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March 31, 2008

The price of diesel fuel

Fuel prices have been rising across the board, but one price in particular has sparked special notice. This is the price of diesel fuel, which seems to be skyrocketing. What's going on, and why should I care if I don't drive a diesel-fueled vehicle? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Two good questions. First of all, what's going on? Of course, diesel fuel is rising, in part, because oil prices have gone up. Diesel fuel is made from oil, so as oil prices have gotten more expensive recently, you would expect to find that diesel fuel as well as regular gasoline will have gone up in price. But there are also some special things going on with diesel fuel. One is that there were some new environmental rules imposed on diesel fuel in 2006, and that's still working its way through the system and resulting in higher diesel prices. Secondly, as the world economy has grown, more products are being moved around the world, including in our country, by diesel-powered trucks. And so the demand for diesel fuel is up. That's also caused the price to increase. Now, your question about whether you should care if you don't drive a diesel-fueled vehicle. Well, you should care because many of the things that we buy in stores have gotten there by being moved by a diesel-powered vehicle. So if there are higher diesel fuel prices, those eventually are going to be passed on to consumers at least in part in terms of higher prices for many of the products we buy."

Posted by Dave at 08:00 AM

March 28, 2008

Who pays taxes in North Carolina?

We hear a lot of numbers about what percent of their income different households pay to the federal government for federal taxes, but let's bring these numbers closer to home. What do the latest numbers show for taxes paid to North Carolina? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"We have a new study that does this, and we want to emphasize what we're looking at here is percent of income paid in taxes, not the dollars you pay in taxes but how much out of your income in percentage terms do you pay in taxes? And what you find is that it differs by the type of tax. For the sales tax where the tax rate, of course, is flat, everyone pays the same percent, low-income households on average pay about 6 percent of their income for the North Carolina sales tax. On the other hand, higher-income households because they save and invest a much higher percentage of their income, they end up paying only 1 percent of their income for the North Carolina sales tax. A similar result for the property tax; low-income households end up paying about 4 percent of their income in the property tax; high-income households, about 1 percent. For the state income tax, where the tax rate does actually increase with income, here you see the reverse. Here you see that the lowest income household pays only about 1 percent of their income for the North Carolina income tax, whereas the highest income household pays about 6 percent. And then what if we combine all taxes, what result do you get? Here we find that low-income households in North Carolina pay about 11 percent of their income for taxes of all kinds in North Carolina. Highest income households pay about 7 percent."

Posted by Dave at 02:51 PM

March 27, 2008

Is being wasteful rational?

North Carolinians are being asked not to waste water. We're being asked to check for leaky pipes, not use water for nonessential purposes and just to generally conserve as much water as we can. Yet before the drought, why weren't we motivated to be just as careful with water? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Because waste is a relative concept. Let's go back nine years - 1999. We had Hurricane Floyd. We had water everywhere, and most of Eastern North Carolina was under water. You think people then worried about leaky pipes and not using water for nonessential purposes, and did we have water restrictions? Well, no. That's because we had too much water. The value of a gallon of water was very low. In fact, it was actually negative because we wanted to get rid of water. So then it would be silly for people to spend money on things in order to save water because we had too much of it. Now, of course, the tables are turned. We don't have enough. That means the water we do have is much more valuable. That means spending money or spending your time on doing things that will save water is much more valuable. And so when you say that we shouldn't waste, you should always say, 'Waste when?' It's a relative term and not wasting a resource makes the most sense when that resource is limited and very high in price."

Posted by Dave at 08:09 AM

March 26, 2008

If it's possible, will it always sell?

With today's big push to find energy alternatives to oil and gas, we're hearing all kinds of suggestions to use different fuels and sources for energy. But even if it becomes technically possible to produce energy from some source, will we automatically see it marketed? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"No, because there's a difference between what we will call technical feasibility and economic feasibility. Technical feasibility simply says, 'Can you make the product?' For example, can you convert corn to gasohol? Can you make electricity from solar cells? If it's technically feasible, then the answer is, 'yes, you can do those things.' Economic feasibility says, 'Can you market those things that you've made at a cost and a price that will be able to be successful in the marketplace?' And this is where you are going to have to take that new product and stack it up against existing products and see if consumers bite, if they will bite and take that new product. And this is going to depend on your costs and whether those costs allow you to put that product on the market for a price that is competitive. And this is the problem right now with a lot of energy alternatives. They're technically feasible, but they're not yet economically feasible. For example, solar power is still much more expensive than getting our electricity from other sources. So you can speed this along, of course, by subsidizing the new technology or taxing the dominant fuel, but of course, this also raises issues. This is a basic principle to keep in mind, that, yes, you can possibly do something, but it still may not be marketable."

