The New Economy
The headline that caught my eye – "Nutella settles lawsuit" – took me back instantly to memories of slathering the product on real French bread. It was convenient. You spread it on like peanut butter, but it tasted so much better: chocolate with just the right essence of hazelnut.
Back then, it was touted as an after-school treat for European kids and hard to find in the United States. Now, it's marketed increasingly for breakfast for American children. That's what got its maker, Italy's Ferrero Group (which also makes Ferrero Chocolates and Tic Tacs), into trouble with US courts.
Advertised as a way to get children to eat a healthy breakfast, Ferrero was insinuating that Nutella was healthy when, in fact, it has about as much nutritional value as a candy bar. Or so claimed several consumers, who sued the company's US unit.
As part of its settlement of two class-action suits, Ferrero U.S.A. Inc. is offering to reimburse consumers for up to five jars (at $4 a jar). Since it doesn't appear you need any receipts, it's one of the easiest $20 you can make. You can apply here.
Your actual reward could amount to less than $20, because so many people may apply for the $3.05 million available. But I'm not sure I'll be one of those people.
Our family is certainly entitled to the money. My daughter has become a big fan, so we bought far more than five jars of Nutella between the court-specified period of Jan. 1, 2008, to Feb. 3, 2012 (Aug. 1, 2009, to Jan. 23, 2012. for those in California, where one of the suits was filed).
And while we were never duped into thinking Nutella was health food, some food companies are so cavalier about enhancing the appeal of their products with words like "natural" that maybe Ferrero deserves to be made to pay. Call it social justice. Or punitive damages.
But here's the thing: Ferrero doesn't appear to be a rapacious megacorporation. It looks to be run like a conscientious family-run business.
The company issued its first social responsibility report two years before the first lawsuits were filed. This year it stopped advertising to audiences where more than half of the viewers or readers are under 12; next year, no more than 35 percent of the audience can be under 12. It has started a training program with USAID for hazelnut growers in the country of Georgia. Last year, one of its two managing directors (and a grandson of the founder) died during a humanitarian mission to South Africa. By 2020, the company aims to supply all its cocoa, palm oil, and coffee from sustainable farms.
These are not the moves of a company with a single-minded focus on the bottom line.
And the ads that helped convince several judges there was a case against Ferrero? Here's the transcript of one TV ad from court documents:
"[MOM]: As a mom, I’m a great believer in Nutella, a delicious hazelnut spread that I use to get mykids to eat healthy foods. I spread a little on all kinds of healthy things, like multigrain toast. Everyjar has wholesome, quality ingredients, like hazelnuts, skim milk, and a hint of delicious cocoa. AndNutella has no artificial colors or preservatives. It’s quick, it’s easy, and at breakfast I can use all thehelp I can get.
[VOICEOVER]: Nutella—breakfast never tasted this good."
Does that qualify as deception? You be the judge. I'm not applying for the money.
Is the United States on the brink of a recession? To judge by the Federal Reserve, which boosted its economic growth forecast Wednesday, the answer is no. Pointing to the 25 percent rise in the S&P 500 index from its October 2011 low, bullish investors cry, “No!”
But consumers, not investors, set the tone for the economy. On the consumer side, the risks are tilted toward the downside.
The US economy has been fueled in recent months by strong consumer spending, which increased in February by 0.8 percent, its best showing in seven months, and 0.4 percent in January. Retail sales rose 1.1 percent in February – the fastest pace in five months – while same-store sales advanced 4.7 percent. These numbers correlate with recent gains in consumer confidence and sentiment.
Unfortunately, that pace doesn't look sustainable. Personal income growth continues to be weak – up just 0.2 percent in February – meaning this recent exuberant consumer spending is being fueled largely by increased debt and further dipping into savings. Real household after-tax incomes declined in February for a second straight month and have gained a mere 0.3 percent year over year. Consumers still face high personal debt levels.
Housing activity remains depressed, with the only life coming from the multifamily component, which is being driven by the zeal for rental apartments as homeownership falls. Homeowners are losing their abodes to foreclosures; many can’t meet stringent mortgage lending standards; some worry about homeownership responsibilities in the face of job uncertainty; and many people have no desire to buy an asset that continues to fall in price. I am looking for a further 20 percent slide in housing prices.
