A Speculated Economic Silver Lining Brightens the Shadow of a Natural Disaster: How the U.S. Economy could benefit from Hurricane Harvey

The ruthless storm battering Houston, Texas is said to rank as one of the nation’s costliest disasters, with speculated loss of tens of billions of dollars in economic activity and property damage in an area critical to chemical, energy, and shipping industries.

 

Despite the widespread devastation and predicted losses of up to $100 billion, economists vocalized optimism that the Texas city is likely to recover quickly and may experience economic growth from rebuilding efforts.

 

Historically, the U.S. economy has rebounded following natural disasters, most easily associated with the financial resurgence following the $40 billion loss from Hurricane Katrina in 2005 and the $25 billion loss from Hurricane Ike in 2008. Dan Laufenberg, chief economist at Ameriprise Financial, stated, “the U.S. economy rebounded from Katrina, although the region hit by the storm has not, demonstrating once again how amazingly resilient our economy can be.”

 

The Houston metropolitan area, the U.S.’s fifth largest based on population, accounts for approximately 3 percent of the nation’s gross domestic product (GDP). Texas is often attributed as a center for oil production and refined products like diesel fuel, gasoline, heating oil, and other distillates.

 

In anticipation of increased demand due to the hurricane, wholesale trading prices for gasoline increased 6 cents to $1.75 per gallon on the benchmark contract set to settle next month. Ellen Zentner, chief United States economist at Morgan Stanley, suggested the lagged effects of rebuilding homes and replacing motor vehicles will outlast the anticipated neutral impact on national gross domestic product in the third quarter, providing a lift to GDP in the fourth quarter and beyond.

Californian Magic Is Real – The GDP Says So

In many aspects, California has been seen as a unique case – at times an anomaly, even – of an American state. During the Rio Olympics there were many mentions of how many medals from the American roster belonged to California, and how that number would compare to other competing countries. When it comes to GDP, one can most definitely expect the similar kind of discussion taking place, especially in the current political atmosphere where the intensely progressive and liberal California stands among an overall right-leaning U.S.A..

The above graph shows California’s annual GDP growth since 2000. As the data suggests, California’s economy has remained largely healthy throughout the way, only taking a reasonable hit upon entering the 2008 Financial Crisis. However, as Bloomberg noted, California has seen a surprisingly speedy recovery compared to the rest of the nation, which the news agency accredited to the state’s liberal cultural-political environment, even going as far as saying that California “is the chief reason America is the only developed economy to achieve record GDP growth since the financial crisis of 2008 and ensuing global recession”.

The article attributed California’s “magic” to its left-leaning policies, such as securing a strong labor force through laws favoring immigrants. At a time where the President has been very outspoken against the topic, California strives to do the exact opposite, by exercising its autonomy on a state level. From raising taxes instead of lowering to encouraging companies to globalize rather than discouraging, California is almost a “rebellious child” in the eyes of the federal government. However, this rebellion has proven successful, as California’s real GDP growth maintained an upward momentum since climbing out of the recession until 2015, where it attained 4.4% while the entire country had only seen 2.6% that year.

There is no reason to believe that California would change course from what it has been doing and what has been working under the Trump administration. In fact, the President’s orders would act as the inverse-compass for the Californian economy. Despite having seen a dip in 2016, California does not seem to concern itself with this little hiccup, and from the looks of its policies, the state is set on remaining being that “problem child” in Mr. Trump’s classroom.

The Quality of Our Dining Foreshadows the Health of Our Economy

There is an idiom expression in China saying that “hunger breeds discontentment.” It is not hard to understand that people are less likely to spend money on fancy meal and dining environment when the economy is bad. With little money in their pocket, people tend to turn to fast-food or eat at home, and the restaurant business goes down. Thus the Performance of the Restaurant Industry is a significant indicator of the health of our economy.

According to the National Restaurant Association(NRA), Restaurant industry sales constitute 4 percent of the U.S. GDP. The president of NRA Dawn Sweeney said restaurant business also stimulates employment and generates tax revenues. He said, “What’s more, for every dollar spent in restaurants, an additional $2 is generated in sales for other industries, generating even more tax dollars and economic activity.”

RPI Index

The Restaurant Performance Index provided by the National Restaurant Association examines a comprehensive health of the U.S. restaurant industry, including sales, traffic, labor and capital expenditures. If the index value is above 100, it means the American restaurant business is growing during this period of time. An index value below 100 means this business is shrinking.