Posted by Dave at 08:00 AM

March 25, 2008

Do some businesses benefit from a recession?

It's generally thought that a recession hurts just about everyone. Businesses sell less and make lower profits, and workers get less pay and have fewer job opportunities. But is it correct to say everyone is hurt by a recession? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"It's really not correct. There are actually some businesses that do better. Now, this is not to say that they want recessions, but it's simply due to the nature of their products. I think this makes sense. When you have recession, people are going to change some of their spending habits. For example, typically we see during a recession people buy fewer new cars. That means they're keeping their existing cars longer, and that probably means they're going to need more repairs on those existing cars. So one area we see that tends to do better during a recession is car repair shops. Also look at construction. Construction often shifts during a recession from building new homes to people staying in their homes and perhaps remodeling. So remodeling may go up. Suppliers in general of lower-cost products will find their sales improve as buyers try to cut costs by going to lower-cost items. So the point here is that people will make changes to cope with an economic slowdown, and when they do make these changes, that can actually help some businesses."

Posted by Dave at 08:00 AM

March 24, 2008

Are we responding to the lower dollar?

The lower-valued dollar, when measured against foreign currencies, is supposed to cut American's appetite for foreign-made products. Has this happened? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"It really has, and this something, I think, that has really been under the radar, hasn't been well appreciated by most people. If you look at our monthly trade deficit, it's actually down by 15 percent since its peak in 2006. Even more noteworthy, I think most people know that a big part of our trade deficit is oil and oil imports, and that's hard to change. But let's take out oil from the equation and look at everything else we're buying from foreign countries, and look at that trade deficit. That trade deficit when you exclude oil is down a whopping 50 percent since 2006. So these changes in our trade deficit are exactly in line with what economists would expect, that is, when the dollar goes down, it makes foreign imports more expensive, so naturally people try to cut back and substitute other things for those foreign imports. And in fact, this really goes hand-in-glove with reducing that trade deficit. The trade deficit in the first place causes the dollar's value to go down, then the lower-value dollar actually causes the trade deficit to get smaller, exactly what economics would predict."

Posted by Dave at 08:00 AM

March 21, 2008

When will we know if it's a recession?

Some economists think we're in a recession, while others disagree. When will we know for sure? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, unfortunately we won't know for a while. In fact, we likely won't know until the recession is over if, indeed, there is a recession. The reason is that there is actually a group outside the federal government - it's a nonpartisan group called the National Bureau of Economic Research - that is actually charged with making the call on a recession. They determine if we're in a recession. They determine when a recession begins, when it ends, how bad it is. And of course to do this, they look at evidence, a lot of statistical evidence about the economy. The rule of thumb is we have to have a broad retreat - negative growth, if you will - in the economy for at least six months. Now the problem is that the data that these folks need to make the determination about a recession comes out with a substantial lag. Many of the data come out three or four months after the fact, so it's going to be a while, for example, to see if we meet that six-month criteria for having a retreat in the economy. It's going to be a while before all those data are here, which means as in past recessions, we'll know if it's a recession, but only after the fact."

Posted by Dave at 08:29 AM

March 20, 2008

Some good economic news

Everything we hear about the economy today seems to be bad. Is there any good economic news?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"There actually are, and I think this is why many economists are having trouble deciding, 'Are we in a recession or not in a recession?' All the economic numbers are not necessarily going in the same direction. There are really four areas where we see a lot of economic hope. First and foremost is exports. Our exports are surging. That's partly due to the low-value dollar. We have a lot of companies that are in the export business, so if you're in the export business, your production and your factory lines actually are up. Then, speaking of factories, factory production is actually still rising. In fact, it was up over 2 percent last year. Thirdly, consumers are still buying, despite all the gloom and doom about consumers and consumer sentiment being down, retail purchases were up actually 4 percent last year, and the latest indicators are, they're still up. And lastly, consumer income. At the base of everything, income and the income of households and consumers really drives the economy. When you look at consumer income, take out taxes, take out inflation, it's still rising. In fact, it was up 2 percent in 2007. Now, of course, these trends can change, but right now, they indicate there are some hopeful areas in the economy."

