Food for Thought

By now you know there’s a rice shortage, or so you’ve heard recently. Sam’s Club and Costco last week imposed limits on the purchase of imported Asian rice – 80 pounds per person per day – which, naturally, has encouraged hoarding behavior among its predominantly food-service buyers of this commodity, and which, in turn, may create the actual, self-fulfilling shortage being reported. (Mind you, there’s plenty of domestic rice available for sale, only Asian imported rice is being restricted.)

The specter of global food shortages is arising like ethanol fumes wafting from a gas pump, and food hoarding behavior, begun in the last few months at a country-level, is entering the psyche of our consumer society whose previous idea of shortages – few remembering the gas lines of the 1970s – consists of a lack of Cabbage Patch Dolls, Tickle-Me-Elmos, X-Boxes or I-Phones.

Significant price movement in grain commodities in the last year have led to a number of nations – Egypt and other Middle East states, the Philippines, Mexico – buying large quantities of wheat, corn, rice and soybeans, while grain producers in other areas of the world are beginning to impose grain export restrictions to insure adequate supplies, and therefore less chance of social unrest, in their own lands. China, which has an abundance of U.S. dollars with which to shop, will spare no expense for food and fuel.

Suddenly in North America, amidst growing concerns about global food shortages, the ethics of using food for fuel calls corn-based ethanol into question as a viable alternative energy to reduce our dependence on imported oil and creates another reason for the developing world, which also wants what we have in terms of diet, housing and transportation, to question our national policies.

Numberwise, First Quarter 2008 advance Gross Domestic Product (GDP) growth of anemic 0.6% annualized, identical to Fourth Quarter 2007, was reported on April 30^th and pessimists determined to find a recession in there somewhere find the devil in the details of residential investment (housing) and durable goods (cars, furniture, appliances), where both categories now are negative.

Some contend pessimists merely are better-informed optimists and so seem obliged to observe that only an undesirable build in non-farm private inventories prevented the Q1 GDP report from becoming the first of two consecutive quarters of contraction necessary for a textbook recession, but cooler heads studying the report will notice the bifurcation between economic segments and regions of which we first informed you in January in our briefing entitled “A Tale of Two U.S. Economies.”

Clearly housing in some parts of the country is well-past recession, more like full-fledged depression after nine consecutive quarters of contraction since peaking the final quarter of 2005. Rising energy costs now are more apparent in “household operation” and transportation components of GDP although, while impacting economic growth positively, they represent more of a redistribution of disposable income away from other consumer spending, as evidenced by the smallest annualized rate of growth (1.0%) in personal consumption expenditures (PCE) in 17 years.

So statistically we are not yet in recession as of the end of March 2008, but, as the pessimists will note, the consumer side of the economy is showing early signs of exhaustion. $120-a-barrel oil, which may by summer translate to a national-average $4.00+ gallon of gasoline (record $3.61 average now) and brewing consumer inflation likely will tip the scales to recession later this year.

Warren Buffett again has said the U.S. economy is in recession and that it “will not be short and shallow.'' Former Fed head Paul Volcker described “today’s financial crisis (as) the culmination…of at least five serious breakdowns of systemic significance in the past 25 years,” and warned the U.S. has become “addicted to spending and consuming beyond its ability to produce.” But to optimists and pessimists alike, in many parts of the nation it does feel like a recession, albeit a slower moving phenomenon than previously forecast, and perhaps the first pressing issue of the November winner of this never-ending 2008 presidential election.

The Federal Reserve, invoking lending powers not used since the Great Depression, has calmed the financial waters following the collapse of investment bank Bear Stearns in mid-March and having conferred upon borrowers and investors another 25 basis point rate cut late last month bringing its short-term rate to 2.0%, likely will rest. Although wary of downside risks to growth and “while the economy remains weak and the inflation outlook remains uncertain,” the Fed’s rate cuts and last-resort lending efforts over the past several months "should help promote moderate growth over time and to mitigate risks to economic activity."

Time for a “pause that refreshes” as the nation’s central bankers step back from the winter’s financial landscape of discontent to see exactly what they hath wrought, thus signalling a lesser likelihood of future interest rate cuts. So let it be written, so let it be done…but don’t forget to spend your tax rebate, a big slug of which should be received this month, the economy is counting on you.