Five Things to Watch in March’s Durable Goods Report

By Yuxin Gao

The U.S. Department of Commerce will publish its first look at this month’s manufacturing sector performance at 8:30 a.m. on Tuesday this week. Economists expect long-lasting goods orders, a main indicator for U.S. manufacturing and business expansion activities, expands at a 1.9% rate, according to 76 economists’ median estimation for Bloomberg.

1. March was an important month

In January and February, factors like abnormal winter weather, early Chinese Lunar New Year complicated durable goods numbers. As the holidays ended and spring came, March’s durable goods new orders will start to show the real demand for U.S. manufacturing businesses.

“There is nothing we can point to and say things are better or worse because of some other factors, ” said Andrew Zatlin, founder of SouthBay Research advisory firm. “This is going to be a pure trend line. ” 

New orders for durable goods has gone down in three of the last four months, which made economists worry that the manufacturing  industry would shrink. Economists have been waiting for March’s report because it will give a hint of what the rest of the year will look like. 

2. Manufacturers postpone investment plans

Regional factory sector surveys showed businesses are holding on to their cash and are delaying capital projects. “We kind of anticipated it’s going to be a relatively soft quarter for capital spending,” said Scott Brown, chief economist at Raymond James financial service. A lot of business are waiting for further signs to tell them the next move. They have the cash to invest, but they have not received new orders yet.

Stagnated investment was led by the weak global economy, including Brazil’s financial crisis, European stagnancy, and China’s slowdown. In February,new orders for durable goods decreased a seasonally adjusted 3.1%, a sharp reversal from January’s 4.3% growth. This kind of back-and-forth has lasted for more than a year.

3. Larger and faster job losses

In March, manufacturing industries lost 29,000 jobs. Durable goods industries accounted for 24,000 of them. The job loss was mainly reported in machinery, computer and electronic products, and primary metals industries. Since reaching an employment peak in March 2015, durable goods manufacturers have cut a total of 68,000 jobs.

4. A weaker dollar may benefit exports

After getting stronger for nearly three years, the U.S. dollar began to weaken in mid-January. This improved  American  exports to its main trading partners –Canada and Mexico because the value of U.S. dollar decreased as compared to Mexican peso and Canadian dollar.

5 Oil prices decline can boost machinery orders

Oil prices hit bottom in February with the average price of $30 per barrel. In March the price rose to average $37-38 per barrel. Now it is close to $40, according to crude oil prices West Texas Index.

Oil-related manufacturers have been struggling for quite a while. Drilling investment has declined. But with the higher oil prices we might see some increase in machinery orders and fabricated metals orders in March’s report.

Contact: yuxin.gao@journalism.cuny.edu

E-tailers Move Offline, Say There is No Substitute For Brick And Mortar

At a time when more and more retailers are moving online, some online only retailers are heading the opposite direction, opening brick and mortar retail stores to grow their businesses.

Karen’s Premium Toffee, a Sturtevant, WI based toffee confectioner opened its first physical retail store after nine years of online and wholesale business last week. Adore Me, a lingerie startup conceived of as an e-commerce site, recently opened it’s first permanent physical store, too. Bonobos, a menswear brand, Harry’s, a shave products company, Birchbox, a cosmetics brand, and Faherty Brand, an eco-friendly clothing company have also taken to the streets since launching exclusively online.

It isn’t that they are reverting to an old model, or that ecommerce shops aren’t profitable – indeed they are. Brick and mortar retail stores are still indispensable, but they are starting to take a different form, and serve a different purpose.

The founders of Bonobos, a menswear brand that launched online, never intended to open any brick and mortar stores. But since its inception, in response to customer feedback, it’s opened what the brand calls “Guideshops”, where guys can go to try pants, suits and more before they buy.

“We had no initial plans to open stores when Bonobos.com began, but we had tons of inquiries from customers asking if they could come in and try on the product. The obvious conclusion was people still like to touch and try on items before they buy,” said Erin Ersenkal, Chief Revenue Officer at Bonobos.