Employment has gained in recent months because American business has, at least temporarily, run out of productivity enhancement, which earlier allowed it to cover output gains with reduced staff. Payroll employment growth has risen in recent months, although the unseasonably warm winter may have temporarily boosted jobs. Furthermore, employment growth has been from an extremely low recessionary base and the unemployment, while down from 9.1 percent last August, is still high at 8.2 percent.
A very disappointing jobs report showed that just 120,000 nonfarm jobs were created in March versus an expected gain of about 205,000. Sure, the unemployment rate ticked down to 8.2 percent, but only because the number of unemployed fell as people dropped out of the labor force. In response, stocks plunged here and abroad as worries were revived about the true strength of an already-feeble economic recovery from the Great Recession.
Are there any positive signs of growth? Gross domestic product has been accelerating in recent quarters, but not after inventory investment is removed to yield final sales. In the fourth quarter of 2011, inventory growth accounted for 60 percent of the rise in GDP, and that accumulation may not have been desired, suggesting future production cutbacks. Industrial production growth is already sliding. The liquidation of excess inventories accounts for a major share of the decline in economic activity in recessions. Recall that late last year, retailers, worried about being stuck with unsold Christmas goods as in 2010, held early sales, even opening on Thanksgiving Day.
Consumer spending is the only major source of strength in the American economy this year. On the other side of the scale several weaknesses are piled up: State and local government spending remains depressed by deficit woes and underfunded pension plans; excess capacity restrains capital spending; and recent inventory-building appears involuntary.
So it should not come as a surprise if a consumer retrenchment tips the balance toward a moderate – and overdue – recession.
– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."
China is responsible for about 20 percent of total global manufacturing and the ubiquitous “Made in China” label can be found on an astonishing array of products. But its days as the world’s discount manufacturer may be coming to an end. This weekend's loosening of controls on China's currency is the latest sign of the transformation under way.
China is moving inexorably up the value chain. It boasts some of the most advanced manufacturing firms in the world. As the level of factory and worker sophistication has grown, so have salary expectations. And the pool of workers once thought inexhaustible is, in fact, proving to be limited. Throw in higher fuel prices to ship its good overseas and it's clear that the factors that tilted in China's favor during its dramatic first phase of development are now tilting away from it in its second phase.
While this might help North America’s beleaguered manufacturing sector eventually, at this point it appears other emerging nations are reaping the main benefits from the change in China. Over the past few years, for example, several US toy companies have turned to Vietnam and Indonesia to produce more of their products. Auto parts manufacturers have likewise increased their presence in India where a thriving auto industry continues to build momentum. Even Foxconn, the manufacturing giant that makes products for Dell and Apple, is in the process of expanding its operations in India and Vietnam. These moves will come at the expense of plants the Taiwan-based firm has contracted in China.
The shift is understandable. Chinese wages are going up – and will continue to go up by 19 percent a year, according to a report from Credit Suisse Group AG. That's explosive growth that's almost double the expected rate of growth in the economy. As a result, Credit Suisse forecasts, wages – which stood at 50.5 percent of China's gross domestic product in 2010 should rise to 62 percent of GDP by 2015.
That's not necessarily bad for China. Richer Chinese will buy more Chinese goods. Credit Suisse expects private consumption, which accounted for 35.6 percent of GDP last year, to reach nearly 42 percent by 2015.
Another reason wages are rising is that the pool of workers is shrinking and companies are having to compete for skilled workers. The old model of factory owners having the upper hand over migrant workers fleeing rural poverty and willing to take on any task at any wage is disappearing. The advantage is slowly turning to the worker.
That, too, is good for China. Employers are being forced to address some of the horrendous working conditions much of the workforce has been forced to endure. Not all abuses have been eliminated by any means, but progress is coming bit by bit.
Chinese manufacturers are also dealing with considerably higher fuel prices, which makes it more expensive to ship goods. Boston Consulting Group predicted a year ago that at the current rate of appreciation for labor and shipping, within the next five years it will be just as cost-effective to manufacture in North America as in China.
