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September 30, 2009

Do sales tax holidays work?

The back-to-school sales tax holiday in North Carolina recently concluded. Many people purchase retail items at that time in order to take advantage of the tax savings. Are sales tax holidays considered a success?

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

"Well, it depends on how you define success. If success is defined by encouraging people to buy when the sales tax holiday is in effect, then the answer is yes. We do see a spike, if you will, in retail sales during those sales tax holidays. But if success is defined as getting retail sales over the entire year to be higher as a result of this sales tax holiday, then the existing evidence says, perhaps not. What we tend to think happens - and there's some research to back this up - is people simply shift when they buy a product. For example, if you were considering buying a computer this year, and you said, well, instead of waiting until the end of the year, I'm actually going to buy it in September when there's a sales tax holiday. Then you did buy a computer during the sales tax holiday, but you would have bought it anyway during the year. Also, if the goal is to get people in other states to come to your state to buy to take advantage of a sales tax holiday, again, the evidence suggests that that doesn't work because more and more states are having these sales tax holidays. In fact, all the states surrounding North Carolina also have sales tax holidays. So it does give consumers a break, but the evidence right now is it doesn't increase overall retail sales."

Posted by Dave at 08:00 AM

September 29, 2009

Good jobs, without a college degree

The question is whether this is possible, to have a good-paying job without a four-year college degree. Do these jobs exist anywhere?

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

"These are what economists call middle skill jobs, and they are jobs in the labor market that require more than a high school degree but less than four years of college. So usually you need something beyond high school. You either need community college or you need some kind of post high school training program. It used to be that these jobs accounted for the majority of all jobs; 55 percent of jobs were these middle skill jobs. Now they're down to about 48 percent, but there are still 67 million of these jobs, so they're a lot of them. And one thing economists see is there are going to be a lot of openings as the baby boomers start to retire. So yes, I think the answer to the question is there are possibilities to get rather good-paying jobs without getting a four-year college degree. What are some of these jobs? Well, there are jobs like nurses, technicians, electricians and mechanics, and they all pay reasonably well, and they've actually gotten good salary increases over the last few years. So, the answer to the question, do you need to get a four-year degree? No, but you do need to go beyond high school and get something. And if you do and you target the right occupation, you can do rather well in this economy."

Posted by Dave at 07:52 AM

September 28, 2009

What stalled the stock market?

For months, the stock market was pushing ahead and making good gains, especially in light of a growing consensus the economy will soon be on the mend. Even in August, the various market indices headed higher. Then September came, and some of those gains had to be given back. Yet we haven't heard of any major change in the economic outlook. What happened?

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

"It's always hazardous to try to understand the stock market, but here's my view right now. We had a big, big boost in the stock market, up to between 40 and 50 percent since its lows a few months ago. And it couldn't keep going up that fast. And I think what's happening right now is investors are looking actually past this year. I think most investors think the economy will actually grow in terms of production the second half of the year. We won't necessarily get job growth, but we will get production growth. What investors are doing, they're looking ahead to 2010, and they're trying to ascertain what kind of economy will we have in 2010. And right now perhaps there's been a little more gloom put in that economic outlook. The big concern is household debt, the fact that households are still carrying a high amount of debt, certainly relative now to their asset values, particularly since home values have gone down. The conventional view right now, that's going to hold back consumer spending. Consumer spending accounts for 70 percent of economic activity, so if consumers aren't spending in 2010, the concern is we're not going to have a robust economic recovery. If we don't have a robust economic recovery, that's not good for corporate and business profits, and that comes back and affects stock prices. Now, this view can all change. In fact, it can change tomorrow, but I think right now, that's the big concern on Wall Street."

Posted by Dave at 07:48 AM

September 25, 2009

The recovery's alphabet

When economists describe the possible path of an economic recovery from the recession, we hear the "V," "U," "W" and now, although it's not a letter, the "caterpillar." Give us the economic definition of these letters plus one insect.

