. Both expeditions are likely to succeed, as ice continues to melt this week at the latitudes where they are sailing. Ousland’s blog has covered the progress of the Northern Passage in detail, with photos and videos.

Probably the most difficult part of the journey for the Northern Passage was traversing the Russian coast in July and August, well before it was clear of ice. This included several days of navigating through ice that appeared solid on the satellite picture, but that contained substantial gaps when seen in the photos taken at the surface. The trimaran left Alaska yesterday, heading into the Northwest Passage. The challenge there will be watching for ice in the diminishing daylight.

The photographs and observations along the way are of scientific interest, as surface measurements of the Arctic Ocean are still few and far between. The crew has measured ocean water temperatures around 8°C along the way. That’s almost warm enough for a swim, apparently, if you’re from Norway. It also helps to explain why sea ice is melting so rapidly in the southern Arctic. The water will continue to melt ice from below well into the fall even as falling air temperatures begin to form new ice at the surface.

Wednesday, September 8, 2010

Redefining Work, Again

Work was redefined in the early years of the 20th century, and it may be time to redefine it again.

The old definition of work, from the agricultural and industrial ages, was based on physical toil. If you were lifting and carrying something heavy, such as a bushel of apples, you were working. But if you were lifting and carrying something light, such as a book, you were not working. This definition was carried forward long after it had lost most of its descriptive force so that business leaders could put themselves forward as being exempt from work.

The current meaning of work is focused not on toil, but on status. If you are a worker, if you are on the clock, then you are working, regardless of what you are doing or how easy or hard it is. If you are not on the clock, then you are not working, again regardless of what you are doing. Thus, the exact same actions may be work or not work depending on whether you are on the clock.

To take a very simple example, if you are walking to a conference room for a late afternoon meeting, that’s work. But when the work day is over and you are walking down the street, that’s not work. The quality of walking could be exactly the same, but it’s part of your work, or not, depending on your status as a worker.

This way of distinguishing work based on status made some sense when nearly all of the important actions that led to a business result were done by workers. But that’s much of a distinction any longer. Many important things are the result of the combined efforts of workers, customers, and volunteers, and this is a trend that seems likely to increase going forward. How much sense does it make to call one part of the effort work, while lacking a corresponding word to refer to the other part?

The tight legal framework that surrounds employment won’t be going away anytime soon. If anything, it is getting tighter, with new rules about proof of identity and health insurance set to go into effect over the next few years. With such a clear line drawn around employment, the status associated with employment will continue also. Yet at the same time, the previously tight connections between employment, work, and income are unraveling. We’ve reached a transitional point that calls for a new look at the meaning of work.

Tuesday, September 7, 2010

Stimulus Plan Repeats Last Year’s Mistakes

At first glance, the new stimulus plan proposed by the White House is ugly. The substance of it is a plan to spend $50 billion on infrastructure. That part, though poorly structured and poorly targeted, makes sense. But tacked on is $300 billion in business tax cuts. Ugly. If it takes $300 billion in giveaways to get $50 billion of stimulus spending through Congress, that’s even less efficient than last year’s package.

What does it mean for a stimulus package to be inefficient? In this case, the proposed spending is too small to lift the country out of the recession, but at the same time, the price tag is high enough to put the federal government’s fiscal integrity — and along with it, its credit rating — at risk.

The business tax breaks are supposed to encourage new spending by businesses, but in times like these, the only spending that will follow will be businesses paying tax accountants to rearrange their budgets so that something qualifies for the tax breaks. If a business were to be persuaded to spend on something new, this year or next, it would be some form of cost-cutting investment, which would lead to less spending in the long run.

I know, stimulus is the traditional strategy for getting the United States out of a recession. This is not an ordinary recession and stimulus cannot provide its usual effect. The errors in the economy need to be corrected before we can get it up to speed again.

Monday, September 6, 2010

Another Quiet Holiday Weekend, But People Are Busy

The local area has been almost as quiet as the Independence Day weekend two months ago, as large numbers of people are staying home for the weekend. Streets are empty, in comparison to a normal weekend, and parking lots are also. A few stores and restaurants actually closed for the weekend, and others perhaps should have, as workers outnumbered customers during what should have been a peak hour.

If people are not out shopping, it’s almost as if they’re not around, and that’s why the area is so quiet. I don’t think people are sitting idle, watching television or meditating, though. I have friends who are painting a room today. Another friend is testing a new recipe. For my part, I spent the morning with the chain saw, cutting up branches left behind by last month’s storm. I imagine this kind of story is repeated all over town, as people finally get a chance to do something they’ve been meaning to do for quite some time.

Sunday, September 5, 2010

Wide Open in the Arctic

I thought I knew something about football from all the amateur games I’d watched, but when I started watching professional football I had to relearn a lot of what I knew. For example, an NFL receiver can be “open,” ready to receive a pass, with a defender just inches away, if the defender’s head is turned the wrong direction. He is “wide open,” able to receive a pass uncontested, if the nearest defender is more than an arm’s length away. These are distances so small it’s hard for the untrained viewer to pick them out on the television screen, but a football fan can see the difference.