Posted by Dave at 08:36 AM

March 19, 2008

Trouble for road funding

North Carolina receives almost $1 billion annually from the federal government for highway projects. But in a couple of years, we may not be able to count on this money. Why? Listen

"Well, the simple reason is that the fund that that $1 billion comes from - something called the highway trust fund at the federal level - is being depleted rapidly. In fact, the latest estimates are that it will run dry at the end of 2009. One factor is that the major tax that funds that highway trust fund - the federal gas tax - is set at 18.3 cents. It has not been changed in decades, which means that the highway trust fund has not kept up with inflation and road building costs, meaning that those funds are going to be depleted faster. In fact, the federal gas tax is set to expire in 2011, so there's no assurance that even if the highway trust fund does not run dry we'd have a funding source for it. So I think this also means that our federal legislators are going to have big decisions in the next couple of years about federal highway money and whether we want to continue having federal highway money. One option, of course, is not to have the federal government involved at all in highway building and leave those projects to the states."

Posted by Dave at 09:25 AM

March 18, 2008

Why aren't all interest rates falling?

The Federal Reserve has been aggressively reducing the rates they control, and interest rates on many types of loans have consequently declined. But not all rates are lower, for example, the rates on credit cards and fixed rate mortgages. Why? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, the credit card answer is the simplest. It's because the cost of borrowing money in terms of the overall cost of credit cards is very low compared to other types of loans. For credit cards, their big costs are related to processing, monitoring and then dealing with losses. And, indeed, since the credit crunch and the riskier nature of lending right now, it actually makes sense that credit card rates are going up because it's a riskier business right now.

"I think more interesting is the issue of the fixed rate mortgage rates. They recently have turned upward, and a lot of people are perplexed and saying, 'Well, why would that happen?' Other mortgage rates - short-term rates - are going down. Why would fixed rates go up? And these fixed rates would be on those loans for 15 and 30 years. Well, here I think the answer has to do with the inflation situation. When a lender makes a fixed rate loan for a long period of time, 15 or 30 years, he is really betting on what the inflation rate is going to be in the future. And the worse the inflation expectations are - and of course they are partially going to be dictated by what's happening to inflation today - the higher the rate that that lender will need. And so I think the immediate answer as to why fixed rates have turned upward recently is because we have gotten several reports about bad inflation. All the inflation measures are up. And until those subside, I don't think we're going to see fixed rates come down."

Posted by Dave at 08:10 AM

March 17, 2008

Did the Fed cause the housing bubble?

There's a new book just published that is receiving much attention because it claims the Federal Reserve under Alan Greenspan is essentially responsible for today’s problems in the housing market. What the argument presented by the book? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"It's a fairly straight forward argument that says the Federal Reserve followed what we would call an 'easy money policy' earlier this decade. They had very low interest rates; in fact, they kept their key rate - the federal funds rate - at 1 percent for over a year, very low interest rates and a lot of credit and money supplied to the banking system. They did that earlier this decade and the analysts - this book - say this really prompted the housing market boom because it allowed people to borrow money to buy homes at unprecedented low rates and it caused there to be a lot of construction, prices bid up, then the Federal Reserve essentially took the punch bowl away later beginning in 2004 when they began a two-year period of raising interest rates, slowing money growth. And eventually that caught up to the housing market, caused the optimism that was in the housing market to dissipate, construction to fall, prices in many markets to fall, and that's essentially where we are today. Now, I think we want to go further there and say, 'Well, why was the Federal Reserve so plentiful with money, why did they keep interest rates so low early this decade, did they want to create a housing boom?' I think clearly the answer is not. I think they were responding first of all to the recession, which we had in 2001, and a very slow recovery from that recession. Secondly, of course, we had 911 and all the uncertainty related to that, and thirdly, we found that in the 1990s the Federal Reserve could actually keep interest rates low and keep an ample supply of money and credit without stimulating inflation due to big productivity gains, so I think the Fed was expecting those productivity gains to continue. This is certainly an argument for worth looking at."

Posted by Dave at 08:30 AM

March 14, 2008

Unwelcome inflation

The latest inflation numbers for January weren't good. All key measures of average price changes were noticeably higher. What will this do to the Federal Reserve's efforts to deal with the economic slowdown? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it will make their job very much harder. The Federal Reserve always fights a two front war. They want to stimulate the economy when the economy is slow, which it obviously is now. But also they want to keep a lid on inflation, and the January inflation numbers were high. The total inflation rate on an annual basis was 4.7 percent. And what we call the core rate, which takes out energy and food, was 3.7 percent. Those were both the highest in months. And more troubling, we've seen this core rate drift above the 2 percent level, which is the level desired by the Federal Reserve. So what we are running here is the risk of something called stagflation. Stagflation means you have a slow economy, yet you also have rising inflation. The last time we had that on a serious basis was in the late 1970s. So I think this is going to make the Federal Reserve's job much more hard, but I think that they will come down on the side of stimulating the economy. So I still expect more fed rate cuts in the future."