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

"And who said economists can't be interesting. Well, all these describe - try to describe, at least - how the economy might get better in the future. The "V" suggests that we're going to have a big rebound from the recession, strong economic growth, big reduction in joblessness and the unemployment rate. Obviously for many people that would be the best kind of recovery. The "U" shaped recovery says, yes, we're going to recover, but it's going to be very slow. We're not going to have that sharp rebound. It's going to be much more heavy slogging, if you will, to get the unemployment rate down. The "W" is perhaps the most concerning. What it suggests is we'll have a fairly good recovery from the recession, probably next year, 2010, but then maybe in 2011, we'll go back into another recession. So this really describes a double dip, that is, two downs and two ups. A lot of economists are raising the flag about that one. And then a new one to the category - I heard this the other day, an economist described it - the "caterpillar." And what this means, if you think of a caterpillar, it moves along a surface gently going up and down. He's suggesting that's the way the economy is going to move. We're not going to see sharp increases or sharp decreases, but we're going to have a slow movement up followed by a slow movement down in the economy. Obviously, we'll have to wait and see which of these letters and caterpillar describes the future, but this is trying to put a picture on the future of the economy."

Posted by Dave at 08:00 AM

September 24, 2009

Reason for optimism

The recession has certainly put many people in the doldrums. But on the other hand, it’s said that recessions are often associated with periods of great business creativity, with some of the most successful businesses created during recessions. Why would this be the case?

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

"Well, I think there are two key reasons for this. One, during recessions, resources are available. People are unemployed, so they have time to think about new products, new markets, and I think that's one reason why we get some good ideas during recessions. We need new businesses, new sectors. Secondly, I think the will to survive; if you're down, and you want to go up, this will often be a great motivator to spark creativity, develop new ways of doing things. This is really all part of what the famous economist Joseph Schumpeter called creative destructionism. It's something that always goes on, where you take the old, you rearrange it, you change things and something new and better will come out of it. And it actually goes on, as I said, all the time, but I think it does get heightened during a recession."

Posted by Dave at 08:00 AM

September 23, 2009

How to measure profits

People are always amazed at big numbers, so when profits of large corporations are released and publicized, many folks can't believe the millions and often billions of dollars that are made in profits. Is there another perhaps better way to look at them?

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

"Well, what economists would argue is to not get caught up in what we would call the fallacy of large numbers. When you're looking at anything that's big, whether it be a large corporation or the federal government or some worldwide organization, you're always going to have big numbers. You're going to have big revenue, you're going to have big expenses, and you're going to have big profits. So what economists argue is better to do - and I think this makes logical sense - is when you're focusing on something like profit, which, of course, is what remains to a business after they pay their expenses, is don't look at the raw number, but the better way to judge is to say, what is the profit rate as a percent of the revenue? How many pennies per dollar revenue actually goes to profits? And when you do this - and indeed, I just checked the numbers for the latest calculations on this by different economic sectors - when you do this, profit rates for most businesses are very modest, about 3 to 5 percent. That means that for every dollar that a business takes in, they're expenses are going to be 95 cents up to 97 cents, leaving 3 to 5 percent or 3 to 5 cents after for profits. And of course, what happens to profits? Well, they're either going to be paid out to owners - which doesn't necessarily mean the CEOs - to the shareholders or stockholders, or they can be reinvested in the company."

Posted by Dave at 08:00 AM

September 22, 2009

Where is the economy now?

There seems to be a mix of optimism and pessimism about today's economy and the economic outlook. Please make some sense of these conflicting messages.

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

"The general consensus right now is that the economy has pulled back from the brink. That is, we're not going to have, as some call it, Depression 2.0. That risk is past, and I think it's one reason we had a good run in the stock market earlier this year. Secondly, most economists now think we may very well have growth in the economy at the end of this year - not necessarily job growth but in terms of new production. Most of that, however, will be due to replacing inventories. Inventories, if you will, of what's in stock back in the warehouse are at very low levels, and it's viewed that now we're at the point where those inventories need to be restocked, and so that's going to ramp up production. The real concern right now, I think, is what's going to happen in 2010. After we get that inventory replaced, how strong will the economic recovery be? And as always, there are different views. One camp says it's going to be very, very slow. Due to high debt loads, consumers are not going to spend, and that slow recovery is going to keep economic growth slow and unemployment rates very high. Another camp says, no, once consumers do see job growth, and we see people getting jobs, incomes going up, consumers - just like they always have - will spend money, and we will actually have fairly decent economic growth in 2010. But right now that's where the debate is centered - what will the economy look like next year?"

