Good News

Haven’s Candies, a Maine harbinger of economic news, looks sweet. Recession hits everyone, but it would make sense that the high quality end of the candy business would be one of the first into recession and one of the last out.  So, I asked Andy Charles, owner and President of Haven’s Candy in Westbrook, how his business was faring.  “We’ve beat 2008 by about 10%,” he beamed.  Unlike some retailers, Andy’s costs have actually risen with the commodity prices of cocoa (up 6% in 2009), and he has not raised prices for three years. But the added revenue from eager shoppers has made this 2009 recession year a success in its own right. Hopefully this bodes well for the rest of the Maine economy!

Crime rate dropping even in recession. States across the country are showing lower crime rates over the past few years.  Even in 2009, amidst economic downturn, cities like Los Angeles, Dallas, Detroit, Chicago, and New York have seen a dramatic reduction in violent crime. According to the FBI, in the first half of 2009, as unemployment doubled, reported murders, forcible rapes, robberies and aggravated assaults decreased by 4.4 percent compared with the first half of 2008. Some say it’s because our capture rate has gone up with modern forensics, discouraging at least some from attempting a crime. Or maybe we’re seeing a window into a less violent future as we become a more developed society.

Something positive about the government bailout: It seems the media hasn’t stopped to marvel at the fact that 12 banks have repaid $113B in bailout money- with interest, ahead of schedule (one year versus five). Aside from the fact that this means our largest financial institutions must be recovering, ask yourself how many government investments have had this kind of return, especially in a down economy.

Bad News

The sobering view through stocks. The stock market is considered by most to be the bright spot in our economic statistic line up.  While unemployment has hardly started to recover and housing is anemic at best, the stock market has risen something like 21% in the last nine months. But a closer look will show that we are only about half way up to our pre-recession highs, and values for the decade are down an annualized 0.8% per year. To make matters worse, fewer companies now pay dividends.  Thirty years ago, 94% of companies sent dividend checks. Today it’s 74%. According to Standard & Poors, our total return (including stock appreciation plus dividend return) for the last decade is lower than the decade of the 1930’s. Ouch.

Health check on housing – still sick. While confidence is rising, the core instigator of this recession, housing, is still not rebounding where we’d like.  The Conference Board indicates consumer confidence has doubled – up to 52.9 from a low of 25 last February. Consumers must not be looking at housing, however. The latest in bad news comes from housing prices – they are up only a hair, hardly what we’d expect with outlooks getting rosier. Add to this that mortgage rates have risen in four weeks 4.71% to 5.14%, making it harder to afford housing. Lower prices could spurn new buying, but prices tell the big picture story that the economy still does not see the long term value of real estate.  As quoted in the New York Times, “I’m worried. Everyone’s worried,” said Karl E. Case, the Wellesley College economist who helped design the housing price index that is being quoted. “If prices sink 15 percent from here, which is a possibility, and the 2008 and 2009 loans go bad, then we’re back where we were before — in a nightmare.”

For What It’s Worth

The world is getting stronger.  Russia, China, Brazil, and India’s stock values went up in the last decade, while the U.S. stock values went down.  In Russia’s case, dramatically up. Consider the positives.  Thirty years ago, Russia was described as the “Evil Empire” by Ronald Regan.  Baby boomers (like me) remember 1962 when schools had regular nuclear blast drills and many were convinced we would soon be seeing nuclear bombs dropped on American cities. While the Russian experiment in democracy is far from perfect, they are growing economically.  China and India together have eight times more people than the U.S. – and thirty years ago they were a time bomb of suppression and poverty. Today they are finding a way toward a more stable and productive prosperity.  Having strong partners not only makes us stronger, it reduces the likelihood that they will attack us. Today’s political and terrorist hotspots cover a much smaller geography than they did in the decades of the past. Lest we not forget that 65 years ago the globe was embroiled in a conflict touching most of the developed world, and ended up killing at least 60 million people and wasting trillions of productive capital.  If we stop for a moment in the midst of the heated debate on the future of health care and national debt, it shouldn’t be hard to find a way to be pretty happy about where the world sits as we face a new year.

GOOD NEWS

How’s the patient?  If we take a page out of the medical profession to evaluate the US Economy, we might say we’ve moved from “Critical” to “Severe” and with a little luck, to “Fair” by the middle of 2010.  The American Hospital Association says a move from Critical to Severe with a human patient means that instability persists but the future looks more favorable.  We don’t get to “Fair” until vital signs stabilize, which we can’t predict quite yet, but we’re getting closer. Unemployment remains the most troubling, and questions about the impact of paying for the government support efforts a close second. But the economy is clearly showing positive vital signs.  We’re producing again (GDP up), existing house sales are up, the stock market is quite strong, and it even appears we had a decent 4^th quarter in consumer sales. Scott Hoyt, senior director of consumer economics for Moody’s Economy.com, said it well: “Although weakness still persists . . . the state of panic is gone.” 

