The Farm & Non-Farm Economies:
The Importance of Open Markets
Farm Financial Management
Ernie Goss Ph.D. Professor of Economics, Creighton University & MacAllister Chairholder www.twitter.com/erniegoss Websites: www.ernestgoss.com www.outlook-economic.com Podcast: Itunes http://coba3.creighton.edu/econoutlook/gossrss3.xml
The Current Crisis
Investment Climate
New Jobs Interest Rates & Economic Growth
Heartland Trade Report, 2007-09
produced in cooperation with Creighton University
70 65 110 60 55 50 45 40 35 30 85 25 20 80 95 105 115
100 Exports Value of $
90
'0 8
ar .' 07
N ov .'
Ja n. '
Ja n. '
Ju ne
Ja n. '
Ju ly
pr il
ay
M
M
A
A
pr -0 9
'0 7
07
07
08
'0 7
'0 8
09
Benefits of trade (for each $1 million of exports)
Industry
Total impact
Wages
Jobs
(in millions)
Frozen food All food Fertilizer manufacturing Retail Steel mills Aircraft manufacturing Tourism
$2.1 $2.9 $3.1 $2.5 $3.1 $3.1 $2.7
$0.40 $0.44 $0.60 $0.81 $0.60 $0.82 $0.87
11 15 12 34 11 14 27
Threats to trade
Exports—high value of the dollar 2009 Stimulus Bill (Buy American) Cap & trade (tariffs on CO2 emitting countries Limiting H1 Visas only 65,000 of 163,000
applicants last year received them. Preventing Mexican trucks from crossing into U.S. (temporarily restarted). H1N1 flu virus Exaggerated health concerns regarding foreign food
U.S. housing vacancy rates and Housing price growth, 1999-2008 (Quarterly Case-Shiller Index)
3.0% 2.8% 20.0% 2.6% 2.4% 10.0% 30.0%
Vacancy rate
2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 1.0%
V acancy r ate s (le ft s cale ) Hous ing pr ice s (r ight s cale )
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
'9 9
'0 1
'0 3
'0 5
'0 7
Q '1
Q '1
Q '1
Q '1
Q '1
Q 1
"0 9
Case-Shiller housing prices
U.S. Housing Affordability,1987-2009
201.0% 181.0%
Housing prices / per capita income
161.0% 141.0% 121.0% 101.0% 81.0% 61.0% 41.0% 21.0% 1.0%
Ratio hous ing pr ice s to incom e (actual) E xpe cte d
Q '1
'8 7
How big is (was) the problem (bailout)?
Homeownership rates: 1995 64.8% 2005 68.9% (highest ever) Relaxing standards brought 4.5 million new and mostly unqualified
buyers into market. Initial price tag was $450 billion With no growth in per capita income, housing prices would have to drop by another 9% by the end of 2009 to return to historical ratio This estimates assumes housing prices do not plummet below prebubble trend A partial solution: 1) Tax credit for all for home purchases, 2) Reduce the hours to achieve active home investor status (500 to 50) 3) Reject the deductibility interest limitation for high income workers
Investment Climate
Stock values vs. U.S. economy, 1952-2009
14.5
12.5
10.5
8.5
Carter begins
6.5
Obama begins
4.5 2.5
Clinton begins
Graph profiles S&P divided by Gross Domestic Product (times 100)
Gov. Bailout vs. Current Vaue (in billions)
$240.0 $190.0 $140.0 $90.0 $40.0 $1.6 -$10.0 AIG BOA Fannie Mae GM $21.0 $0.6 $20.0 $1.1
Current value Gov. bailout
$200.0 $180.0 $138.0
Solution: >Make 2001 and 2003 tax cuts on dividends & capital gains permanent >Reduce Gov. spending to less than 20% of GDP > Reject lifting the cap on taxable social security wages
Jobs
The Mainstreet Economy
A monthly survey of community bank CEOS Colorado, Illinois, Iowa, Kansas, Missouri, Nebraska,
South Dakota, Wyoming Intended to gauge the economic conditions in the non-urban areas of region Average community size is 1,300 population Available at: www.outlook-economic.com www.economictrends.blogspot.com
The Mainstreet Economy (index over 50 indicates expansion) Apr-08 Mar-09
Apr-09 21.7 50.8 66.7 61.0 41.2 29.6 30.8
Area economic index Loan volume Checking deposits Certificates of deposit Farmland prices Farm equipment sales Home sales
47.5 57.3 54.8 57.3 71.3 71.4 33.6
18.7 46.2 67.4 62.9 33.1 30.0 24.6
Hiring in area Retail business Confidence index
43.4 40.3 36.9
23.0 18.7 35.9
15.8 20.5 45.6
The Mainstreet Economy, 2006-09
90 Overall economy Farm equipment sales Farm land price growth 80 70
60
50
40
30
20
10
0