If we compare this chart to the United States GDP, we could see a general trend that the RPI and GDP have a positive relationship. The higher RPI foreshadows a growing GDP, usually about one year ahead. For example, RPI falled below 100 value after 2007, while American confronted a recession in 2008. While RPI started to recover after 2009, the GDP began to increase after 2010.

American GDP Chart

Stifel analyst Paul Westra and his team believe that “US restaurants are showing signs of heading toward a sector-wide recession.” Restaurant spending is a strong indicator of consumer behaving, which is a large part of American economic growth. It also demonstrates people’s confidence about their money. Stifel’s team said “Restaurants have historically led the market lower during the 3-to-6-month periods prior to the start of the prior three US recessions”. The RPI and GDP charts above has backed up Stifel’s statement.

The RPI Index for 2017 is pretty close to the value of 100. Westra said, “restaurant performance this year, particularly in the second quarter, is shaping up to look pretty similar to the second half of 2000 and the first half of 2007 – the periods that immediately preceded the last two U.S. recessions.” If the history repeats itself, it means 2018 might become the beginning of another U.S. recession period.

At Least You’re Always Ready for a Night Out?

The lipstick index, created by chairman of Estée Lauder Leonard Lauder in 2011, is the theory that consumers are ready to indulge in cheaper—yet still satisfying—purchases like lipsticks over expensive items like designer bags in rough economic times such as the recession, according to U.S. News.

Lauder “hypothesized that lipstick purchases are a way to gauge the economy. When it’s shaky, he said, sales increase as women boost their mood with inexpensive lipstick purchases instead of $500 slingbacks” (qtd. in New York Times).

In other words, when the economy is low, people are stressed or depressed and what is one way we reduce or momentarily solve that problem? Shopping—but we can’t splurge and treat ourselves with overpriced items so we resolve to the little things in life like a new set of lipsticks.

Although “[this] theory has been debunked many times,” according to Forbes, personally, it is very simple: our morale may be low but at least we look great.

Not to mention, lipstick are not “inferior goods,” as said by the New York Times. In fact, they’re a luxury item that boosts one’s confidence—I don’t think of it as second choice to, for example, a pair of $300 shoes I would have bought instead, but as a deserving little bonus gift for myself that provides me a different kind of happiness. An example of an inferior good would be choosing Taco Bell over having dinner at my favorite taqueria, Gordos, because I should be saving the money.

Sarah Hill and four other researchers studied Lauder’s theory, which was published in the Journal of Personality and Social Psychology, “[confirming] that the lipstick effect is not only real, but deeply rooted in women’s mating psychology” (Scientific American). Hill explains that in a time of economic instability where unemployment rates are high, women want to look their best to attract the financially stable opposite sex who is scarce during recession.

But lipstick sales have been declining since 2007 while sale polish “are up since the first half of 2008,” according to market research firm Mintel (qtd. in Times). Lauder responds that “[nail] polish] is the new lipstick” in Times, and once again reiterates his lipstick index as an idea on the significance of succumbing to smaller luxury items like beauty products, regardless of what it is, during hard financial times.

In times of economic despair, romance is in the air?

Could having a successful love life also be attributed to economic downturn? The New York Times reported that Match.com reached more dating app first dates are initiated when market sentiments are low.

With the advent of online based dating sites, a swath of analytics are available to derive sociological meaning from. Match.com’s data shows strong correlations of ambitious first dates right around the time the economy tanks.

Despite sky-rocked unemployment rates, foreclosures, and failing businesses in the thick of the 2008 recession, Match.com saw their fall quarter as their busiest period in seven years (since post 9/11 woes). Even with monthly fees of $60, eHarmony.com reported a 20% increase in membership, and OkCupid saw a 50% increase in activity. Misery loves company, and with the increasing distrust in financial institutions, many looked for stability in romantic partnerships. In fact, Match.com and eHarmony.com logged some of their highest traffic volumes on days when the Dow Jones took a nose dive.

Tighter personal budgets prompt less discretionary spending, which includes small luxuries such as going out for drinks, where people typically meet with the goal of finding romantic prospects. Singles no longer need to spend money buying a potential partner drinks when first meeting them. Neurologists also say that good first dates release brain chemicals that can ease worries in other spheres of one’s life (e.g. layoffs, plummeting stocks, etc.)

In the long run, finding a partner and splitting bills is cost effective. In tough times, the idea of sharing bank accounts and receiving tax benefits incentivizes the subconscious desire for marriage.