China may have no choice but to concede the production of low-margin goods to other countries in order to concentrate on products with sufficient capacity to absorb higher production costs. The transition must be carefully managed, however, as it is paramount for China to maintain growth as the country continues to evolve.
For guidance, China can look to Japan, which faced a similar dilemma.
In the years following World War II, it was Japan that specialized in the mass production of cheap goods as a means to rebuild its economy after the war. By the 1980s, however, Japan had mostly shed its status as a peddler of poor-quality trinkets to become a leader in electronics and automobiles. This ushered in a period of rapid growth that made Japan a global exporting powerhouse.
Alas, heading into the 1990s, the collapse of a wildly out-of-control domestic asset bubble triggered a serious bout of deflation. This period is still referred to in Japan as the “lost decade” and the hangover from this period continues to affect the economy today. China will have to avoid such pitfalls if it is to manage successfully its next period of growth.
Chief among the needed reforms is to allow the yuan to fluctuate freely against other currencies. This is a move China has long resisted as keeping the yuan devalued has helped maintain an export advantage, but Chinese authorities have signaled a new willingness to ease currency controls. The latest action came this past weekend when the People’s Bank of China doubled the yuan intraday trading band from +/- 0.5 percent to a full percentage point.
Despite the greater currency fluctuation authorities are now willing to tolerate before intervening, the yuan’s value is still tightly controlled. The chronic undervaluing of the currency, while helping export sales, is fueling higher price inflation within China’s borders. This has some observers warning that China could be heading for its own lost decade.
Investing is about making good choices. It's also about avoiding bad ones.
Last month, we looked at nine investment themes for 2012. Here is my list of the 10 areas investors should avoid. In my view, we're in an age of deleveraging, which began in 2007 and probably has another five to seven years to run. Despite rising economic optimism, I foresee a moderate US recession, a hard landing in China, and a severe recession in Europe – in sum, a global recession in 2012.
1. Developed country stocks: This theme reflects my forecast of a downturn in global economic activity accompanied by financial crises of unknown depth. The United States and other developed economies are in a secular downswing that includes a secular bear market in equities.
2. Your house, second home, or residential investment property: If you plan on selling soon, do so yesterday. If I'm right and house prices have another 20 percent to fall in the next several years – after already declining 33 percent – this approach is obvious.
3. Home builders and related companies: Conditions now are far different from when home building was a growth industry characterized by lax underwriting standards, laissez-faire regulation, and, most of all, conviction that house prices would never fall. All those conditions have now been reversed.
4. Selected big-ticket consumer discretionary equities: With real incomes falling amid a continuing need to repay debt, I expect consumers to retrench this year – to the detriment of cruise lines, automakers, high-end consumer electronics, recreational vehicles, and resorts.
5. Consumer lenders: The consumer retrenchment and global recession I foresee will be bad for credit-card is-suers, who are still dealing with all the bad debt piled up in the borrowing-and-spending years.
6. Banks: Deleveraging and the carryover from past financial woes still plague major US banks and financial service institutions. I expect more weakness as deleveraging and write-downs persist in a recessionary climate. The downturn will affect banks here and abroad, big and small.
7. Junk securities: The slow-growth, deflationary scenario I foresee will be lethal for many junk bonds – both those issued as high-yield instruments by companies with shaky balance sheets and fallen angels that have been downgraded to junk status. Slow revenue and cash-flow growth will make it difficult for financially weak and weakening firms to service their debts.
8. Developing country stocks and bonds: The effects from the hard landing in China will spread widely from the world's second-largest economy and major commodity importer. Along with the likely major recession in Europe and economic downturn in the US, a severe slowdown in China will spawn global economic retreat, battering commodity- and export-dependent economies.
9. Selected commodities: I doubt that the commodity price declines in 2011 fully anticipated the global recession I foresee this year, so further significant declines are probably in store, especially for industrial commodities.
