Where Have All the Consumers Gone?

By: Dr. Lynn Reaser

April numbers revealed a soggy retail sales report. Confounding expectations that spring would bring a rebound from spending depressed by bad weather, total retail sales did not budge between March and April and were up less than 1.0% from a year ago. With household spending accounting for about 70% of gross domestic product (GDP), it could be hard to generate strong economic growth if consumers stay on the sidelines

The personal saving rate dropped from an average of 4.8% in 2014 to 5.3% in March. What is going on?  Consumers are using some of any income gains and lower costs at the gas pump to pay down debt and raise their savings. Stronger household balance sheets are important to the underlying financial health of the economy and should underpin higher expenditures going forward.

Consumers already are spending actively in the new car market, at restaurants, and online. If they have the means, Americans never skimp on shopping for too long.

Image Credit: globe-views.com

The Institute in 2015

By: Cathy Gallagher

When I began my role at the Fermanian Business Center in 2005, much of the Center’s mission was related to student support for both the undergraduate and graduate students of the Fermanian School of Business. As we transitioned from the Center to the Business and Economic Institute in 2010, we added consulting to our “menu of services” for our constituents.

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In fall of 2013 as our consulting work increased, the undergraduate support services transitioned out of our Institute and in spring of this year, the MBA has as well, allowing us to focus on consulting services.

For 2015, although not broadly announced, The Fermanian Business & Economic Institute (Institute) has effectively become a quasi-independent consulting firm within a university setting.

How do you run a consulting institute tasked with being entrepreneurial and innovative in an academic setting you ask??

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It isn’t always easy… but it does create unique opportunities to cross disciplines, create value, build reputation, and support and promote the overall mission of PLNU. Our work in bioinspiration, as an example, has led to intellectual property for PLNU, cross disciplinary collaborations, and international partnerships and recognition.

For any firm or organization, recognizing and taking advantage of opportunities is key to growth, success, and creating competitive advantage. At the same time, it is just as important to be aware of and identify barriers to innovation such as decentralized models, duplication of efforts, fragmented relationships, skills mismatch, customer resistance to change, and lack of sufficient financial investment, to name a few, that can easily threaten to derail efforts or distract from the mission of the firm.

How do we provide a solution? I’m glad you asked!…

The Institute represents the academic standards of the university by incorporating ethics, transparency, and integrity into our relationships and our work. We have developed a reputation for using a clear, unbiased approach and proven methodology in our studies, projects, and reports and can confidently present results to business professionals, community and civic leaders, government officials, and media outlets locally, nationally, and internationally.

Customer intimacy is our primary value discipline. The Institute team is made up of seasoned professionals with a wide range of skills and expertise who value relationships. We operate in a “high touch” environment. We work closely with our clients to understand and meet their specific needs and create clear channels of communication which allow for flexibility as needs arise or change occur throughout the life of a project. It is our commitment to deliver value added services that bring actionable results and build trust and loyalty throughout our constituents.

For the Institute staff this slight change in our mission brings excitement and the ability to focus on exploring new relationships, innovative opportunities, and interdisciplinary partnerships that will bring long term value to PLNU and the broader community. We appreciate the ongoing support of our friends and business partners, and look forward to continuing to provide actionable business & economic consulting services.

Death, Taxes, and Both

by: Dr. Lynn Reaser

Inheritance-tax_2476151b-460x288The U.S. House of Representatives has voted to repeal the inheritance tax, which currently taxes assets of $5.4 million or more of an individual who dies before they can be passed on to a family member. This often forces an individual to sell the property, business, or farm since it may be difficult to pay the necessary amount.

The inheritance tax fundamentally penalizes savers versus consumers. Specifically, if one chooses to spend his wealth during his lifetime, he is not taxed, but if he saves for his heirs he is. The tax encourages tax avoidance, evasion, and other non-productive activities.

The tax currently affects only about 5,500 families. The overall revenue or deficit reduction impact is also small, adding only about $269 billion to federal coffers over a ten-year span. This amounts to only about one-half of a percentage point of total spending estimated over the next decade.