Should hopeless romantics look forward to a dip in the market for better chances of finding love? While the choice between financial stability and love is certainly not a zero-sum game, the data doesn’t lie in times of economic woes bringing together more singles. Akin to the unemployment rate, perhaps it is worth looking at the spikes and drops in singles actively pursuing relationships.

 

References:

http://www.businessinsider.com/bizarre-economic-indicators-2012-8#the-first-date-indicator-18

http://www.cnn.com/2009/LIVING/personal/02/25/tf.online.dating.recession/

http://www.chicagotribune.com/sns-onlinedating-doingwell-story.html

http://www.sandiegouniontribune.com/sdut-us-downturn-dating-070409-2009jul04-story.html

 

 

Your Economy Is What You Eat

Within the United States’ precarious political environment, many Americans live in fear that the economy will dip into a deep recession like that of the housing crisis, which occurred not even a decade ago. These nerves are rational, as our market economy is cyclical. Periods of growth have always inevitably been met with periods of recession.

Economic indicators can help us to analyze the economy. Studying trends in retail sales, unemployment, etc. can help us make educated guesses as to where the economy is and where it is going. An interesting economic indicator we can use to analyze these trends is restaurant sales.

In an economy with contracting growth, individuals and families may feel their first inklings of strain in terms of food. In an unhealthy economy, the dollar might be devalued and workers may be laid off, which would lead to a decrease in consumption, which accounts for almost two thirds of the U.S.’s GDP. Consumption measures what is spent on goods and services produced in the United States. Even though it is only a portion of a nation’s GDP, consumption can be used to help predict the future of an economy, especially in a country like America because its consumption is relatively high in comparison with other economic variables.

If an economy is shrinking, one of the first areas of decline is restaurant sales. Economically strained Americans first tighten their finances by refraining from eating out. Food as a commodity is a short-lived luxury, since after you eat it, it’s gone for good. Therefore, food, especially going out to eat, is one of the first areas in which people start to cut back when trying to save money. Declining restaurant sales are an indicator that economic growth is slowing.

Within slowing or flat restaurant sales reports is a hierarchy. The first types of restaurants to feel decreases in sales are full-service, sit-down restaurants. They’re the first to go for individuals trying to save because they are the most draining of important resources, e.g. time and money. Next comes fast casual restaurants, whose sales’ declines mean that there is much more financial strain amongst a nation’s citizens, leading financial experts to turn decidedly bearish on them. Decisions like these lead to less valuable restaurant stocks.

However, not all trends in restaurant sales decline when Americans are nervous about the economy. An example of an outlier is pizza. As Bloomberg reports, in June of 2016, restaurant sales were flat, the lowest growth in sales since 2013. In contrast, Domino’s continued growing, with sales toping 5% for Q2 2014 – Q2 2016. Bloomberg Intelligence Analyst Michael Halen explains that Pizza does well in recessions due to its value proposition–moneymakers feel frugal spending $7.99 on a large pizza to feed their families.

Many other aspects of food can be economic indicators. Increases in grocery store sales indicate that more people are eating in and thus trying to save money. And similar to pizza shops, fast-food chains tend to do well during recession due to consumers’ value propositions. Hugo Lindgren of New York magazine went so far as to publish the “Hot Waitress Economic Index” explaining that during slow, flat, or declining economic growth, restaurant servers are more attractive, assuming that attractive people tend to find higher-paying work during good economic times.

Economic indicators are measurements collected to assist in hypothesizing the future of the economy. They are useful only with supportive data and examined in long-term contexts. Some indicators are estimated by governmental organizations or professional private companies. However, some are more suitable for normal citizens, like pizza.

Other sources: Eater Wall Street Journal Forbes 

 

 

 

 

 

 

Housing Vacancy Rates

The economic indicator of housing vacancies and homeownership delves into the overall status of homeowners and renters, particularly the vacant rates. Rental and homeowner vacancy rates are obtainable for U.S. regions, states and for the 75 largest Metropolitan Statistical Areas (MSAs), and information about geographies are accessible both quarterly and annually, according to census.gov.

The real question is, how do we decipher these rates in the short term (the past few years) and in the long term (a decade or longer)? What does an understanding of these rates tell us about housing issues in the United States?

As of July 27, 2017, the rental vacancy rate was 7.3 percent, and the homeowner vacancy rate was 1.5 percent. These numbers have noticeably improved (decreased) since 2010. In fact, from 1995 to 2017, the rental vacancy rate hit its highest number in 2010, a 10.23 percent average in all four quarters. The homeowner vacancy rate was usually around 1.5 percent over that time span, but it obviously rose when the U.S. economy entered a recession in late 2007 and spiked close to 3 percent.