10. Many old-tech capital-equipment producers: Besides the depressing effects of excess capacity, low-tech and old-tech firms suffer from foreign competition that grows as their technology is transferred abroad. Challenges include: high-cost labor, lack of productivity gains, and saturated, slow-growth markets.
– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."
For weeks now, debate has raged over a mystery that only an economist could love: Why is the number of jobs growing faster than what the underlying growth of the economy would seem to justify?
Is the economy really growing faster than the numbers show? Or has the relationship between growth and employment changed? Or is the jobs number skewed?
On Friday, economists got the first piece of the answer. The Labor Department released a disappointing employment report, saying the US economy created 120,000 new nonfarm jobs in March, only half the total added in February and the smallest jobs gain since October. The argument that the economy is growing faster than the data show fell like a thud.
So, assuming that the relationship between economic growth and employment remains intact, the best explanation for the mystery is that the jobs number is out of whack.
The reason, many economists speculate, is that firms panicked during the recession and fired too many people. So when the recovery began, they had to hire more than the usual contingent of workers just to catch up with the growing demand. Fed Chairman Ben Bernanke himself championed the catch-up theory in a speech last month.
Another explanation for the better-than-expected job numbers from the winter is the weather theory. It suggests that everything from retail sales to construction was boosted because of the unusually warm winter enjoyed by much of the nation.
The challenge with both the catch-up and weather theories was that, at some point, there would have to be a payback. Exaggerated hiring under catch-up would level off once firms caught up with demand. Retail sales and hiring boosted in warm January and February would slow more than expected come spring.
So, it could be argued that the March employment report is the payback that many were expecting. The more pessimistic scenario is that spring 2012 will be a replay of the past two years, when an early rally and strong job gains gave way to spring and summer doldrums.
It's too early to predict which scenario is correct. A single month's data doesn't make a trend and, anyway, the Labor Department routinely revises its job numbers, sometimes substantially.
What does seem clear is that the job increases of January and February were probably a little overstated.
"Our read is that March is understating the underlying improvement in the labor market, while January and February overstated it," Nigel Gault, an economist at IHS Global Insight in Lexington, Mass., writes in an analysis.
Other recent economic data has come in slightly weaker than expected, but many economists – even skeptics of a bullish recovery – still see job growth ahead.
"Admittedly, the payback [in the employment report] is a little bigger than we had expected," writes Paul Ashworth
a Toronto-based economist with Capital Economics, in an analysis. "But we don't think this is the start of another spring dip in labour market conditions, as we saw in 2010 and 2011. Even factoring in the March disappointment, the three-month average gain is still 212,000 and we expect employment to continue rising at about that pace over the next few months."
That view is bolstered by other employment data, including the ADP employment report (which estimated a 209,000 rise in private-sector jobs in March), the Labor Department's weekly reports on first-time unemployment claims, and job-cut analysis from outplacement firm Challenger, Gray & Christmas, based in Chicago.
"Hiring demand continues to be strong," says Jim John, chief operating officer of Beyond.com, an online career network based in King of Prussia, Pa., for employers and job-seekers. He says job ads posted on his website in January (which would typically be filled in March) also suggested a slowdown in hiring after a very strong December. Since then, job postings have picked up again, rising 32 percent from February to March, which would suggest strong hiring in May.
Managers remain cautious and appear ready to restrain hiring at the first hint of a weakening economy, he warns. If Friday's employment report convinces them that the economy is slowing, "it could become a self-fulfilling prophecy."
So far, though, the March job numbers are just a partial answer to a mystery, which like most economic mysteries, raises new questions.
Employment grew at a disappointing rate in March, adding some 80,000 jobs fewer than what a consensus of economists had expected.
At least it was growth – 120,000 new jobs – and a tick down in the unemployment rate. But the recovery has left behind one important if less vocal class of worker: teenagers. Economists and advocates across the political spectrum are using words like “sobering” and “crisis” to describe historic levels of teen unemployment.
Last month, one quarter of young Americans age 16 to 19 was out of work. That's the highest rate in more than a year and, except for a run of more than a dozen months immediately after the Great Recession, the highest on record going back to 1948. Government and private groups are working on solutions. But with summer less than two months away, the numbers cast a dark shadow over the summer job prospects of US teenagers.
