NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
September 2, 1999
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
Demand for all meats, including beef, is strong. While it is not yet a trend, the last six months of beef demand data suggests an increase in beef demand -- the first increase in at least two decades. Given this beef demand situation, let's look at some indicators from the general economy to see if we can better understand what is motivating this increase in beef demand.
The United States economy has experienced an extraordinary period in recent years. It weathered the current financial crisis in Asia, Russia and Latin America and beat most economists' forecasts. Growth in Gross National Product has averaged 3.25 percent during this expansion and 4 percent during the last 3.5 years of this expansion. If the general economic expansion holds for the rest of this year, it will be longest on record. It will even exceed the economic expansion of the 1960s which was fueled by the Vietnam War.
U.S. consumers appear to be delighted with their current economic conditions and are spending like never before. Rising wages coupled with low inflation have resulted in increased purchasing power. The growth of the U.S. stock market represents added wealth that consumers want to spend. Consumer spending has grown at an annual rate of 5 percent for the last 1.5 years, or about double the pace of previous years. Consumers are spending this newfound wealth on cars, homes, eating out, etc. Since consumers purchase two-thirds of all goods and services in the economy, consumer spending greatly influences the economy's direction.
Consumer spending is so high that it is actually outpacing consumer's gain in income. As a result, consumers are actually consuming savings in order to maintain their current spending habits. Increased spending has resulted in a negative 1.1 percent savings rate. Apparently, consumers are feeling the stock market wealth and have decided to spend some of it. I suspect that as long as the stock market is strong, consumers will continue to spend. If and when consumers should stop spending, the economy would slow immediately. However, there is no indication yet that consumers are going to stop spending.
This all suggests that beef farmers and ranchers can watch the stock market for general economic signals relating to beef demand.
I describe consumers' increased spending for beef, and increased meat demand in general, as the "SUV (sports utility vehicle) effect." Car manufactures can not build SUVs fast enough. I've heard that one-fourth of all vehicles in Chicago are now four-wheel-drive off-road vehicles that will never be driven off-road. Consumers just want a SUV and feel that they have the money to buy one. Similarly, consumers are also eating out like they have never before -- and they like beef. The demand for high choice and prime beef, consumed in restaurants, is very strong.
Let's look at three U.S. general economic indicators to get a feel for why consumer spending is so high: employment, prices and interest rates.
The economic expansion since 1991 has added about 20 million employees, or about 3 million employees per year in recent years. Today more than 64 percent of U.S. residents have jobs, the highest percentage in history. Unemployment last month was at a three-decade low of 4.3 percent and has been at or below 4.5 percent for more than a year.
Historically, when unemployment falls below 6 percent, wages and salaries typically get bid up. This appears to be holding true for today, as both wages and benefits are beginning to creep up. Last year benefit costs rose 2.5 percent and wages rose 3.75 percent. That's the biggest increase in seven years.
Our second economic measure, prices, rose only 1.6 percent in 1998, according to the Consumer Price Index. This was the lowest in three decades. While consumer prices edged up 2.1 percent in the 12 months ending June 1999, this is still a relatively low level and may be due to a sharp decline in oil prices last year.
Rising worker productivity can enable businesses to boost worker compensation without a matching increase in output prices. There are indications that a recent surge in labor productivity has boosted worker output and limited the price pressures from increased labor compensation. I think much of this has to be attributed to microcomputers and the Internet.
The key question is this: How long the current increase in productivity can be sustained? Should productivity fail to continue to accelerate, while demand growth continues, the economy could overheat and inflation could take off. It is my assessment, however, that agriculture does quite well under periods of inflation. Inflating land values stimulate farmers and ranchers like the inflating stock market appears to stimulate consumers.
A third contribution to low price increases is the excess production capacity of troubled Asian countries. They exported their excess capacities to the United States. Record net imports into the United States last year were stimulated by a weak world economy and the strong U.S. dollar. In general, agriculture does not do well under a strong U.S. dollar, as it makes our agricultural exports to expensive.
A strong U.S. dollar works like a huge vacuum cleaner that pulls commodities into the United States. For example, look at the importation of Canadian beef, pork and grains into the United States, a result of the weak Canadian dollar relative to the U.S. dollar. It was not policy changes that drew in the Canadian products, it was the strong U.S. dollar that promoted the importation of Canadian agricultural products.
In summary, the combined high employment and low inflation is the best in the last 50 years. The concern is that prices have started to increase. Prospects for overheating the economy and inflation pressures led the Federal Reserve Bank to recently raise the federal funds rate by 0.25 percent. This increase was to the rate at which banks lend short-term funds to one another. This and other financial market developments have edged short-term interest rates lower and long-term interest rates higher. It appears that the market is building in an expected higher long-term inflation into the increasing long-term interest rates. Agriculture is negatively impacted by increasing long-term interest rates that will have a negative impact on land prices.
The question that you and I need to be concerned with is this: "How long are the good times for the general economy going to last?" Is increasing beef demand a short- or long-term phenomenon? Let's hope that domestic beef demand stays strong while we take a year or two or three to build back foreign beef demand. We need the time.
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Source: Harlan Hughes (701) 231-7380
Editor: Tom Jirik (701) 231-9629
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