At its heart the company is still digital though, and all orders are submitted through Bonobos.com. Product purchased at “Guideshops” is delivered, too. And unlike traditional brick and mortar stores, “Guideshops” don’t stock inventory in sizes, only samples. “This way we can showcase our assortment in a way that’s not overwhelming to shoppers and it’s easier to find product as you’re not thumbing through multiple sizes,” said Ersenkal.

Less inventory means less square footage. “Ultimately, the “Guideshops” and Bonobos.com act as brand awareness tools for each other,” said Ersenkal.

Some successful online only brands are opening up shop to tap into hyper local communities. Others say their stores act as marketing tools, rather than profit generating centers. They’re strategically located and designed to drive traffic to companies’ ecommerce sites. Businesspeople in the retail sector agree that despite the associated costs and responsibilities of running a brick and mortar store, it’s worth it.

“There’s no replacement for seeing a new customer pick up your product and discuss it with you. That’s what happens in a physical store and it is difficult to recreate in an online experience,” said John Gillis, chief product developer at Harry’s Razors, a men’s shaving product company that launched online first, before opening a Manhattan barbershop in 2013.

The trend back to brick-and-mortar comes as retail sales as a whole are shifting online. In 1999, ecommerce retail sales made up 0.6 percent of all retail sales, according to seasonally adjusted economic data from the Federal Reserve. That number has risen or remained steady every year since, as more consumers turn to and rely on the internet for purchases across diverse categories of consumption. By the end of 2010, online sales made up 4.6 percent of total retail sales. The Fed’s most recent data, from October of 2015, shows that online sales account for 7.5 percent of total retail sales.

Economists say that this trend is unlikely to lose steam. “When you see company reports you see Amazon’s revenue growing 20 percent plus and a store like Macy’s is seeing revenues decline a lot. That shows a shift in terms of the venue for spending,” said Jim O’Sullivan, chief US economist at High Frequency Economics.

New companies are launching online for a number of reasons. Ecommerce allows fledgling brands to test a marketplace before committing substantial resources to a product they’re not sure will succeed. “There is more flexibility to change the digital product and experience versus a physical product and in store experience,” said Gillis. The online platform makes it easy to quickly roll out new iterations of products to consumers, he said.

But even those retailers that have entered the retail market online agree that web stores are not substitutes for brick and mortar. More and more retailers are realizing that the online experience has not, and is not likely to ever replace the experience of shopping in a physical store.

Faherty Brand, an eco-friendly clothing company, launched online before opening its first store in Soho because when it started, it didn’t yet have a full collection. “We started just with swim and if we had started with a store we wouldn’t have had enough merchandise to showcase,” said Kerry Faherty, one of the company’s co-founders.

Most people assume physical stores are much more expensive, but e-commerce has substantial costs attached as well. “The cost of acquisition of customers in a web-based only model is quite significant,” said Tom McGee, CEO of The International Council of Shopping Centers.

On the other hand, brick and mortar stores are valued for their unparalleled ability to convert shoppers into repeat customers. To draw customers to stores can drive additional sales. “Someone buys something online and collects it within a store and often times end up buying more,” said McGee. “Growth and profitability are really what are driving web retailers to grow their physical retail space,” he said.

Consumers have come to expect it all from retailers. They want to be able to browse and buy online, or go see and try on clothing before making purchases. And so retailers are adapting. Older existing brands are working to develop robust web presences while newer digital brands open up brick and mortar shops to build brand loyalty that’s developed through physical, in-store experiences.

Retail rents aren’t expected to drop anytime soon, either. Occupancy rates are at a pre-crisis high of 94 percent. “There is a legitimacy that exists by having a store that doesn’t exist online,” said McGee.

5 things to watch for in the consumer price index report

By Harini Chakrapani

The Labor Department’s monthly report on consumer price index (CPI), a measure of what Americans pay for everything from meat to medicines will be released Thursday, April 14 at 8.30 a.m. Economists will keep their eyes peeled, because the CPI is an indicator of inflation. According to Barclay’s forecast, the CPI is expected to gain 0.2 percent in March, indicating a stronger economy and foreshadowing an increase in interest rates.