“Young people got beat up really bad in the last decade,” said Andrew Sum, director of the Center for Labor Market Studies at Northeastern University in Boston. “People say, 'Well, things are recovering,' but young people have not gotten one new job in the last two years. Fewer kids are working today then were two years ago.”
The persistence of the problem extends nationwide, although there is a large disparity among states and cities, with low-income urban areas and minorities the hardest hit. In March, the unemployment rate for Hispanics in the 16 to 19 age range was 30.5 percent, and for blacks it was 40.5 percent.
The Great Recession can explain some of the decline in job opportunities for young people. During the mid-2000s, the overall teenage unemployment rate ranged between 14 and 18 percent. Then, the downturn hit and teen unemployment began to rise, peaking at 27 percent in October 2009 (overall unemployment peaked three months later at 10.6 percent). Since then, the recovery has created more than 1 million new jobs for adults and brought the unemployment rate down to 8.2 percent. But there's been no recovery for teens. For the past 41 months, the national average unemployment rate for teens has remained above 20 percent – a postwar record.
One factor behind the stark numbers is that the overall base of teen employment is eroding. For one thing, fewer teens are entering the workforce. That's not always a bad thing. The January issue of the Department of Labor's Monthly Labor Review cited an increase in school attendance, including summer school, as a major reason behind the decline in overall youth employment.
They also are facing more competition from adults, who are now more eager for jobs that they might have dismissed a few years ago. “If you look at the labor force participation of older workers, they are becoming a large contingent of the labor force," says Michael Saltsman, research fellow for the Employment Policies Institute, a research organization in Washington, D.C.
Also, new technologies are shrinking the number of available hourly jobs. ‘We’re at a transition point,” Mr. Saltsman says. Jobs like bagging groceries or working the counter at the local drugstore are increasingly being replaced by automated self-checkout counters and automated price checkers.
The concern about teen unemployment runs across the political spectrum, because research suggests that a job helps teenagers learn job skills and earn more in later years. A National Bureau of Economic Research study from 1995 found that high school seniors employed 20 hours per week were, six to nine years later, expected to earn approximately 11 percent more annually than their unemployed peers. A 2006 Journal of Human Resources study found that periods of unemployment, even as a teenager, were more likely to adversely affect the future successes of the job seeker later in life.
"The value of a summer job is more than just a paycheck, it’s the skills they pick up,” says Saltsman, whose conservative Employment Policies Institute is managed by a communications firm with ties to the restaurant, tobacco, and food industry. “It’s probably too early to write this generation off, but it’s something to be concerned about when you have young people who get discouraged and say they’d rather spend the summer hanging on the couch instead of out there learning something."
President Obama, a Democrat, has also called attention to the problem: “America’s young people face record unemployment, and we need to do everything we can to make sure they’ve got the opportunity to earn the skills and a work ethic that come with a job,” he said, when announcing his summer jobs initiative in January.
The president's “Summer Jobs +” initiative is an effort to encourage private-public partnerships and reach a goal of at least 250,000 teens hired this summer. So far the White House says it has received pledges from companies including AT&T, Bank of America, and CVS/Caremark that amount to 180,000 jobs. The number of jobs partners have pledged varies greatly, however, from just a dozen paid positions to thousands.
Jamba Juice, a national food and beverage chain, has pledged to hire at least 2,500 young people and recently hosted a national hiring day in 80 cities across the country. “The issue with teen unemployment is a compelling story,” says Kathy Wright, vice president of human resources, in an e-mail. “It made sense that the private and public sector work together to help put youth to work and we felt it was something that we could help out in doing. “
Others are not impressed with the White House plan. “The program [Mr. Obama] put out, let’s be honest, it’s a pretty pathetic initiative,” says Mr. Sum, the Northeastern University professor. He says a better solution would be to offer government-funded tax incentives or wage subsidies to companies willing to take on teen employees. Also, brokers need to be put in place to help connect out-of-work youths with hiring managers.