Posted by Dave at 08:00 AM

March 13, 2008

Can we avoid a recession?

The government recently said the economy actually grew in the last three months of 2007. Some are pointing to this finding as support for the view that the economy is not in a recession. Are they right? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"What this number was is the initial estimate of economic growth in the fourth quarter, and it showed the economy grew on an annual basis at a very slow .6 percent. Still, it was a positive number, not negative, so some are pointing to this, saying perhaps the economy is not as bad as many had thought. But there are probably a couple of reasons why it's too early to celebrate. First of all, this number will be revised, in fact, twice. And it could easily end up being a negative. Secondly, if it still turns out to be positive for the fourth quarter, we could still have negative growth in this current quarter we're in, in 2008 as well as in the second quarter of 2008, which means we'd have two back-to-back quarters, and we would qualify for a recession. I think the bottom line here is that whether we have slow growth or negative growth, the economy is still likely to crawl, certainly through the early part of 2008."

Posted by Dave at 08:00 AM

March 12, 2008

Determinants of entrepreneurship

Entrepreneurs are essential to the economy because they are the people who take risks to start new companies and develop new products. Do we have any information suggesting what kind of environment is most conducive to encouraging entrepreneurs. Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Actually, we do have a new study that related the levels of entrepreneurship through several factors. Firstly, the study found that you tend to have more entrepreneurs in regions that have more colleges, that have more information arts companies and actually have more foreign-born workers. All of those factors were related to the level of entrepreneurship. Entrepreneurs also flourish where there are more financial institutions available for financing their projects. And lastly and probably no surprise, researchers have found that entrepreneurs are more active where there's easy Interstate highway access and where there's broadband Internet available. So all these factors are things that economists have found are related to this group of risk takers that are very essential to the economy."

Posted by Dave at 08:18 AM

March 11, 2008

Economic impacts of splitting up

Although the divorce rate in the country has been declining, divorce still has major social and economic implications. One clear financial consequence is that the income and living standard of the divorced couple are adversely impacted. But what other impacts of divorce have researchers been able to find? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"There have been a couple of other interesting findings. First of all, there's some evidence that when divorce is easier, couples are less likely to have children earlier in their marriage. Also, in states with easier divorce laws, we find that both the husband and wife are more likely to work full time and are less likely to support the other in paying for their education. And that makes sense, because if there's concern that the marriage may not last, you'll be less likely to invest in the marriage. Finally, researchers have found that the daughters of a divorced family are more likely to have their education and future earnings adversely impacted much more so than the sons of divorced couples."

Posted by Dave at 10:29 AM

March 10, 2008

Benefits and costs of larger cities

In many fast-growing urban areas of North Carolina, such as Charlotte, the Triangle and Wilmington, growth is an issue. People see the costs is more crowded schools and more congested highways. Why are many people still attracted to such regions? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, because along with the costs of larger cities, there certainly are benefits. Clearly, the costs include sitting in traffic longer, higher housing prices, crowded schools, crowded cultural facilities, etc. And people see that, and because we're human, we complain about that. But on the flip side, there are a lot of benefits that go along with cities getting bigger. Medical facilities tend to be more widespread. There are more specialists. You can only afford to have some medical specialists in large cities. Cultural and entertainment opportunities are more available, from music to arts and, finally, job opportunities. In bigger cities, you're going to have a broader array of professions and occupations. So the bottom line here is, yes, larger cities certainly bring higher costs but they also bring higher benefits. And, of course, every individual person has to sort and weigh whether these benefits exceed the costs."

Posted by Dave at 08:13 AM

March 07, 2008

Gains in women's salaries

It used to be said the average woman earned only two-third of what the average male worker earned. If this is true, why would women earn less than men? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, actually the numbers are a little better today. It's closer to 80 percent, but still less. But the problem with that number and these kinds of comparisons is that they are truly apples and oranges comparisons because they don't account for the fact that men and women have different kinds of jobs, based on different levels of education, experience, etc. And one reason, however, why the percentage of male salary that women earn has gone up is because women have gotten higher levels of education. But if you would actually compare men and women in exactly the same jobs where those workers - male workers and female workers - have exactly the same characteristics, average pay is actually very, very close. However, there is one factor that economists have widely pointed out that may hold women back. And that is the fact that many women take time off from their job for childbearing. It's something men can't do, physically. Women do have to take time off to have the child and perhaps a few weeks afterward. And in some jobs, not all, but in some jobs that can actually impose a cost to them on the job where, for example, if they take a couple of weeks off they may lose contact with clients or time on important projects, etc. So that is one biological factor that will probably in many jobs will keep women's pay somewhat under male pay."