Here are the 5 key highlights to watch out for in the report.

  1. Say goodbye to low gas prices:

Price at the pump is climbing. According to AAA’s fuel gauge report, the national average cost for a gallon is $2.057 compared to last month’s $1.917. The 14-cent increase might seem small, but it’s helping steady the economy.

For months, the CPI has been weighed down by the falling energy index. Last month, the CPI fell to 0.2 percent, while the gasoline prices plummeted by 13 percent, the lowest since February 2015.

Although, low prices can make drivers happy they are a drag on the economy.  The huge losses have already caused oil rigs to shut down and employees to lose jobs.

“The biggest surprise in this month’s report is that gas prices will be a major driver of overall CPI,” said Senior Economist Oren Klachkin at Oxford Economics.

Source: Bureau of Labor Statistics

 

  1. We are inflating, but we won’t burst

The core CPI that excludes the volatile energy and food indexes is expected to remain strong at 0.2 percent, following surges earlier this year.

January’s core CPI (0.3 percent) was the highest in four years and alleviated worries of a slowing US economy.

“Core prices were up 2.3 percent in February, the biggest yearly increase since the recession. We expect medical and rent prices to boost the core and continue the trend,” said Sophia Kearney-Lederman, economic analyst at FTN Financial.

High core prices mean Americans are paying more for rent and medical care, but inflation isn’t always bad news. Moderate inflation, indicates an increase in spending, production and consumption of goods and services, is needed to boost the economy and enable the Federal Reserve to achieve its target 2 percent inflation.

Economists predicted an eventual moderation in core prices.

“Last month’s increase in core had people starting to wonder if inflation is getting to be a bigger issue. But the core is likely to moderate due to rental costs,” said Sophia.

  1. Rent costs to stabilize

Rent costs have been responsible for driving the core inflation but are expected to stabilize.

Last month, the rent index ticked up to a seasonally adjusted 0.3 percent. Economists believed it to be an after effect of the improving job market, with demand growing from more employed Americans.

“We saw double digit growth in rents during the past year in San José, San Francisco, Seattle, Denver, Portland and Miami. However, we do forecast a slowdown, where rents are still going to be growing very quickly, but more in the single digits,” said Skylar Olsen, senior economist at online real-estate listing service Zillow.

Skylar attributed the slowdown to supply catching up to demand.

“There are so many new rental units. More and more landlords are having to offer concessions, and are slowing the pace of rent increases, because they are competing against more supply,” she said referring to the pick up in multi-family units including rental apartments but not condominiums that are owned by people.

  1. Getting well will continue to hurt

According to the Labor Department, medical care was one of the largest contributors to the rise of the core CPI last month.

Chairman and Chief Investment Officer of Hugh Johnson Advisors, Hugh Johnson predicted the medical care inflation to remain high at 0.3-0.4 percent in March.

Medical inflation has been outpacing overall inflation, growing at nearly twice the rate, over the past two decades.

The Journal of the American Medical Association (JAMA) revealed the main culprits for rising inflation in the healthcare industry through a 2013 analysis– price of drugs and medical devices, administrative costs, hospital care amongst others.

However, consulting giant Pricewaterhouse Coopers’ Health Research Institute is anticipating a slowdown in medical costs compared to last year.

Changes to government health insurance plans and the advent of virtual care where patients are monitored remotely instead of an expensive brick and mortar hospital setting, have been cited as factors that could drive down the pressure in medical care prices.

  1. Interest rates to rise

The Federal Reserve’s decision to raise interest rates has kept economists on tenterhooks. But now, economists are certain a hike is likely to happen in its September meeting.

“The core CPI has been strong, the domestic scene has been strong. If we maintain the current course, the Fed will raise rates in September,” said Oren Klachkin, senior economist at Oxford Economics.

The interest rate refers to the rate at which banks can lend money to each other.

The Fed needs to raise it to achieve its target 2 percent inflation to maintain a healthy economy.

Last December, the Fed approved an interest rate hike from 0.25 to 0.5 percent following a seven-year period of near zero interest rates- devised to encourage borrowing and spending and help America recover from the financial recession of 2008.