Housing mixed, but hey, let’s see the bright side. We’re still far from healthy housing, as the ground zero housing crisis that started two years ago is still producing foreclosures at an alarming rate. But existing home sales are stirring.  The Kennebec Journal reported last week that home sales in Maine were up nearly 49 percent in November from a year earlier, the sixth monthly increase, while the US was up 42%.  Existing home sales lead to some multiplier effects in fix-up construction and new appliances. United States’ new homes went the other way, and are down 11%, but while the press has been harping on the gloom in that number, one has to realize that not a lot of new houses have been built.  Some also point at the $8,000 tax credit creating unrealistic demand – maybe so, but there were 1,025 homes sold in Maine in November, increasing activity in 15 of Maine’s 16 counties, making 1,025 happy buyers and 1,025 sellers, and that’s good news.

BAD NEWS

The State of States.  Some might conclude that one of our biggest looming concerns comes from State financing breakdowns.  36 states are facing shortfalls. 2.8 short years ago, 41 states had surpluses, with California showing the third biggest black ink number in the country. Today states are nearly $30 billion in the red overall, $2 billion in California, and this includes the $146 billion state lawmakers already cut from spending.  Some chilling strategies are unfolding, such as Oklahoma’s 10% across the board services cut and Michigan’s mandatory state worker furlough affecting 4,500 people. The fear of state bond defaults (decisions not to pay interest on money they’ve borrowed from individuals and businesses) could lead to Federal bailouts like we saw last Fall in the private sector. Only one state defaulted on bonds during the 1930’s depression – Arkansas, and it took 16 years for them to return to any kind of normalcy.

And how’s Maine?  It’s not the spending, it’s the income.  Our future is dependent on economic recovery, not federal support or cost savings.  Here’s a status report for those who might have missed the newspaper during the holiday break:  State government has seen a $1.1 billion drop in revenue projections, and even after cuts, we still see a $438 million deficit that needs to be filled in.  The Governor has presented his plan to address this, which will be taken up by the legislature in January, including the elimination of 44 state jobs, less money for education (public schools and higher education); and reduced payments to Medicaid and MaineCare.  We have had some recent relief from Federal support: $150 million for the biomass industry (mostly wood pellet related); 1,000 temporary census jobs; $500,000 to research enhancements to the Lewiston Auburn municipal airport. But these are literally just drops in the bucket – or “swimming pool” is more appropriate.

FOR WHAT IT’S WORTH

Have we learned?  College students will be writing papers about this period for centuries, and one answer they will have that we don’t yet is whether we will learn from this.  History shows that we don’t do well remembering to be prudent in taking risk in search of high returns or making major purchases (like a home).  We learn secondary lessons, like we did in the 2001 “Dot Bomb” crisis. We learned to be cautious investing in internet companies with little more than a website and a couple of young people. But it appears we went right back to making other risky investments. 

We can’t forget that risk taking is good.  Some argue that risk taking by those who can afford it create an important engine of economic growth – because if their investments are right, eventually everyone will benefit, but if they’re wrong, then only that one investor will lose. So if we react to this period by squelching the ability for some to take high risk for the chance of high returns, we may “throw the baby out with the bathwater.”  The two best lessons to be learned from this period: 1) Only take risks we can afford to lose, and 2) Be honest and clear about the risk we sell to others.

New Year’s Wish: Opinions about the proper course from here are dividing our country in a dramatic rift. Here’s a New Year’s wish that our three party system of politics will find a solution that combines the best of all opinions, even if it takes a lot of fighting to get there.

Good News

All Good, No Finance:  This holiday edition of Good News Bad News will only have Good News, and there won’t be a single economic index – it’s time to slow down a notch.  It’s not that there isn’t any bad news, the world is chock full of it. But one week a year, let’s do something a little one sided. After all, this is the week we wear garish blinking musical brooches and neckties and think they look great. Maybe someday in the dead of winter we’ll have an all Bad News edition.

Social media funds business projects.  The NYT Magazine announced the 9^th annual Ideas Award, and one went to Kickstarter, a fascinating way to use Social Media for testing business project ideas. Over 1,000 projects have been funded, from $8,142 for a solo sailboat trip around the world, to a songwriter who found buyers before she recorded anything. Projects not getting support get a hard but important lesson before spending a dime.

Strangely, lower-tech is gaining popularity.  Maybe that closet full of old equipment will find a use again. CD’s have better quality than MP3 players, yet they’re going the way of vinyl records. Most photos on the web are from low quality cell phones when there are so many high end digital cameras available. People are abandoning their expensive watches for a peek at the tiny clock on their cell phones. People watch movies on tiny iPhone screens when there are cheap TV alternatives. Even in war, while we have advanced expensive aircraft, we often use drones using the equivalent of a snowmobile engine.  Here’s another perspective on this: Professor Jonathon Berger at Stanford University found that young music listeners prefer low fidelity versions of rock songs over high, and this has been true six years in a row.