Posted by Dave at 08:08 AM

March 06, 2008

Why is gold glittering?

Gold prices have been surging. This trend raises two important questions. Why? And is the run over? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well you are absolutely right. Gold is now flirting with the price of a thousand dollars an ounce. That even a few years ago would seem almost inconceivable. And your questions are right on mark. I think the why is that gold has always been viewed as an alternative to currency or more specifically the U.S. dollar. So when investors get a little jittery about the U.S. dollar, often times they will increase their holdings of gold. And of course, we've had issues with the U.S. dollar recently, really over the last three or four years in terms of its international value going down. So we would expect to see as the dollar's international value has gone down, more people have flocked to gold. And as they do so, because gold is of limited supply - it increases in quantity very slowly each year - the price tends to respond very greatly to increases in buying. Now in terms of whether the run is over? Actually gold is not at an all-time high. When you adjust for inflation, which you always need to do when you're comparing prices over time, gold would actually have to hit two thousand dollars an ounce for it to set a record. So that is why some gold bugs, so to speak, say that we will see further increases in the price of gold."

Posted by Dave at 08:17 AM

March 05, 2008

What will happen when the boomers sell?

There's obviously much concern today about the housing market and housing prices, but some economists see a bigger housing issue that goes beyond today's financial turmoil. What is it? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Economists call it the emerging generational housing bubble, and what they mean is that if you look at the baby boom generation, it's 78 million strong. And that baby boom generation is quickly aging, and the concern is that as that baby boom generation ages two things are going to happen. First of all, many of those households are going to decide they want to sell their bigger homes and move to smaller homes or maybe even condos or apartments. And then when some of those folks do begin to die off, their homes will come up for sale. So what some economists who are looking ahead over the next 10, 15 or 20 years see is a very long buyers' market in housing and either stable or perhaps even falling housing prices. Now, there are going to be some geographical differences. The faster growing states in the south and the west will see this generational housing bubble come much later and be much more muted. But what we may end up seeing down the road is some communities actually advertising for people to come and buy their homes."

Posted by Dave at 08:16 AM

March 04, 2008

Limits on cutting government waste

A popular political campaign plank is to cut wasteful government spending. Of course, the idea is appealing. Who wouldn't want to reduce waste in government or anywhere, for that matter. But are there programs in government budgets labeled waste? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, of course they're not, unless you are referring to waste disposal at a local government level. And that's really the problem, that it's very easy to talk about cutting government waste, but it's really hard to find it. For example lets look at the federal government budget; 82 percent of the budget is in programs like social security, Medicare/Medicaid, defense, interest on the national debt, and public assistance programs like food stamps and unemployment compensation. I would dare say that most people are in favor of those programs.

"So right off the bat you have 82 percent of the budget that's sort of off the table in terms of finding waste. Now there are some programs that are labeled earmarks. So some in the popular press call them pork spending. These are programs that bypass the regular budget process that favor a particular geographical area or sector. But the problem is that these programs collectively account for only one half of one percent of the federal budget. So instead of just broadly talking about cutting government waste, I think really what serious people have to do is just like if you want to cut back on your household budget you've got to go through and really closely examine where you're spending, weigh the costs and benefits of each of your spending categories. You have to do the same at the federal government level or state government level. You really have to go through each program, and very laboriously evaluate them and decide what can go and what has to stay."

Posted by Dave at 08:11 AM

March 03, 2008

Measuring change the right way

Big numbers can sometimes trip us up. For example, in looking at the recent increases in taxable property values in Wake County, many owners saw hikes of 50 percent, 100 percent or even 200 percent. These seem like huge gains, but are they? Listen

"Well, these big numbers can be deceiving, and the best way to look at these numbers in evaluating them is to look at them at an annual rate, that is look at the annual rate of increase. Now this is actually a little more complicated than just dividing by the number of years over which the increase has occurred, but that actually gets you close. So let's take some examples. In the case of the Wake County property reevaluations, the change in property values actually was over eight years, so those increases were increases over eight years. So for example, a 50 percent gain over eight years actually comes to a 5.1 percent annual gain. A 100 percent increase is a 9 percent annual increase, and a 200 percent is a 14.7 percent annual increase. So I think it's good to put these numbers in these annual perspectives because then you can evaluate really how fast your property value has been going up and maybe compare them to other investments that are typically quoted on an annual basis like the stock market or gains on a CD or bond. And what this does is get you to an apples and apples comparison."

Posted by Dave at 08:31 AM