Besides the core CPI, other economic indicators have also registered positive gains including the labor market, and the personal consumption expenditure (PCE) that also measures price changes in consumer goods and service and is the Fed’s preferred index to determine inflation.

“The Fed will want to want make sure the economy is on a strong footing before the rates are raised by another notch,” said Oren.

Five Things to Watch in the March Retail Sales Report

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The United States Census Bureau releases its monthly snapshot on retail sales for March Wednesday. Economists polled by Bloomberg expect a 0.1 percent increase in retail sales overall, and anticipate a more substantial increase when automobile sales are excluded. Here are five things to watch in the report.

  1. How do auto sales impact the report?

Auto sales saw a slowdown in March, dropping to a seasonally adjusted selling rate of 16.6 million from 17.5 million in February. Economists expect this decline to drag down the retail sales headline number, when the report comes out tomorrow morning. Wells Fargo economists are calling for a 0.1 percent increase on headline retail sales, and a greater 0.4 percent increase when autos are excluded. “That’s going to be one of the factors really weighing on the headline number,” said Michael A. Brown, a Wells Fargo economist.

  1. Gasoline prices play a role

Gasoline prices rose nationwide in March, and although the increase was only slight, it could mitigate auto sales’ constraint on the headline number. The national average price per gallon was $2.06 last month, an increase of 33 cents from February. Economists expect strong gasoline station sales to compensate for losses in the auto sales category.

The price of gasoline could affect other areas of the report as well. Gasoline is sold at non-service station outlets at places like Costco and Walmart. “There’s lots of talk lately about gasoline being sold at non-service stations so you might see some of the price affecting other areas of the retail sales report as well,” said Michael Moran, Chief Economist, Daiwa Capital Markets.

  1. Are people going out to eat?

Eating and drinking establishments have been a consistent contributor to overall retail sales data, and are expected to remain strong.

One caveat: higher gas prices could eat into cash reserved for eating out at restaurants. Consumers tend to use their savings on gasoline prices on going out to eat, and less money in savings could mean less eating out.

Gas prices are still much lower than they were a few months ago though, and so growth here is still expected.

“Gasoline prices still are very low so there is some discretionary income that is freed up for the eating and drinking places,” said Brown.

  1. Discretionary Spending

The latest jobs report showed brisk hiring in March. 215,000 nonfarm payrolls were added, according to the Bureau of Labor Statistics. Low unemployment and solid job growth support consumer spending, especially of the discretionary kind.

Retail sales subcategories including clothing and furniture, in addition to eating and drinking establishments, are expected to post strong numbers.

This category could be revealing: discretionary spending relates to purchases that can be postponed if budgets are tight. But based on jobs data, economists are expecting a strong showing in this category.

  1. Revisions, revisions, and more revisions?

 Upward revisions to the January and February retail sales reports could be in Wednesday’s cards. The January report’s revision was substantial: the headline was originally reported to be up 0.2 percent; it was later revised to down 0.4 percent. Overall weakness in January and Februarys’ reports is incongruous with labor market data over the first quarter of the year, which shows that despite sluggish wage growth, more people are working. But that data doesn’t align with consumption patterns.

An upward revision to prior months could allow for better alignment between consumption data and labor market data. It’s something to keep a close eye on; retail sales revisions are very common.

U.S. Trade Deficit Hits Six-Month High, Reflects Troubled Global Economy

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A weak global economy tied to a strong dollar continued to hurt America’s exports as the country’s trade deficit rose to a six-month high in February.

The U.S. trade deficit for February was $47.1 billion, a $1.2 billion increase from January, the Department of Commerce announced on Tuesday. The gap was wider than expected; economists surveyed by Bloomberg had a median estimate of $46.2 billion with a range from $41.6 billion to $48.3 billion. Continue reading U.S. Trade Deficit Hits Six-Month High, Reflects Troubled Global Economy

Strong Job Market Keeps Auto Manufacturer’s at Ease After Sluggish March

Kathryn Casteel

Auto sales dipped in March but auto manufacturers remain confident due to strong job growth.