Posted by Dave at 08:00 AM

September 21, 2009

The Fed under fire

The Federal Reserve has been by many measures the main governmental player in fighting the recession. A recent poll of economists found high praise for the actions by the Fed during the economic crisis. But at the same time, there is legislation circulating in Congress that would put new oversight on the Fed. So it seems like we have a love-hate relationship with this very important institution. How do you explain that?

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

"Well, I think while many people, especially professional economists, do credit the Fed, on the other hand, the Fed over the last couple of years, has really redefined itself. It has wielded huge power. It has gone into places in the economy it has never gone before. And while again, many would say, well, that's been good because it has, perhaps, saved us from something worse in the economy, now folks are sitting back and saying, gee, do we really want that institution to have that much power? So I think that's the reason for the debate. Now, people should remember that the Fed is not an independent institution out there just operating on its own. It does have oversight from Congress. You often will see Fed Chairman Bernanke and before him Fed Chairman Greenspan frequently going up to Congress and testifying. In fact, their charter comes from Congress. The managers, if you will, called governors of the Fed are presidentially appointed and also confirmed by the Senate, so it isn't as if this is an independent entity operating out there. But I think one piece of the debate right now is whether the Congress should have more direct oversight on the operations, the day-to-day operations, of the Federal Reserve. Some say that is called for given how things have changed in the economy over the last couple of years. Those inside the Fed are saying that really wouldn't work because the Fed does need to move very quickly, and it can't take time to have a committee review its actions."

Posted by Dave at 08:00 AM

September 18, 2009

Limping land lines

Probably no industry has changed more in the past decade than the phone industry with the rise and growing popularity of cell phones. How has this changed the way we now communicate using phones?

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

"Well, I think it's the obvious thing - people know this, I'm just going to put some numbers on it. It's obviously increased the usage of cell phones at the expense of land lines. Indeed, for the first time in 2008, of the households who only have one kind of communication - that is, they only have a cell phone or they have only a land line, they don't have both - more have only a cell phone than have only a land line. That's the first time that ever happened, in 2008. Indeed, 21 percent now have only a cell phone compared to 19 percent only have a land line. Now the majority still have both. In fact, 60 percent have both. But many experts in this field expect the trend is still going to go more toward the cell phone and away from the land line, so that probably in 10 years, that 60 percent is going to be, maybe, 40 percent, and the vast majority of people will only have one kind of phone communication. And it will be a cell phone."

Posted by Dave at 08:00 AM

September 17, 2009

Was there a place to hide?

It's been said this recession hit almost everyone everywhere, particularly investors. Most stocks, mutual funds and even bonds suffered big losses as the severity of the recession unfolded. Did any kind of investment do well?

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

"Well, just to review, in 2008 the numbers really are dramatic. In that year stocks were down about 40 percent, commodities like basic metals were off 30 percent, and even municipal bonds - which are considered very safe and have a tax advantage - were down 7 percent. There was one place to hide, though. There was one investment that did very well. It may seem ironic to many people; it was actually investments with the federal government - treasury securities. Why? Because people wanted safety. Treasury securities - despite what people might say about how the federal government manages or doesn't manage money - treasury securities, which are simply the debt issued by the federal government, are always considered very safe. So in 2008 if you invested in treasury securities, you gained 27 percent on your money. What this does, of course, is suggest that the natural thing in times of great economic stress like we had last year, continuing somewhat this year, people do flee to safety. And they consider the federal government to be the safest entity still left."

Posted by Dave at 08:00 AM

September 16, 2009

How insurance operates

Health insurance has been a topic in the debate over health care. How exactly does insurance operate? Is it different from other businesses?

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

"Well, first of all, it is a business and it operates very importantly on the principal of uncertainty. And what people do with insurance is we all face some unknown risk. We know than someone in that risk pool is going to face a big cost, a big loss. So we all willingly put money into an insurance pool, and then whoever does have a loss gets the money. Let me give you an example. Let's say that one person in 10 will face a loss of $1,000 in the next year, but no one knows who it's going to be. So what people are motivated to do is everyone in that group will kick in perhaps $101, so that the losing person does get $1,000. And then maybe there's $10 left over for the insurance company to compensate them for their time and money. Now, what this illustrates is that the insurance company has to operate on the principle of uncertainty, not knowing who exactly is going to face that risk. If, for example, we say that an insurance company has to pay each of those 10 people $50 for an annual checkup, what’s that going to do the insurance premiums? Well, they're going to go up by $50 because the insurance company knows exactly that they're going to have to pay - $50 for each of those people. It also raises the issue of pre-existing conditions. If an insurance company knows that they're going to have to shell out a bunch of money for one person because they know that person's going to get sick, obviously that's why that person's premiums would be very high. That's an issue, of course, we could address outside, perhaps, of insurance."

