Author: Sherry Jarrell

Housing and the Economic Recovery

Perhaps the housing market is the best economic indicator?

As an economist, I am frequently asked for my predictions on when the economy is going to turn around.  Have we reached the bottom?  Have we begun to recover?  Might we go into a second, perhaps more severe recession?

Those are tough questions to answer.  Business cycles are notoriously difficult to predict.  In fact, about the only thing we know for sure is that no two business cycles are alike. Each is unique in some significant way.

Changes in the housing market may be one of the most meaningful indicators of a recovery, because housing stability is such a fundamental indicator of how households are budgeting their income.  Notice that I did not say that the level of homeownership was a useful indicator; instead, I look to changes in the housing market, either away from or toward an apparently sustainable and affordable supply of homes, for evidence of where in the business cycle the economy may be.

Despite record low mortgage rates and first-time home buyer credits, the U.S. housing market remains anemic.  Rising foreclosures in several major metropolitan areas will keep housing prices low for some time to come.

The U.S. currently has about 1.7 million excess housing units available.  Typically, about 1.3 million new households are formed in the U.S. per year.  But with the unemployment rate topping 10%, new household formation will fall to about 1 million per year.  If new home construction remains at its current level of about 600,000 units per year, it will take over 4 years (1.7 million/400,000) for the excess supply of housing to be absorbed and housing prices to recover.

Recovery rates will be much slower in some markets, such as in Florida, Nevada, and California, but I believe that the rest of the U.S. along with most other developed economies are looking at a three- to four-year period of time before housing and thus the overall levels of output return to their pre-recession levels.

By Sherry Jarrell

Commercial Real Estate and the U.S. Financial System

This is not over yet, folks

The U.S. banking system remains vulnerable to sizeable potential losses as the housing market struggles to recover.

Estimates of these losses range from $500 billion to $1 trillion (£312 bn – £625 bn). The Federal Reserve Board is especially concerned about the impact of commercial real estate on many regional and small banks across the country.  Occupancy and rental rates continue to decline dramatically as 2009 draws to a close, and the worst seems yet to come.

Commercial real estate loans on banks’ balance sheets total almost $1.1 trillion dollars.  With near-term commercial real estate losses topping $100 billion, the Wall Street Journal estimates that as many as one-third of small and mid-size U.S. banks could experience financial distress.



Troubled banks restrict lending until they can raise more capital.  In this illiquid market, expect banks to fight for survival by raising lending rates, shortening maturities, and lowering loan amounts.  Credit will continue to shrink in the U.S., which spells big trouble for any economic recovery.

By Sherry Jarrell

Let’s Introduce Obama’s Left Hand to his Right

To post or … what to post?

As I was perusing the business press this morning, an article caught my eye:  “That would make a great post!” I thought to myself.  I continued reading through the rest of the articles, intending to go back to the one that piqued my interest to compose a comment.  Of course, when I went back, I could not find it!

Trouble internally

But in the process of looking for that particular paragraph, I noticed something troubling. Something that, should my students’ papers include the same, would bring their score down by a full letter grade, if not more.

Read more of this Post

Paul Krugman’s Endless Ego

A small challenge to a Nobel prize winner in Economics!

In a recent New York Times op-ed, Paul Krugman continues his boundless quest to become the “it” guy in the world of economics.  I have taken issue with his command of basic economic facts in the past — a gutsy, if not insane thing to do given the man was awarded a Nobel Prize in Economics.

Krugman accepting the Nobel Prize

This post is more about ego than economics, however.

In this op-ed, Mr. Krugman says (and I kid you not),

…But after the debacle of the past two years, there’s broad agreement — I’m tempted to say, agreement on the part of almost everyone not on the financial industry’s payroll — with Mr. Turner’s assertion that a lot of what Wall Street and the City do is “socially useless.” And a transactions tax could generate substantial revenue, helping alleviate fears about government deficits. What’s not to like?

Well, I disagree with the idea that what Wall Street does is socially useless.  And I am not on the financial industry’s payroll.

Nope, I’m just a simple economist, using my head, training, and experience to consider this idea, map out the pros and cons, and analyze the logical end-game of such a tax.  I conclude that it is a really bad idea.

Why?  There are lots of reasons, but I will mention only two.

  • One, raising taxes reduces private economic activity, which will curtail growth, reduce tax revenues and increase the deficit.
  • Two, taxes distort the price signal between suppliers and demanders of goods and services, including financial capital, reducing economic efficiency.

