June 2011 Big Grower

Steady As She Goes By Charlie Hall

One of my favorite meetings each year to attend and speak at is the Big Grower Executive Summit, and this year's meeting in Miami was no exception. Besides the information provided by the noted speakers, the informal interaction among the participants is invaluable. I learn as much (or maybe more) from attending the meeting as I'm sure the participants learn from me. If nothing else, I always learn about a few more books that I need to add to my reading list each year!

In my remarks this year, I focused on the economic situation and outlook and had mostly good news to report. There are positives pushing the economy forward including improved household finances, moderate employment and income growth, declining inventory of new and existing homes, stock market improvement, and increasing corporate profitability and ample liquidity. The financial system also continues to heal, supporting growth, although lenders remain conservative and some businesses and consumers still have only limited access to credit.

But there are counteracting negatives weighing down the economy including the continued declines in home prices, higher food and energy prices, financial and disaster-related crises abroad, and fiscal adjustments that the Fed is going to have to make some time this year (probably). The net effect of these positives and negatives is moderate growth in the economy and will continue with gradually declining unemployment. One sign of this is that real consumption expenditures reached a record-high of $9.459 trillion (seasonally adjusted, annual rate in 2005 dollars) in February, according to the BEA report on Personal Income and Outlays. Consumer spending is now 1.1 percent above the pre-recession level of $9.355 in December 2007, and almost 4 percent above the cyclical low of $9.114 trillion in April 2009.

The nuclear and natural disaster continues unfolding in Japan and will likely reduce U.S. exports to Japan over the near term. Partially offsetting this negative demand shock will be an increase for some U.S. products as Japanese manufacturers and utilities look for alternative sources and suppliers. For example, food and water supply issues in parts of Japan could increase U.S. export of some agricultural and energy products to Japan. Overall, the negative impact of Japan's disasters on the U.S. economy is expected to be rather small with the biggest risk to the U.S. economy coming from a supply shock that could unfold. Prolonged supply disruptions from Japan could negatively affect domestic manufacturing and, in turn, sales in the United States.

Inflationary Pressures

The biggest uncertainty, however, is one that most economists are still struggling with at the moment and that is the effect of higher fuel prices and other inflationary pressures (food) on the economy. We know from history that increases in the cost of gasoline and food force adjustments in household budgets. Since last August, the cost of groceries is up about 2.5 percent, and gasoline costs are up about 25 percent. Back-of-the-envelope calculations by the Atlanta branch of the Fed suggest that over the past six months, the rising cost of groceries and gasoline has added just over $50 a month to the average household's expenses. Tighter budgets can mean less spending on more discretionary items.

The Energy Information Administration (EIA) expects the retail price of regular-grade motor gasoline to average $3.56 per gallon in 2011, 77 cents per gallon higher than the 2010 average and about 40 cents above the projected price in their previous price estimate. EIA projects gasoline prices to average about $3.70 per gallon during the peak driving season (April through September) with considerable regional and local variation. EIA says there is also significant uncertainty surrounding the forecast, with the current market prices of futures and options contracts for gasoline suggesting a 25-percent probability that the national monthly average retail price for regular gasoline could exceed $4.00 per gallon during summer 2011.

Generally, higher fuel prices translate into consumers losing confidence in both their current situations and in expectations for the future (and indeed we saw that back in mid-spring). The largest blow, however, is to their expectations of the future. This should not come as a surprise, given the heightened sense of uncertainty across the globe that we all felt during the spring. The only silver lining is that people tend to base their spending decisions more on current finances rather than on fears about the future. Thus, consumer spending is likely to slow, but not collapse or contract, in the face of rising oil prices.

Business Confidence Increases

However, while consumers remain as fickle as ever, business confidence seems to be increasing, particularly among younger firms who are growing more optimistic about their near-term prospects. While productivity gains have helped profits at many businesses during the recovery, one obstacle has been credit — tighter lending standards have discouraged firms from seeking loans, in turn restraining investment and hiring. That is beginning to unwind. The Federal Reserve's senior loan officer survey has shown more banks easing terms in recent quarters and now firms are becoming more optimistic. The Atlanta Fed's most recent small business lending survey shows sentiment is improving particularly among newer businesses.

This same optimism came through in some of the benchmarking data collected from growers and reported at the Summit — 78 percent of those surveyed indicated that they intend to increase acreage in 2011 compared to only 53 percent indicating as such last year. Of course, this optimism may stem from the fact that earnings before interest, taxes, depreciation and amortization (EBITDA) was about a full percentage point higher for reporting firms this year than last year!