Posted by Dave at 08:04 AM

September 15, 2009

Do we spend too much on health care?

As a country, we spend 17 percent of our total income - or $2.4 trillion - on health care annually. Some say this is just too much. Should we make it a goal to reduce our health care bill?

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

"Well, that, of course, is the attitude of many, and certainly those positions are very strong and very arguable. Let me sort of play devil's advocate here and take the opposite idea, that maybe we're not spending too much. First of all, let's recognize that that spending is income to a lot of people. In fact, the health care industry in our nation supports 14 million jobs. Secondly, it also makes sense that a rich country like ours - where basically we have our basic needs of food, clothing and shelter satisfied - as people move up the income ladder, they're going to be more focused on their own health and be willing to spend more on health care with a higher standard of living. And then thirdly, some people, indeed, are predicting that that 17 percent will go, maybe, to 30 percent. And they're saying, gee, this is not sustainable. Well, it could be sustainable if our economic pie grows large enough that we can still spend more on other things and support a higher percentage on health care. So there are two sides to this argument, and hopefully both of these sides will be taken into account as we look at reforming our health care system."

Posted by Dave at 08:00 AM

September 14, 2009

North Carolina as a banking giant

When people think of North Carolina's economy, they think of tobacco, textiles, furniture and even technology and medicine. When people think of banking, New York and maybe San Francisco come to mind. But actually North Carolina and specifically Charlotte is the second largest banking center in the country. Why?

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

"That's a really good question, and one that I've gotten a lot recently because of, obviously, the financial situation, and people realizing Charlotte has really been hit by this economic downturn. It goes back to two things. One, North Carolina's rural character. We traditionally were a state with a lot of small towns, no big large city. So if you had a bank here and you wanted to make money, you had to have a lot of branches spread across the state, not just one. If you were in New York, you had a bank in New York City, well, you're going to make money there. So North Carolina's economy developed with a lot of small banking branches, if you will, across the state. The second thing, in the 1930s, most states became very suspicious of banks, and they put restrictions on the number of branches banks could have. North Carolina and our sister state South Carolina did not do that. And so what happened is we had, first, a tradition of banks with a lot of branches, then we had also the fact that because of our liberal banking rules, we had banks headquartered in Charlotte and they could have these branches spread across both states. Then, when starting in the 1990s, we saw the rules about banking change, and the nation allowed first regional, then nationwide banking, those banks in North Carolina, headquartered in Charlotte, were ready to go. They could take advantage of those rules. They had experience maneuvering and managing banks across geographical areas, and they went on a merger binge and grew into those big banks that, indeed, we have today."

Posted by Dave at 08:00 AM

September 11, 2009

A double dip ahead?

While most economists see the current recession coming to an end either this year or early next year, they are also raising a warning flag. This warning flag says, beware of a double dip. What does this mean?

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

"Well, not the double-dip ice cream. What it means is that after we have a recession, and the economy gets out of a recession and grows; however, it grows for a very short period of time, and we slip back into another recession. There are two good examples of this. One, during the famous Great Depression of the 1930s, where we had a downturn from 1929 to 1932, then we actually saw growth in the economy from 1933 to 1936, then another downturn in 1937 and 1938. And more recently, we had a recession in 1980, growth for about half a year, and then we slipped back into recession in 1981 and 1982. There are two reasons why this can occur. One is that the first recession was just so strong that even though we got out of it, there just wasn't enough steam in the economy to keep the business sector growing, and so we slip back into recession. Or the Federal Reserve, the Federal Reserve could say, after the recession's over, well, we need to raise interest rates to head off inflation. They raise those interest rates too fast, too soon. It actually kills the economic recovery, and we go back into another recession. So there are real risks that we could have at this time, but hopefully not."

Posted by Dave at 08:36 AM

September 10, 2009

Is buy and hold out?

One of the long-taught and recommended investment strategies was buy and hold. Applied to the stock market, for example, this strategy said investors should purchase a diverse set of stocks and hold them for the long term. In other words, don't try to outguess the market. Now this strategy is being questioned. Why?