His reasons?  Other than citing one academic study (while ignoring the many others that reach a different conclusion), he gives no economic reasons for his views.  Instead, he make claims. He claims, for example, that “socially damaging behavior … caused our current crisis.”  He says that the financial services industry is “bloated” and needs to be cut down to size.   He says that the new tax is okay because it raises revenues for the government which, he claims, should make us all feel better about the deficit and, apparently, the size and nature of government spending under Obama. And, the lamest of all, for no other reason than to hide behind their skirt, he claims the existence of some phantom majority, apparently to create the impression that anyone with a different view is clearly in the minority.   A tactic that should be beneath a Noble Prize winner, but one that runs through his work with increasing frequency over time.

But, Mr. Krugman, I so disagree with you.  And even in an op-ed piece — perhaps especially in an op-ed piece – I believe that one needs to reign in an ego that would parade claims as facts, especially when each of those claims is disputed by your fellow economists, none of whom stooped so low as to imply that you were paid for your views.

By Sherry Jarrell

U.S. Growth Rate Revised Downward

As expected … and as cautioned here:

The Commerce Department has revised downward its estimate of the U.S. growth rate from the third quarter of 2009, see this report.

Citing weaker consumer spending than originally estimated (discussed in an earlier post here) the annualized growth rate is now 2.8%, down from 3.5%, far too weak to make any progress on the employment front.

By Sherry Jarrell

Why the Anger over U.S. Executive Compensation?

Pay and the Free Market

It came up again in conversation today:  someone was offended and upset over the level of compensation of some senior executives in the U.S. economy.   I have to admit I just do not understand the anger. And I have a fundamental lack of respect for the arguments that have been served up thus far in support of the position.

I have tried to resist drawing the conclusion that the anger is born of envy, but I am very close to throwing in the towel on that one.  Why should we begrudge anyone who earns a healthy salary, especially in an economy that provides each of us the opportunity to aspire to the same?

Even if there were reasonable ways around the practical issues and costs associated with legislative caps on salaries — how to set them, who sets them, using what measures, what value judgements — it simply makes no sense.  It is the antithesis of a competitive market economy where individuals have the incentive to learn, grow, work hard, and succeed.  It ignores the role played by capitalism in creating a strong and vibrant private economy that provides endless opportunities for all who want to put in the hours and the effort to succeed.

U.S. corporate governance rules provide the framework for determining the compensation for senior executives, and it works remarkably well.  Each shareholder, or owner of the company, gets one vote on material issues such as reorganization. The Board of Directors is responsible for hiring and firing senior management on behalf of the shareholders.  If the shareholders do not like the decisions of the board, including those that set the level and form of compensation for senior management, they have at least two, very effective choices. They can either sell their shares in the company or they can vote to replace the board members.  The board can take several steps if, after negotiating the compensation package for senior management, the executive fails to perform. The board can withhold the bonus, renegotiate the terms of the contract, or fire the executive.  Then the long, mostly objective arm of the competitive labor market will determine the market-clearing value for the skills and experience of the recently fired executive.

One thing I’ve never quite understood is why the market doesn’t seem to exact more punishment on senior executives who run their companies into the ground.  Maybe there is an old boys network that looks out for ex-executives; maybe my observations are biased; maybe I notice only those cases where failed executives rise again.  But it’s an empirical question, in any case; we can gather data on the issue and study it objectively.

Regardless of the conclusions of such an analysis, however, decisions about executive compensation must remain in the labor market where your ability to produce economic value still reigns supreme over your ability to curry votes and political favor.

By Sherry Jarrell

The Power of Words

Never give up is so much more than just a cliché.

Regular readers will know that fellow LfD author, John Lewis, has been posting regularly on the subject of remarkable people.  I have found them inspiring, to the extent that I’m going to depart from my usual safe area of economics and tell a personal story.  It’s a story of family dynamics, the power of sibling bonds and why hope and trust in the future, especially for young people, is so, so important.  I have called my story the Power of Words.

—–oooOOOooo—–

I can hear it like it was yesterday, resonating in my head, crowding out the doubts and negative thoughts, filling my mind with possibilities:  yes, I CAN do it!

Then ....

I was in my junior year of college and had no idea what I was going to do with my life.  It was becoming quite a burden.

Because I had always been good in school, i.e., the “smart one,” everyone had expected so much of me when I went to school.  I really envied my older sister; she had always been the pretty one, the popular one, the one who got invited to the prom by not one, but three young men.

And, it seemed to me at the time, she was so lucky because no one expected her to go out and conquer the world after high school.   She didn’t go to college; she went to secretarial school and studied to become an airline attendant instead.

I envied her in every way possible!  But at least I had something: I was “the smart one,” or so I thought!  Years later, my sister went back to school to study psychology.  She earned a 4.0 [four straight ‘A’s. Ed] and was invited to continue on to earn her Ph.D.  I’ll be darned if she wasn’t the smart one, too! And she is a wonderful and thoughtful person to boot! But I digress.

Read more of my story

Government Spending and jobs! Uh? What jobs?

Government spending isn’t what it is made out to be.