Manufacturers reported mixed reviews last month, suggesting that auto sales are beginning to level out from their record highs from last year.

Americans purchased vehicles at a pace of a seasonally adjusted annual rate of 16.43 million vehicles last month, much lower than February’s number of 17.43 million and the expected 17.2 million originally predicted by automotive research company Kelley Blue Book. Although these numbers were below expectations, overall they’re still reasonably high.

Some dealers were a bit slower than forecasted, but kept a positive outlook for the future of consumer spending in result of this month’s strong job report released Friday. The 215,000 added jobs and slight uptick in wages are expected to keep driving consumers toward vehicle purchases, just not in as high of a number as last year.

“Auto sales are quite driven by the health of the consumers, and consumers have been doing well given labor market and rising incomes,” said Russell Price, senior economist at Amerprise Financial Inc. “But we’re likely to see things level out.”

In sum, manufacturers sold close to 1.6 million light vehicles.

Some dealers held on to their strong performance from February, including Nissan Group, who saw a 13 percent surge in sales. Fiat Chrysler Automobiles, Honda Motor Co., and Ford Motor also saw substantial increases in sold vehicles around 8 to 9 percent for March respectively.

However, General Motors, America’s biggest car manufacturer, gained less than a percent in sales, while Toyota Motor Group saw a decrease in sales around 2 percent. Volkswagen AG, continuing to suffer from an emissions-cheating outrage, saw another month in the negative with a sales decrease of 10 percent.

SUVs and pickup trucks remain some of the strongest selling vehicle segments among manufacturers. Although the average price of gas in the U.S. trickled up to $1.91, it is still much lower than last year and in line with where prices were in January. Economist say it’s still a sustainable price for consumers to handle, which allows them to continue purchasing larger cars and trucks.

Mark LaNeve, V.P. of U.S. Marketing, Sales and Service at Ford, says millennial consumers are particularly driven to SUV purchases. Past data shows that this age group, made up of those born between 1982 and 2000, tend to get their licenses and form families a little later than older generations. But dealers, like LaNeve, say they’re starting to show up to buy cars as slowly begin to fall into these trends.

“They eventually do all of those things, and when they do they really like SUVs,” said LaNeve. “They’re shopping and buying them at an increasing pace, which is a good sign for our future.”

Economists say millennial activity in the economy is important because they are the next generation of big item consumers, and consumer spending is the driving force of the economy.

Tony Ream, 24, of Spartanburg, SC, recently got a job this year as an underwriter for a commercial lender. Feeling the benefits of a strong job market, Ream was promoted only six weeks in and recently purchased a new Toyota 4Runner from a local dealership.

I went hoping I’d score a good deal since it was towards the end of the month and the dealerships are trying meet their quotas. Luckily for me, I was right,” said Ream.  

Economists say low interest rates, along with a stable job market, will keep drivers purchasing vehicles, though diminishing demand from post-recession purchases is evident in the March numbers. But as the U.S. creeps toward full employment, speculation grows that Federal Reserve could start to raise rates and make financing a vehicle a little more of a burden. However, economist say it’s not likely.

“The Fed obviously has struggled with just how quickly to raise rates,” said Robert Hughes, senior research fellow at American Institute of Economic Research. “Global growth has been challenged, to say the least, so that’s been a factor, so even if they got a strong report they’re going to be very timid.”

 

The ugly truth: Why looking beautiful is getting cheaper than ever

By Harini Chakrapani
While the rest of the country is experiencing a surge in medical inflation, cosmetic surgery prices are falling.

Reports released by The American Society of Aesthetic Plastic Surgeons (ASAPS) indicate nip-and-tucks are not just popular, with Americans spending over $13.5 billion, but also affordable. Costs for certain cosmetic procedures have barely increased since 1998.

In 2015, liposuction or the removal of excess fat, and breast augmentation, amongst the most sought after treatments saw less than a 35 percent increase in prices from 1998.  