I’m having to learn a similar kind of distinction when looking at shipping lanes in the Arctic Ocean. If I were on a cargo ship, I would want almost no ice in sight. To me, that would be an open shipping lane. I look at the ice maps, and I say that the Parry Channel and the Siberian coast might be open. But of course, I’m not qualified to navigate a ship of any kind. Reports from actual cargo ships making the trip in the second half of August have said that both passages were wide open.

How can this be? To begin with, as I’ve learned, much of the ice in the Arctic Ocean is too thin to matter, too thin to represent an obstacle to a cargo ship. If ice is just a few inches thick, a cargo ship can go through it as easily as it goes through water. At the same time, some of the areas of ice include large patches of open water that a ship can steer through. And of course, the Arctic Ocean is much larger than the map, so a tiny opening on the map is miles wide when a ship is passing through.

I had imagined that the beginning of routine cargo traffic across the Arctic Ocean would be a bigger media event than it has been. Regardless of the lack of headlines, cargo is crossing the Arctic now, and will continue for the rest of this month, and perhaps every September from this year forward.

Saturday, September 4, 2010

How School Schedules Lead to Overeating

A story on reports on a study that reinforces a long-established scientific idea that there is a connection between lack of sleep and weight gain. This study, though, focused specifically on teenagers, and it strongly suggested that the causality goes both ways. Excess food can keep people awake later at night, and lack of sleep can lead people to seek more energy from food — especially when eating an early breakfast. Much of the stress may be caused by an externally imposed schedule that forces students to get out of bed at an unnaturally early hour.

More of the sleep-deprived teens consumed a significant amount of calories between the hours of 5 a.m. and 7 a.m.

When I was a teenager, I found it hard to get up at 6:25 a.m. to catch a bus at 6:50 for classes that started shortly after 8. Now that I have more control over my schedule, I tend to sleep until what I consider the more civilized hour of 7. These days, though, many school districts operate more than an hour earlier, forcing students out of bed between 4 and 5. To make matters worse, daylight time was recently extended to cover half of the school year, which means students are really getting up as early as 3. It should be no surprise if this unnatural schedule messes up students’ entire day, including what they eat.

According to the new study, teenagers who sleep less (for example, 7 hours, instead of 8) are more likely to eat high-energy foods. This fits the intuitive idea that if you aren’t able to restore your energy with sleep, you might rely more on food to maintain a functioning energy level, which in turn could lead to weight gain.

There is no easy answer for teenagers who are forced to start their day 3 1/2 hours before sunrise. Still, the conventional advice about food and sleep holds: sleep enough, if you can, and don’t eat when you should be sleeping.

Friday, September 3, 2010

This Week in Bank Failures

In testimony this week, Bernanke and other regulators testified that shutting down large financial institutions would permit the economy to avoid a repeat of the upheavals of 2008. Bernanke cautioned, though, that regulators would have to avoid the temptation to turn a blind eye to problems.

A credit union was liquidated this week. Wisconsin regulators closed First American Credit Union of Beloit, Wisconsin, on Wednesday. Michigan-based First Community Federal Credit Union assumed the assets and liabilities to provide uninterrupted service to the credit union members.

I am not expecting any bank failures tonight because of the holiday weekend and the season, which finds so many workers on vacation. Should any occur, though, I will be sure to look into them.

Thursday, September 2, 2010

“Drill (BOOM!) Baby (BAM!) Drill”

Today’s oil rig explosion will prompt even the more optimistic oil explorers to pause and reassess the safety of the technology of offshore oil drilling. Two rigs destroyed by explosions caused by separate acts of nature five months apart certainly makes it seem like the oil drilling process is not sufficiently controllable using current technology. If drilling for oil in the sea is like riding a dragon, because the technology really isn’t up to the task, then it makes good sense to leave the oil where it is until the right technology is available.

Wednesday, September 1, 2010

Greece Cracks Down on Smoking

In another sign that Greece is addressing its financial challenges, the country is cracking down on smoking. A new measure bans all smoking in public places and all cigarette advertisements.

A previous attempt, which had a complicated set of exceptions, was ineffective at curbing smoking, so the new measure includes no exceptions and imposes fines of up to €10,000 for business violations. During the current economic slowdown, the amount of the fine is enough to close down the average restaurant, so owners and workers will be forced to pay attention to the new rules. Individual smokers can be fined as much as €500 per violation. That’s not necessarily enough to be an effective deterrent, but it is more than just a token fine.

Greece is the smokiest country in Europe, where an estimated 40 percent of adults smoke cigarettes and more than half of the country’s medical expenses are smoking-related. The country can’t afford the costs of so many illnesses, not to mention the many other costs associated with tobacco use.

The government’s decisiveness in dealing with this issue is the same forthright approach we’ve seen in hundreds of other reforms that, taken together, have put Greece on a sound financial footing. This is a choice that was available to the country all along, and looking back, it is hard to understand why the previous government chose accounting fraud instead.