Since 1995, the rental and homeowner vacancy rates are able to stay more or less intact even though the median asking rent has continuously increased, while the median asking sales price for vacant houses can increase and decrease in somewhat of a cyclical fashion, falling when the prices get too high and outweigh demand. Via information from the United States Census Bureau, the median asking sales prices for vacant units climbed up to around $200,000 but began a steep decline once the 2007 recession arrived.

After leveling out for a few years, the median asking sales price has begun the upward trend again and, measured at $177,200 in the second quarter of 2017, is on pace to eclipse $200,000. Rental and homeowner vacancy rates can continue to stay low, but if the numbers compiled on the graphs of recent years tell us something, it’s that troughs follow peaks, even if skyrocketing prices and lower unemployment rates make the economy seem like it’s booming.

Rental and homeowner vacancy rates help describe important characteristics which define value in a marketplace: supply and demand. If more and more people are buying and renting houses, you’d expect the vacancy rates to be lower. In this case, the supply of housing is getting less and less, and the demand for housing is likely higher. Therefore, rental and home sales prices should increase, making the housing market unkind to a significant portion of regular people.

“The irony of the modern housing market is that the places where we are seeing wage growth are places where people can’t live because they are too un-affordable,” said Nela Richardson, chief economist at real estate brokerage Redfin, per Forbes.

Now, economists must deal with the possibility of housing prices becoming overinflated, as they hope for the market to stay stable over the next decade or two.

Los Angeles rents soared as wages stagnated

Rent prices in Los Angeles County increased by nearly 15 percent over a recent period as wages remained unchanged, putting pressure on renters to find other ways to make ends meet or face potential homelessness.

The U.S. Census Bureau pegged the median household income in L.A. County at $56,196 in 2015, the most recent year for which data are available. That was virtually the same as in 2011, when that figure was $56,266 in inflation-adjusted 2015 dollars.

But over the same period, rental prices in the area shot up increasingly quickly. Rental website Zillow, which compiles nationwide home and rental data, found that the median monthly rent increased by 14.5 percent from the end of 2011 to the end of 2015.

That increase didn’t happen steadily. Instead, rents increased significantly in a short period of time. After remaining stable for a few years, the median rent in L.A. County increased rapidly in 2014 and 2015, with a peak year-over-year increase of 8.2 percent from June 2014 to June 2015.

Zillow’s rental index is calculated to reflect changes in the monthly median rent and account for fluctuations in the kinds of homes that are available to rent. This makes it suitable for comparisons, but individual data points are not a reliable indicator of median rent at the time.

It’s not obvious what led to soaring rents, but the trend has not slowed down. Zillow found that in July 2017, the median rent was more than 4 percent higher than a year earlier.

Official income data isn’t available after 2015, which makes it impossible to identify whether rent increases continue to outpace changes in income. Both the state of California and the city of Los Angeles have increased the minimum wage since 2015, to $10 and $12, respectively. Those minimums are set to increase to $15 in the coming years.

California’s statewide minimum wage had increased during the survey period before 2015, but those changes didn’t seem to affect the real dollars Angelenos could afford to spend after accounting for inflation. For example, the state minimum wage reached $9 per hour in July 2014, but the real median household income in L.A. County remained essentially unchanged.

The increase in rental costs might have had major impacts on individual lives. According to municipal government data, the number of homeless people in the Los Angeles area increased by 12 percent from 2013 to 2015, as rent prices increased dramatically.

That city and county data, compiled by the Los Angeles Homeless Services Authority, showed an increase in the total homeless count from 35,524 to 44,359 across the survey area, which did not include the cities of Long Beach or Glendale.

Though census income data isn’t available after 2015, continuing increases in rents and the numbers of homeless people suggest that this trend increased. The municipal governments’ 2017 homeless survey found that 55,188 people lived without homes in the L.A. area, an increase of 24.4 percent from 2015 and 55 percent from 2013.

Median rent has also continued to increase by sizable margins — it’s now 8 percent higher than in 2015 and 24 percent higher than in 2011, when the survey period began.

California’s housing crisis: What gives?

It’s no new news that California is experiencing a housing crisis. Just how bad the crisis is might surprise you.

The San Jose Mercury News published an in-depth investigation into the current crisis and finally answered the question: “What gives?” and most importantly “What’s next?”

Home ownership in California is at an all-time low since World War II. The average home price is 2.5 times higher than the average price nationally. With a median cost of around $437,000 more and more people are choosing to rent instead of buy.