Brokers like TeenForce, a northern California start-up, serve as a go-between for low-income and at-risk teens in Santa Clara County. Acting as a hybrid matchmaker, human-resources representative, and payroll office, TeenForce streamlines the hiring process for area teens and employers alike. The teens are paid by the nonprofit directly, so employers don’t have to deal with paperwork or insurance.
“It makes it very convenient for employers,” Mr. Hogan says. “Our model is definitely designed to be replicated, and scalable. Just as any community would want to have an YMCA, our vision is every community would want a TeenForce jobs program, because they work. Our vision is to demonstrate that there is a better way, that kids have value, their labor has value, and that businesses will pay for it.”
In the short term, teens who do want a job when school lets out need to start thinking about possibilities, and be prepared to get creative.
While fast food and retail may seem like the obvious places for teens looking for work, Rick Parker, senior vice president in marketing at Snagajob, an hourly employment network site, recommends applying for positions in more unexpected sectors, like car care, for example.
Snagajob conducts an annual survey of over one thousand hiring managers nationwide, in advance of the summer season, to get a feel for current trends in the hourly labor market. This summer, it’s all about timing.
“We're seeing that hiring mangers are hiring earlier this year than they have, in the past. Eighty percent will complete their summer hiring by Memorial Day,” Parker said. “If teens want the best paying jobs, the best types of jobs, they should be looking early, in fact they really already should be looking.”
Some of America's most closely watched housing numbers are starting to suggest that the big decline in housing is coming to an end, at least in some metros.
Home prices in Seattle, Minneapolis, and Denver have begun to trend upward in the past few months, according to the S&P/Case-Shiller housing indices. Even hard-hit metro areas such as Tampa, Fla., and Phoenix have seen a modest rebound.
But in Atlanta home prices not only continue to fall, the declines are accelerating. They now stand at a 14-year low.
That artifact should give homeowners pause, especially those who expect a quick rebound in housing. Nationally, prices haven't been this low since 2003. In Atlanta, they haven't been this low since early 1998.
"Atlanta continues to stand out in terms of recent relative weakness," said David Blitzer, chairman of the index committee at S&P Indices, in a statement. Of the 19 cities tracked in January, Georgia's largest metro saw prices fall 2.1 percent from a month earlier and a whopping 14.8 percent over the last year, the biggest year-on-year decline since the depths of the Great Recession..
So is Atlanta an oddity – or a troubling signal that other homeowners should worry about?
"Atlanta's a real quirky market," says Hank Miller, real estate broker and certified appraiser based in Roswell, Ga. With no natural boundaries, developers expanded wildly during the housing boom, so that outer suburbs in the south and near Hartsfield-Jackson Atlanta International Airport are awash in homes that are depressing prices. But in many suburbs north of the city, "it's actually a very tight and stable market, stable to the point that people are building new homes. I've got three new homes under contract for over $500,000 in the last two weeks."
Some other sprawling metros are also witnessing continuing declines, such as Chicago (down 6.6 percent over the past year) and Las Vegas (down 9.1 percent). Other sprawling centers, however, are seeing small declines, such as Minneapolis, or stabilization, such as Denver.
The 19-city Case-Shiller index (which this month was missing data from Charlotte, N.C.) stands somewhere in-between these cities and Atlanta. Prices are down 3.8 percent over the last year, on par with year-over-year declines seen in previous months and nowhere near the declines in the depth of the recession.
Atlanta, for all its recent decline, has not seen prices fall half or more from their peaks, as Las Vegas, Phoenix, and Miami have. Its average home price would have to fall another 20 percent to reach their level of distress. So it's natural that these local real estate markets go through a period of volatile adjustment as buyers and sellers find the floor for prices.
But there are no guarantees that housing prices will go up. Mr. Miller, for one, isn't expecting any quick turnaround. He points to the huge inventory of foreclosed and other homes still waiting to come onto the market. "You still have a couple years to shake this thing out," he says.
The Woodlands in greater Houston is a planned community that draws middle- and upper-income families looking for good schools, safe neighborhoods, and a suburban lifestyle. So who's moving in?