The headlines are full of claims about the number of jobs created or saved by the stimulus package, the impact of the Cash for Clunkers program on U.S. output and, the latest, the reduction in the deficit from the proposed U.S. health care reform legislation.

What total rubbish!

Government spending is just that — SPENDING.  It does not, can not, never has, and never will CREATE any output, economic wealth, or job.  The only way — and I mean the ONLY way — that profits or wealth or a new job is created is through a business.  Businesses are the only entity that can hire labor and capital and combine them in such a way as to create a product or a service that society may decide is worth more than it costs.

And that spread between the cost of production and what society is willing to pay is economic value; it is the generation of profits that then enables the taxes that the government collects to spend on the goods and services it thinks America ought to consume.

Private industry is the job creator.  Not the government.   And this is not wishful thinking, or a political point of view, or a theoretical model.  It is an unmitigated, irrefutable fact.

By Sherry Jarrell

The ageing of the USA, Part Three

Back to the future – a new way of seeing forward

The concluding part of a three-part paper previously published by Professor Sherry Jarrell, Part One is here and Part Two is here.

What kinds of business establishments will thrive in the U.S. city of the future?  To answer this question, we examined the count of the number of establishments per business category listed on yellowpagecity.com, adjusted proportionately to represent a population of 500,000, and found the following results.

Death services. Although the strain on the healthcare system has received much attention in relation to ageing in the United States, the next logical step—death—is rarely mentioned, although it certainly represents many business and professional opportunities.  Our data suggest that the number of funeral facilities and cremations per 500,000 residents might double or even triple by 2025. The same applies to the number of cemeteries and companies listing monuments.

Healthcare. Along with roughly 30% more doctors, our data suggest that a range of medical services and products will be in greater demand by 2025. Nearly all of them relate to age. Consistent with the expectation that mental and self-care disabilities increase with age, listings also jump considerably for alcohol information and treatment, and counseling services. This trend doesn’t occur, however, for mental health services.

Real estate and living arrangements. Real estate listings significantly increase across the six MSAs, along with a substantial growth in listed land surveyors. The number of listings for nursing and convalescent homes moves from an average of 30 for the current MSAs to 50 for the 2020 and 2025 cities. There’s an even larger average rise in the number of retirement communities and homes.

Perhaps the most surprising pattern, at least initially, is the dramatic increase in the number of listings for mobile home dealers and mobile home parks and communities. Insurance studies have shown, however, that the percent of manufactured (mobile) home owners who are age 65 and older has risen from 26% in 1990 to 30% in 2002. Similar percentages are cited for owners who are retired. In addition, over the same period, the amount of owners age 80 and older has changed from 3% to 7%. Therefore, the future might be replete with mobile homes. The data might reflect the strategy of retirees selling larger homes to extract the equity, which is used to help fund retirement and buy a less-expensive manufactured home.

Activities. The data show a marked increase in the number of associations, clubs, churches, and fraternal organizations, which supports the description of mature adults as “joiners.” Bingo games are more popular in the 2020 and 2025 cities. Perhaps most noticeably, more golf is played in the 2020 and 2025 MSAs, requiring many more golf courses and golf-related products and services—not just in Florida, but also in Youngstown, Utica, and Scranton. Residents in the 2020 and 2025 cities also spend more time at the library, at recreation centers and parks, and reading newspapers.

Finance. Services that will be in higher demand as retirees seek assistance in managing their retirement assets include credit and debt counseling services, insurance, loans, mutual funds, and stock and bond brokers.

Products. The number of listings for new and used automobile dealers increases between the 2005 and 2025 cities, as do listings for new and used furniture dealers, health and diet foods, hardware, lawn and garden equipment and supplies, service stations, TV and radio equipment sales and service, and vitamins. But the data also reveal many other rising trends that are likely age-related, such as for antique dealers, arts and crafts, ceramic equipment and supplies, embroidery, gift shops, giftwares, jewelers, and security-related products. The substantial increase in florists is probably related to the number of hospitals, funeral facilities, and crematories in the cities.

Services. The Yellow Pages listings indicate many more business, employment, and investment opportunities in the future. Several categories relate to home improvement, such as contractors for remodeling, landscaping, and swimming pools. Home maintenance also is in greater demand in cities with older populations. Similarly, listings related to servicing and repairing automobiles, furniture, and jewelry rise across the three pairs of cities—along with beauty salons and massage. Pets apparently deserve no less, as pet washing and grooming services are in greater demand in cities with older populations.

Research Implications

This innovative methodology for studying various aspects of the future reveals that many of the detailed trends across the three pairs of cities have significant implications with respect to new product development and marketing. For example, marketers need to begin partnering with development and land use officials to anticipate future growth in demand for golfing facilities, churches, parks, libraries, cemeteries, and mobile home parks. And medical services providers must be prepared to meet the demands for home health services and many other healthcare preferences of older adults in an increasingly competitive environment.