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

"Well, I think it's simply due to the devastating results of the recession. If you look at one index - the stock market, for example - the stock market has not done anything in the last 15 to 20 years when you account for the drops we had during this recession. So people who bought and held didn't make any progress over this 20 to 25 year period, so I think that strategy is being reevaluated. I think there's now more of a view of, well, we've got to go back to looking at individual stocks and individual sectors and not just buying a diversified set of stocks but rather looking specifically at companies and trying to figure out which will do better in the kind of economy that we have. I guess if I would revise the so-called buy and hold strategy, I'd call it buy, watch and decide. Yes, buy stocks, but watch them very carefully. And don't be afraid at some point to decide that you need to sell."

Posted by Dave at 08:00 AM

September 09, 2009

Looking like more, for less

Many changes are expected to result from the recession. One is the way that business operates, particularly in the products and services offered to consumers. Can you speculate on any themes buyers will see in the coming years?

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

"In the last couple of decades, we were really riding high. And of course, I'm talking about the average consumer now, certainly not everyone. The average consumer really almost had it all. They were able to afford much better quality in terms, for example, of the homes they bought. Homes became bigger, more amenities. The vacations they took. The clothing they bought. So we really had a good run. Many think that the recession has sort of put an end to those gravy days, that even though the economy will eventually recover, income growth will be very slow. And I think businesses are realizing this. They're realizing they're going to have a different consumer to deal with once we get out of this recession. And so I think what businesses will be trying to do is to provide products and services to consumers that appear - appear - to be of the quality that consumers were used to prior to the recession but are much more affordable. So call it quality on a budget; I think that's going to be the new business objective. Now that's going to be a big challenge for businesses, and it's also going to be a challenge for consumers. Consumers will have to be able to detect if, yes, I am paying more and getting something better, or is it just all fake and phony. But I do think this is going to be the new focus in the future of how can we get what looks like more - in fact, many times is more - but on a budget that is much less than in the past."

Posted by Dave at 08:00 AM

September 08, 2009

The real minimum wage

The federal minimum wage was increased to $7.25 a couple of weeks ago. This means it has increased by $1.75 an hour in the past three years. But does this necessarily mean the minimum wage is at an all-time high?

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

"No, it does not. Actually, unlike many government programs - and the one that comes to mind is Social Security - the minimum wage does not automatically get adjusted for inflation. People who receive Social Security, for example, do get a bump in their payments each year based on the inflation rate. That does not happen with the minimum wage. Indeed, Congress and the president have to pass legislation specifically changing the minimum wage. Now, the good news right now for minimum wage earners is that since this latest increase has been implemented, when you adjust the minimum wage to account for inflation, it is now at its highest level in over 25 years. The bad news, however, is that it is lower than it has been in some previous years, specifically between 1965 and 1982, the minimum wage was much higher. Indeed, if you look at the minimum wage in 1968 and calculate a comparable level today, we would have a minimum wage of about $9."

Posted by Dave at 07:58 AM

September 07, 2009

The other real estate crash

One of the major parts of our economy affected by the recession has been residential real estate. But there's a whole other part of the real estate market related to office buildings and retail outlets, broadly called commercial real estate. How has it fared?

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

"Well, not well. Since 2007, sales volume for commercial real estate is down by two-thirds. Prices are also off, by about 35 percent. Incidentally, that's very close to the drop in the average home price. And financial firms that are invested in commercial real estate have been losing money. So, yes, this is another aspect of the broader real estate crash. I think it certainly shows that this recession has really hit all corners of our economy. Also, one of the disturbing things here for commercial real estate is that history shows that commercial real estate slumps can actually last for years. So while we are becoming more optimistic about residential real estate and residential real estate sales, there's some concern that this slump in commercial real estate may go on. In fact, historically again, commercial real estate has been one of the last parts of the economy to recover from a recession."

Posted by Dave at 02:46 PM

September 04, 2009

Would a 'fat tax' work?

There's discussion at national levels of implementing a new tax on foods that contain high fat content. Promoters of the tax say it would accomplish two things. First, it would raise money for health care, and second, it would encourage people to reduce their fat intake. Would such a tax really do these things?