Wealthy Mexican entrepreneurs escaping the violence in Mexico, says Bill Gottfried, broker and owner of a Houston real estate firm and a member of the international advisory group of the Houston Association of Realtors. In his informal polling of other brokers catering to international clients, he estimates that roughly a third of home sales in the Woodlands have been to Mexican nationals in the past year.
If the battered housing market hasn't inspired Americans to rush into real estate – existing home sales fell nearly 1 percent from January to February, the National Association of Realtors (NAR) reports – it is attracting foreigners. They're snapping up homes in increasing numbers for various reasons: Home prices have fallen, the value of the US dollar has weakened against some currencies, and the US market is seen as safe and stable. That investment is helping to stabilize US home prices, at least in metropolitan areas popular with foreigners.
Foreign sales of residential property grew nearly a third in the year ending March 2011, according to the latest figures from the NAR. At $82 billion – only about 8 percent of existing home sales – foreign purchases aren't doing too much to boost home prices in, say, Iowa. But in the states where foreign sales are concentrated, the influx of international buyers appears to be buoying the real estate market. Several of those states are the ones hit hardest by the bursting of the housing bubble.
Take Florida. All by itself, the foreclosure-battered state attracted 31 percent of all foreigners' purchases, according to the NAR. In a separate survey in conjunction with its Florida branch, the NAR estimated that foreigners accounted for a quarter of all the state's residential sales in the 12 months ending in June 2011. That level of sales can have a big impact.
Foreign sales in Florida may be doing more than buoying the market. "Iit may be enough to turn it around, depending on the selling pressures," writes Susan Wachter, professor of real estate and finance at the University of Pennsylvania's Wharton School in Philadelphia, in an e-mail. "It is not just that a quarter [of buyers] are foreigners, it is that foreigners are likely to be the marginal buyers – those that are offering top dollar. Their wealth has not been hit by the crisis, unlike the balance sheet of the US buyer."
Two other states hit hardest by the housing bust are among the four most popular states for international buyers, according to the NAR: California (12 percent of international sales in the US) and Arizona (6 percent).
The US is also the most popular locale for international buyers of commercial real estate. Perennially the No. 1 destination of investment money, the US received fewer first-place votes in 2011 than in 2010, as other locales, such as Brazil, grew in popularity, according to a survey released in January by the Association of Foreign Investors in Real Estate, based in Washington. Still, 60 percent of the commercial investors in the survey said they planned to increase their property purchases in the US this year.
In Texas, commercial and residential real estate investors are increasing their activity. Texas accounted for 9 percent of foreigners' residential sales in the US, according to the NAR.
"We are seeing a larger component of international buyers coming into the Houston metro area," says Mr. Gottfried, the local broker and owner of Gottfried International Estates.
With its diversified economy of oil, electronics, and health-care, Houston has long attracted buyers from Mexico and other Latin American destinations. Their purchases have increased in the past two to three years, Gottfried says, and half or more of them purchase properties to live in while they work in the Houston area.
"We have very good pricing for our properties," Gottfried says. "We are seeing our numbers moving up."
April 1 is often a day for pranks. In the tax world, however, it will mark something more serious. Barring another Fukushima Daiichi-like catastrophe (which delayed its plans last year), Japan will cut its corporate tax rate by five percentage points. That move will leave the United States with the highest corporate tax rate in the developed world: 39.2 percent when you add state and local taxes to the 35 percent federal rate.
The corporate income tax is a particularly problematic way to collect tax revenues. Corporate taxes are often more harmful for economic growth than ones on personal income or consumption, as noted in a recent study by the Organization for Economic Cooperation and Development. Moreover, a high corporate rate is an invitation for US multina-tionals to play games with their accounting, locating profits overseas while reporting as many tax-deductible expenses as possible here at home.
That's why there's a growing bipartisan consensus that the federal rate needs to come down. President Obama recently proposed lowering it to 28 percent. His likely Republican challenger, Mitt Romney, wants to bring it down to 25 percent.
But corporate tax reform can't just be about lowering the statutory rate. America faces enormous budget challenges and cannot afford to simply cut future revenue. Moreover, the high statutory rate isn't the only problem with our system. The code is riddled with tax subsidies and loopholes. Those tax breaks, more generous than those in many nations, reduce corporate tax burdens significantly.