v No 6-
n - Ja 7
r Ma 7-
y Ma 7-
l - Ju 7
ep -S 7
v No 7-
n - Ja 8
l - Ju 8
8 r- 0 Ma
09 prA
The Regional Economy: Survey of Purchasing Managers& Business Leaders
A Partnership Among Creighton University,
and State Purchasing Management Associations
Monthly Survey of Business Conditions
Leading Economic Indicator Released First Business Day of Each Month
to Media
Released Via WWWeb: www.outlook-economic.org www.ernestgoss.com Appears in media throughout U.S. Survey of supply managers in over 900 firms
Business Conditions Index, 2003-09
80 70 60 50 40 30
U.S. Mid-America
20
ar M 03 h' c 4 3 . '0 ec. '0 pt D Se 04 e' n Ju '05 n. Ja 6 l '0 ri Ap ar M 08 h' c F 9 . '0 eb
105
M ar
15
25
35
45
55
65
75
85
95
ch '0 3
ug . Se '0 pt 3 . Ja '03 n. '0 4
A
Ju ne Se '04 pt .' O 04 ct . D '04 ec .' 04
U.S. Mid-America
A pr il '0 6
Prices Paid Index, 2003-09
Ju ly
'0 7
Ja n. '0 8
A
pr -
09
Important indicators: keep an eye on:
The employment report for May will be released on June 5th . I expect the
report to show job losses (and large) for a 20th straight month and an increase in the unemployment rate to 9.1%. (www.bls.gov) First time and continuing claims for unemployment insurance. Released every Thursday. First time claims below 450,000 and continuing claims less than 5.0 million would be bullish. I don’t expect this though. They will be worse. (www.doe.gov ). Keep an eye on the yield for 10-year U.S. Treasuries. Current yields are artificially low and reflect unprecedented fear among investors. Large increases will tell us that either 1) global investors are taking funds out of the U.S. market, or 2) inflation expectations have increased, or 3) investors have reduced the risk perceptions and are pulling money out of treasuries and putting it into equity markets (http://finance.yahoo.com ) Case-Shiller home price index—if the declines become smaller and smaller, iit will be very bullish. Gold prices (safe haven buying)
The Quantity Theory of Money
Currently: Money * Velocity = Prices * Quantity
2010 Money * Velocity = Prices * Quantity
30 Year Mortgage Rate 2007-10
8.0% 6.0% 4.0% 2.0% 0.0%
'0 7 '0 7 '0 7 '0 8 '0 8 '0 8 '0 9 2 3 4 1 2 3 4 1 Q Q Q Q Q Q Q Q
7.8% 5.6% 5.4% 5.5% 4.7% 4.7% 4.7% 4.7% 4.9%
-2.0% -4.0% -6.0% -8.0% -10.0% -12.0%
For each 1% increase in the deficit as % of GDP, the mortgage rate increases by 0.3%
30-Year Mortgage Federal deficit as % GDP
Q
1
'1 0
08
The Risk Factors (Long & Short Term) Taking cap off of taxable social security wages. Cap & trade ($650 billion over 10 years) Limiting interest deductions on high income workers. Anti-trade language in Stimulus Bill and cap & trade The biggest risk is housing prices dropping by another 25% for 2009 (overwhelming pessimism) Asian reduced buying of U.S. Treasuries (Chinese de-link their currency to dollar).
The Outlook
From Goss: Year over Inflation will remain very low (< 1.0%) for most of 2009 as large commodity prices pass through the system. However, inflation will pick up considerably in 2010 rising to 4% - 5% by the end of 2010. Despite the Fed’s efforts, mortgage rates will rise by 2% by the second quarter of 2010. Annualized inflation will rise to 4% - 5% by the second half of 2009. From the National Association of Business economics: The current cyclical downturn will rival that of 1973-75. In the current downturn real GDP is predicted to decline 2.8%, slightly less than the 3.1% during the early ‘70s. Economic weakness will be dominated by a retrenchment in consumer spending reflecting large employment and wealth losses. The jobless rate will peak at 9.0% by the end of the year. House prices are predicted to decline 5% during 2009, though the S&P 500 index is expected to rise a solid 8% by December 31, 2009. From the Conference Board: The unemployment rate will peak at 10.1 percent in 2010. Housing starts will grow from 540,000 in 2009 to 730,000 in 2010. The economy will grow by 1.6 percent in 2010. This is well short of the potential of 3.5% to 4.0%.