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

"Estimates are that such a tax could raise a lot of money. In fact, one estimate puts it at $500 billion over 10 years. But there are a lot of questions here. One is exactly how would you implement that tax? Exactly what would you tax? I think the problem - the practical problem - is many foods that may have high fat content actually have a lot of nutritional value. So how would you calibrate the tax to in some sense just get at the fat content? And secondly, I think if the point of the tax is to in some ways discourage people from eating foods with high fat content, then the practical question is, would it do that? And that's where we can rely on economic research that shows that actually taxing high-fat foods would only change consumption behavior very, very slowly over time. It will make a significant change, but it may take a long time for people to change their behavior. So I think one of the concerns is that if you implemented such a tax, would you end up simply having those people who are heavy users of fatty foods continue to eat those fatty foods and still pay this tax? So there are a lot of questions here before I think this idea will hit the streets, so to speak."

Posted by Dave at 08:00 AM

September 03, 2009

Oil and the dollar

Oil is an international commodity that is traded around the world, yet oil’s price is always quoted in U.S. dollars. Why?

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

"Oil is actually a fairly unique commodity. It goes through several stages of production and refinement before it gets to us in terms of its final product, like jet fuel and gasoline and home heating oil. So you go from the drilling. You go to the transportation. You go to the refining. You go to the wholesaling. You go to the distribution. So oil and its derivatives are actually turned over so many times before it gets to the consumer. And because of that, for simplicity reasons, it's often good - it just makes things easier - if you do all that buying and selling in the same currency, in one currency rather than when you refine it, you sell in euros, when you distribute it, you sell in dollars, and when you wholesale it, you sell it in pesos - whatever. And so because the U.S. dollar has for a number of decades - really half a century - been the leading currency in the world, the U.S. dollar has been what all those transactions have been quoted in. And it actually saves people in the oil industry money because they don't have to be constantly converting from one currency to another. So I think as long as the U.S. dollar is the dominant currency in the world - and I don't see that changing anytime soon - I think we will always have oil quoted in dollar terms."

Posted by Dave at 08:00 AM

September 02, 2009

Pent-up demand

As it appears the recession is coming to an end, consumers are stirring. Both home and car sales have improved, and there's optimism these gains will continue. Is there something automatic that will make consumers buy more durable goods when the recession ends?

"There is, and it's what's called pent-up demand. Here's what happens during a recession: people obviously have to buy food, they have to have medical care, they have buy their essentials. But what people do because they're scared because their income may have fallen because they may lost money in the stock market or their home, they don't buy those non-essentials. So they drive their car longer. If they were thinking of buying a bigger house, they don't do that. Underlying those actions for many is that they wanted to do that. They wanted a new car. They wanted a bigger house or needed a new house. So internally there's this sizzling. There's this urge to have bought these things, but they didn't. Then, however, when the economy does improve, and people feel better about the economy, and maybe someone who was unemployed gets a job, all of the sizzling comes to the forefront, and we often see a surge in buying of these big ticket, non-essential items. We often see a surge in car buying - we've already seen some of that - and home buying, which appears to be on the upswing. This is what economists call pent-up demand, and it really is what leads us out of a recession. It's often why the initial quarters after a recession are very strong, and then we settle back down to normal."

Posted by Dave at 08:00 AM

September 01, 2009

Why have stocks roared back?

Even though there's some increased optimism about the economy, things are still pretty bad for businesses and workers. Why, then, did investors in the stock market enjoy tremendous gains in July? What are they seeing that many of the rest of us don't?

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

"And, indeed, actually, the stock market has been on a roll since the spring, up something like 40 to 45 percent. I think it's because investors feel as if the economy has now moved back from the brink. I think there's been a real assessment that last fall and winter, the economy was really on the edge. We could have had another Great Depression. And I think the view is now that, no, that's not in the cards. There's been enough done to really backstop the economy, particularly what the Federal Reserve has done. And so, I think when we got down, for example, the Dow Jones industrial average down in the mid-6,000s, that was really the point at which people were fearing the economy could slip, really big time. Now that we're up around 9,000, 9,500, I think the view is, ok, we're not going to slip. We still have economic problems, but we know we're not going to go into a Great Depression. So I think it's all based on the view that the economy has stabilized, and we're not in free fall. Now, of course, the big question - and this is what investors are asking right now - is what's the economic recovery going to look like? We know we're going to have an economic recovery. How strong will it be? I think that will dictate where the stock market goes from here."

Posted by Dave at 08:00 AM