That leaves us with the worst possible system. It maximizes the degree to which corporate man-agers must worry about taxes when making business decisions but limits the revenue that the government actually collects.
One side effect is that the system plays favorites among different businesses. Retailers and construction companies, for example, pay an average tax rate of 31 percent, according to recent Treasury Department calculations, while utilities pay only 14 percent and mining companies (which include fossil fuel producers) pay only 18 percent.
I know of no reason why the tax system should favor utilities and mining while hitting construction and retailers so hard. Far better would be a system in which investors deployed their capital based on economic fundamentals, not the distortions of the tax system.
Another problem is that the system perversely favors debt financing over equity. Interest payments are tax-deductible, while dividends are not. Corporations thus have a strong incentive to finance their investments by borrowing. Given what our economy's been through, it is hard to believe that the tax system ought to subsidize more debt.
The solution to all this is to reduce the corporate tax rate while taking a hatchet to many corporate tax breaks. Done right, that would level the playing field across different businesses and between equity and debt and maintain revenues.
Mr. Obama and Mr. Romney have proposed reforms along these lines, albeit with much more clarity about the rate-cutting than the base-broadening. That isn't surprising. Leveling the playing field (while maintaining revenues) will require that some companies pay more so others can pay less. Politicians would rather focus on potential winners, not losers. But losers there will be.
The US Chamber of Commerce has said that it "will be forced to vigorously oppose pay-fors [tax increases] that pit one industry against another." But such pitting is exactly what will be necessary to enact comprehensive corporate tax reform.
– Donald B. Marron is director of the Urban-Brookings Tax Policy Center.
Yes. Already the fourth largest energy consumer in the world, India's demand for oil looks set to rise inexorably as more of its people buy cars and take to the road. Ditto for China and other emerging markets. Their rising demand is pushing up prices for everyone.
This consumer competition is usually subtle. For decades, Americans were king of the road. When they put the pedal to the metal, the world rushed to produce the oil and gasoline to fuel the ride. (The exceptions, from OPEC nations, were temporary.)
Now, however, world producers of oil and gas are not going to jump quite so fast. There are other, more dynamic markets to serve than the United States.
Have you driven on the East Coast, lately? Prices surged there late last month for all the normal reasons plus one: the increasingly dire state of refining in the Northeast.
The East Coast facilities are old and set up to process the wrong kind of fuel (crude from Europe and Africa, which is selling at a premium because of the West's tensions with Iran). They're also located in the wrong place. Although the Northeast market is huge, it is stagnant. Regional demand for gasoline is actually down 7 percent since its peak in 2005.
As a result, refiners are losing money. Last year, two refineries in Pennsylvania closed. Another one, a US Virgin Islands facility that supplied the East Coast, shut down last month. Those closures have stretched the region's capacity to produce enough gasoline for the region and pushed up prices. If Sunoco closes its huge Philadelphia refinery this July, which it says it will do if it can't find a buyer, it would eliminate a third of the region's refining capacity and probably cause gasoline prices to rise even more over the next several months, the US Energy Information Administration says.
Why not build new refineries? Oil companies don't want to build new facilities in declining markets.
"You go where the growth is," says Andy Lipow, an independent oil analyst in Houston. That means Asia. India boasts the largest oil-refining complex in the world, itself equal to all the refining capacity in the Northeast US.
Prices in the Northeast are high enough that the oil industry will figure out how to meet demand, especially once the fate of the Sunoco refinery is settled. That might mean more gasoline brought in from the Gulf. Or it could be more gasoline imported from overseas.
India, notably, already delivers 40,000 barrels of gasoline a day to the East Coast. Rising prices in New York might coax a little more gasoline out of the subcontinent. But India also has the world's second-fastest growing car market after China. By one estimate, it will have more cars on the road midcentury than any other nation in the world.
So where is its gasoline going to go in the long term? Bangalore. Not Boston.
Drivers in the fast-growing nations of the developing world have grabbed the steering wheel. And they're not going to let go.