While renting may seem like the better option it still takes a toll on residents as nearly 70 percent of poor Californians see most of their paychecks go to constantly rising rent. Couple the cost of rent with student loan debt and you have a crisis.

It can be said that while rent is infinitely more expensive in California than other places, residents are still getting paid more. This is indeed true, however, hidden within the truth is the fact that income has not kept pace with rising home costs.

This large income inequality has led many to move out of California, namely those living on the poverty line. From 2000-2015 800,000 residents have moved out of California to other states including Texas. The average income for the thousands that left in 2007 was $50,000.

Those who choose to tough it out and stay in California often become homeless. Between 2015 and 2016, California saw an uptick in homelessness of about 2,400 people. Housing data website, Zillow estimates that a 5% rent increase in Los Angeles would result in an additional 2,000 homeless people. So far rent has increased 4%.

The study found that such a crisis has large repercussions on the economy as a whole. The McKinsey Global Institute found such crisis cost the economy between $143 billion and $233 billion annually.

So how can California fix its problem before the bubble bursts? The state will once again tackle its long-awaited housing package again this month. While help may be on the way it won’t fix the problem entirely. According to the Legislative Analysts Office, helping the 1.7 million poorest residents would cost around $15 billion at the very least. The Los Angeles times estimates that of the three bills being considered only 25% of that estimation would be provided.

One Rate Does Not Make a Summer, But May Indicate a Mild Fall

It is almost the end of August and this summer seems to have brought positive news to both the U.S. and European markets. The latter especially may now breathe a sigh of relief since, as the Wall Street Journal reported on Aug. 24, 2017, even the weakest European economies such as the Greek, the Portuguese, and the Spanish have been showing growth over the last year. Along with them, the Italian economy seems to be enjoying a substantial reversal in its usual downward trend, as shown by the steady decrease of the unemployment rate released by Istat, the Italian National Institute of Statistics, on June 7.

These developments are being reported just as the Federal Reserve’s annual conference is taking place in Jackson Hole, Wyoming, where Mario Draghi, president of the European Central Bank, and Janet L. Yellen, the Federal Reserve chairwoman, will speak about the future of the European and U.S. monetary policies for the year to come. Their speeches will focus on whether the current lenient regulations will be removed.

The decision on this very hot topic—appropriate for the end of summer—might affect the improvements shown by the delicate economies of the Eurozone, such as Italy’s, which has been reinvigorated by the positive unemployment and employment figures released in June 2017.

Why do these rates matter? Even though they are mere numbers, they stand for people; people who have been struggling to find jobs. As reported by the Italian business newspaper Il Sole24ore,  the unemployment rate decreased 0.2 percent from May to June of 2017, and has settled at the level of fall 2012—when Italy reached its lowest unemployment rate. This news has created confidence among markets, entrepreneurs, and investors.

The recovery of Italy’s economy was also reported by Quartz and Bloomberg this month; these two media outlets showed that the Italian GDP increased by 0.4 percent in the last quarter, thanks to added value of manufacturing and services, as Lorenzo Totaro wrote on Aug. 16, 2017, on Bloomberg; this GDP increase reflects the larger number of employed people.

These indicators have also revealed another interesting aspect of the story: the employment rate of the female population has increased by 0.7 percent from June 2016 to June 2017, reaching the threshold of 48.8 percent. Women are more likely to be unemployed in Italy; this upturn signals a great change in the economy of the country.

In this scenario of mild recovery and optimism, the decision of whether to pull back the current stimulating monetary policy is very important for a country such as Italy, whose policies and efforts seem to be heading in the right direction. Certainly, as recently stated by Carlo Calenda, minister for economic development, and Ignazio Visco, governor of the Bank of Italy, the improvements observed through the lenses of economic indicators such as the GDP or the unemployment and employment rates do not mean that Italy has completely recovered from its financial crisis (Corriere della Sera, Aug. 24, 2017); the country still needs reforms to encourage business innovation, and support the work life of employees.

“For the first time in ten years all the major economies of the planet are growing,” (Marketplace, Aug. 24, 2017) and what might happen to Italy after the Federal Reserve’s annual conference concerns European countries as well as the U.S. We have to wait to see if this new wave of economic growth will be fostered and advanced by the new regulations that will be implemented by Mr. Draghi and Ms. Yellen at Jackson Hole. All we know now is that the enthusiasm about Italy’s steady growth is based on solid facts, and it is part of a remarkable turnover regarding the entire Eurozone.

Unemployment Rate Forecast; source: tradingeconomics.com/italy/unemployed-persons/forecast