Although it’s true that many factors other than age will shape future spending patterns, such as changing tastes among mature buyers, new technology, and various economic factors, many of these trends are almost entirely age-related. Therefore, it’s unlikely the future will look that different from Lakeland today, where the share of the population age 65 and older is identical to that projected for the nation in 2025.

The United States will not be a nation of Floridas in 2025; it will be a nation of Lakelands.

By Sherry Jarrell

The ageing of the USA, Part Two

Back to the future – a new way of seeing forward

Part Two of a three-part paper previously published by Professor Sherry Jarrell, Part One is here.

In this post, we examine the current income and spending patterns from metropolitan statistical areas (MSAs) with age demographics similar to those projected for the U.S. economy in 2020 and 2025.  Two MSAs are selected for each year to verify that differences in buying patterns across cities are because of differing age distributions, not peculiarities in the cities.

We began with U.S. Bureau of Census data on the percent of total U.S. population expected within five age groups through 2025. The share of U.S. population attributed to people age 65 and older is expected to increase from 12.4% today to 16.3% in 2020 and 18.2% in 2025. By 2025, nearly one out of every four drivers will be age 65 or older, compared with 15.6% today.

Income and Spending Patterns

We find that, although many mature adults are highly mobile, most stay put; this results in the Northeast and Midwest remaining key mature markets.  Three of our four 2020 and 2025 MSAs are in Ohio, New York, and Pennsylvania. We also find that older consumers:

  • spend more of their income: The spending per income ratio rises from .67 today, to .76 for the 2020 MSAs and .77 for the 2025 MSAs.
  • continue to depend on their cars and prefer them to public transportation.
  • spend increasingly larger shares of their income on healthcare.
  • make TV a key element of their lifestyles.
  • remain in their homes and avoid nursing homes.
  • are politically conservative.
  • are civically active and wield growing influence.
  • are joiners.
  • spend heavily on housekeeping supplies, household furnishings and equipment, new vehicles, entertainment, computers, healthcare products, vitamins, healthier foods, and reading materials.
  • spend less on apparel, cosmetics, and fast food.

Retail spending data

We find that the percent of retail spending on necessities such as products at food and beverage stores and the subcategory of grocery stores is generally higher in all six of our MSAs, compared with the nation. The same is true for the general merchandise store category, which includes discount stores.  We also observe generally lower spending shares relative to the nation in the more discretionary categories of clothing and accessories stores, furniture and home furnishings stores, electronics and appliance stores, building materials stores, and garden equipment stores.

The more important observations relate to spending patterns across the three pairs of MSAs. Looking at food and beverage stores, spending as a share of total retail sales declines across the three pairs of MSAs with increasingly older populations. Beginning with an average of 17.2% in the 2005 MSAs, spending at food and beverage stores drops to 14.1% in the 2025 MSAs.

Similarly, the subcategory of grocery stores falls from 15.1% today to 12.2% in the 2025 MSAs. Note that the approximately 3 percentage point declines in these categories are in spending relative to total retail sales, and that within the categories, the decreases in spending are nearly 20%. For example, for every $1,000 in retail spending in the 2005 cities, approximately $151 is spent at grocery stores. That compares with $122 in the 2025 cities. Thus, although spending shares at food and beverage stores are higher than the national average in all six MSAs, the spending shares fall across the three pairs of MSAs as their populations become increasingly older.

The trend also is downward over time for food service and drinking places, from an average of 9.7% in the 2005 MSAs to 7.5% in the 2025 MSAs—with the trend again representing a roughly 20% absolute dollar spending decline per capita within the category. These results support the expectation that older consumers eat healthier and in less quantities (especially in the case of fast food), and also spend fewer dollars at drinking places.

Per capita spending at clothing and accessories stores decreases from an average of 4% of retail sales in the two 2005 cities to 3.2% in the 2025 cities. As before, although the 1% drop appears small, it represents an approximately 20% reduction in per capita spending.

What types of stores benefit from older populations?

Our results indicate increased spending on furniture, automobiles, and homes. Looking at the per capita shares of total retail spending for furniture, home furnishings, and electronics and appliances, spending shares rise from an average of 2% in the 2005 MSAs to 3.9% in the 2020 MSAs and 4.2% in the 2025 MSAs. This suggests a doubling of per capita spending at furniture and related stores. There are similar patterns for the subcategories of furniture and home furnishings stores, and electronics and appliance stores. Spending also generally rises at building materials and garden equipment stores. Upward trends across the six cities additionally are shown for motor vehicles and parts, and healthcare and personal care.

In the third and final installment of this research, we will discuss the specific types of business establishments that will thrive in the U.S. city of the future.

By Sherry Jarrell