While the exclusion rate of $5.4 million might be raised, inflation will force more people to be caught in the inheritance tax net over time. This negative influence on incentives to create and preserve entrepreneurships and businesses should be abolished.

Should You Be First in Line to Buy an Apple Watch?

By: Dr. Lynn Reaser

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U.S. consumers bought over one million Apple Watches last Friday, maxing out pre-order sales. Prices ranged from $349 to $17,000. Does it make economic sense to be an “early adopter” of such new technologies?

Four primary factors would argue “no.” First, prices will decline as competition enters the field or improved versions are developed. Second, the product still may have bugs, kinks, and defects that need correcting. Third, there may be a gap between marketing hype and reality, which will be revealed as consumers use and review the product. Fourth, apps may initially be limited.

Still, all these negatives may be outweighed by your desire to own the next “cool” thing. Indeed, it is tempting….

Business and Politics—Should They Be Linked?

By: Dr. Lynn Reaser

As issues such as race discussion and religious freedom have again surfaced, questions regarding the proper role of business in taking strong positions on social and political issues are relevant. How socially/politically active should a corporation be?

Some political activism, such as that leading to a better education system, can yield economic dividends. However, corporate activism may often primarily reflect the chief executive officer’s (CEO’s) political preferences. According to a study done by John C. Coates IV of Harvard Law School, companies that had created political action committees and engaged in other political activities showed an 8% worse performance than other firms after the 2008 recession. Activism can frequently distract a company from its strategic focus, according to the study, and lead to poor investment choices.

A company is accountable to its employees, its customers, and its shareholders. This does not mean that it should ignore its responsibilities to the community or its obligation to safeguard the environment. It does mean that considerable care must be taken to avoid pursuing paths that may not be in the best interests of its constituents.

Shadow Banking

By: Dr. Lynn Reaser

This week the Federal Reserve Bank of Atlanta is hosting a seminar on bank regulatory issues, attended by policy officials, academics, and representatives of the private sector. Much of the focus is on the shadow banking sector and the risks that it may pose. A shadow bank is defined as an institution that performs credit or deposit functions outside of the regulatory confines of banks. Today, approximately 40% of credit creation in the United States is conducted through these shadow banks. These include institutions as diverse as money market mutual funds, hedge funds, and insurance companies

The Federal Reserve is determined that a financial crisis, such as took place in 2008, not be repeated. While it believes it has enough controls on banks, shadow banks could pose a bigger threat. The Fed is monitoring activities of those institutions closely. The government also has the power to declare an institution “systemically important” or in a position to threaten the overall financial stability of the economy. That designation then allows the Federal Reserve to exercise its various regulatory tools, such as increased capital or liquidity requirements.

Policy officials clearly no longer believe that the market will police the financial system to avoid the possibility of collapse. It is far from obvious that another financial crisis can be avoided, but the Federal Reserve is certainly deploying a “full court press” to avert its recurrence.

Utility Bills and the Environment—Cost and Benefits

by: Dr. Lynn Reaser

San Diegans are probably unhappy every time they receive their utility bills. Although we typically use less electricity to cool and heat our homes because of the mild climate, rates are high. This is a statewide problem.

According to the U.S. Energy Information Administration (EIA), electricity rates averaged 14.54 cents per kilowatt-hour (kWh) in December, 2014, a 44% premium over the national average. This was even greater than the 33% premium paid just a year earlier. This is another factor boosting the cost of living and the expense of doing business in the state.Blog photo utility bill

Much of the differential reflects the public’s endorsement of efforts to focus on alternative sources of energy. Specifically, utilities must generate one-third of their electricity from solar, wind, geothermal, or biomass sources by 2020. This clearly puts us at a disadvantage when the price of natural gas, along with oil, has plummeted.

This may be critical to achieving a reduction in our emissions of greenhouse gases, but it does come at a cost.