Price changes for cosmetic procedures- surgical 

Source: The American Society for Aesthetic Plastic Surgeons 

Non-surgical procedures tell a different story altogether. Botox and laser hair removal fell in prices from 1998.

Price changes for cosmetic procedures- non-surgical 

Source: The American Society for Aesthetic Plastic Surgeons 

In a world of escalating inflation where medical inflation has grown by 84.6 percent since 1998, cosmetic surgery serves as an anomaly. Experts say it remains immune because it operates outside of the insurance industry that governs the prices for drugs, and treatment by doctors and nurses. Since, consumers directly pay for services instead of insurance companies, they can bid on the prices.   


“When people pay out-of-pocket, they are more cost conscious. They have more incentive to shop around and look at different surgeons, physicians, and clinics and see where they can get the best deal,” said Economics professor
Mark J. Perry at the University of Michigan-Flint, who studies medical inflation and blogs for the Washington D.C. based think-tank American Enterprise Institute.

He also cited one of the reasons why medical care excluding cosmetic surgery was inflating quickly was because consumers were not aware what they were paying for while their insurance providers covered their bills.

“If we could go shopping for groceries, and we only had to pay 10 percent of the cost ourselves and 90 percent was paid by somebody else, we would buy more expensive food than when we were paying the full amount out-of-pocket,” he said.

Sheila Nazarian who set up her cosmetic surgery practice in Beverly Hills, California believes fierce competition from an ever-expanding pool of cosmetic surgeons was affecting prices.

“People who are charging very low prices are obstetricians and gynecologists, general surgeons, dentists who have no training in cosmetic surgery whatsoever. They will come out and charge $3000 for a breast augmentation when the going rate is normally $7 or 8,000,” said Dr. Nazarian.

Besides breast augmentation, other procedures with weak growth in prices include eyelid surgery, tummy tuck and breast lift.

Today, the anti Affordable Care Act, a.k.a Obamacare sentiment remains fervent at the presidential debates due to the high healthcare premiums.

But there’s a reason why insurance exists.  

Adria Gross a proponent of insurance coverage from MedWise Insurance Advocacy offered her insights.

Her client, whom she declined to disclose, was embroiled in a court case due to a plastic surgeon’s negligence.

“She broke her fingers in two areas. The plastic surgeon who worked on her messed it up. She wound up having to pay a bill of $30,000 for a procedure that costs 2-4000 dollars. What happens if you have cancer and don’t have insurance? You will get ripped off,” she said.

The benefits of insurance are open for debate. But for now, the cosmetic surgery industry remains a true market, by not allowing the insurance system to dictate prices, instead letting consumers (patients) decide how much they’re willing to pay, and businesses (doctors) compete with each other on price.

 

Florida seeks new markets as Brazil and Canada spend less on their vacations

 

Top Countries for International Spending in Florida copy

Brazilians and Canadians have for years flocked to Florida’s warm beaches, but a strong dollar and the weak global economy is negatively affecting these sunny vacations and threatening Florida’s economy in the process.

Travel has been the top-earning category in U.S. service imports for the past two years and amounted to $10.4 billion in December of last year.

The Florida tourism industry seeks to attract new foreign visitors as international visitors, such as Brazilians and Canadians, spend less on their vacation because of the rising dollar.

 

Continue reading Florida seeks new markets as Brazil and Canada spend less on their vacations

Sluggish global economy hurts durable goods new orders in February

by Yuxin Gao

New orders for long-lasting goods—the power engine of U.S. manufacturing—reported a modest drop in February due to the drags from strong dollar and softer global growth.

New orders of durable goods, products designed to last more than three years, were down a seasonally adjusted 2.8% in February, a sharp reversal from January’s revised 4.2% growth. Non-defense capital goods excluding aircraft, which economists consider an indicator of future business expansion, dropped 1.8%.

The drop hit the optimism based on recent data that had suggested the downward trend in manufacturing was close to an end. January’s increase in new orders ended a two-month period of downturn since last November.

Economists don’t necessarily think this one bad report indicates economy is in any sort of difficulty right now.

“There is drag from strong dollar. There is drag from downturn in investment in energy infrastructure,” said Augustine Faucher, deputy chief economist at PNC financial service group, “But I don’t think it indicates there is a broad base problems in the U.S. economy.”

The overall report was weighed down by the 27.1% plunge in commercial aircraft orders. Boeing, which had reported 68 aircraft orders placed in January, had only two orders last month. This volatile change happens quite often in aircraft and defense orders, so economists tend to ignore them when looking at durable goods numbers.

Drilling activity is down because of the steep drop of oil prices since mid-2014. It continues to hurt drilling equipments orders for oil exploration. 

Other trends that have been hurting U.S. manufacturers are ongoing. Exports were curbed by the stronger dollar. It aggravated the weak global demands for machinery equipments, especially for countries that labor cost is relatively low.

Lilian Moura, a Brazilian children accessories manufacturer, is delaying buying new machines from the U.S. for her factory in Rio de Janeiro.

“It became unrealistic to replace our old acrylic molding machines right now,” said Moura. She has considered to buy machines from U.S. because inflation continuously boosted labor costs in Brazil. The double-folded U.S. dollar to Brazilian Real exchange rate made Moura reply on the “handmade” clips and headbands.

On the other side, economists are worrying that the continuous downturn of global economy will eventually drag U.S. economy into deep hole.

“In February, most of the major categories were down, so it’s a bit of concern,” said Scott Brown, chief economist at Raymond James financial services company.

Orders for primary metals, fabricated metal products, machinery, computers and electronic products as well as electrical equipment, appliances and components also fell, although orders for motor vehicles and parts rose 1.2%.

Data source: U.S. Department of Commerce; Chart: Yuxin Gao

What worries economists are steeper decline of “core capital goods”— the non-defense capital goods excluding aircraft orders that economists believe reflect businesses’ investment plans. It has been down for three successive months since last December.

“It looks like business and investment is very likely to make a negative contribution to first quarter GDP,” said Brown, “I think we really going to be watching the numbers for the spring month– the March, April, May. I think that’s gonna be a lot more important to the overall outlook.”

Contact: yuxin.gao@journalism.cuny.edu

Low Oil Price Has Not Yet Benefited Toy Manufacturers

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Image source: Flickr

By Yuxin Gao

The pre-teens building robots with LEGOs at the Jacob Javits Convention Center last weekend probably weren’t thinking about oil prices. But whether they knew it or not, the teams of primary and middle schools students competing in a city-wide LEGO robotic competition were working with oil.

The LEGO kits they used to build and program robots contain motors, sensors, and 610 pieces of LEGO bricks, which are completely made of ABS, a medium-strength heat-resistant plastic processed with crude oil. The kit sells at $350 each.

For toy manufacturers, falling oil prices should have been a major advantage. However, the toy industry reveals that even the companies that are most dependent on plastics, such as LEGO, have reaped only minimal benefits from oil’s plunge.

Oil price has dropped two thirds of its price since mid-2014, and over 90% of toy products are made of crude oil derivatives—plastics, nylon and others. But Lego had small amount of cost savings last year—its gross margin grew 0.8%, lower than its 1.0% growth in 2014. Mattel, manufacturer of Barbies and Transformers, even saw its gross margin slightly decreased, because they had greater losses by exchanging foreign currency to dollars than they saved from the costs.

The toy industry’s struggles shows how the advantages of low oil prices have been more limited than expected, as the plastic prices do not always drop when oil price drops.

Data source: FRED ; Chart: Yuxin Gao

“There is definitely a lag time,”  said Kent Furst, a senior polymers and materials analyst at Freedonia Group, in an email. Starting from mid-2014, crude oil price haved dropped 70% of the original price, but the prices of plastics dropped only about 10% in the same period of time, said Furst.

Plastic prices don’t come down as much as the price of the crude oil because the market wants more plastics than the plastic producers could produce.

“As long as there is a tight supply-demand balance, as is the case for many plastic resins right now,” said Furst, “producers will be able to keep prices relatively high and reap increased profit margins from the low oil price.”

That suggests that low oil prices benefited plastic producers more than toy manufacturers.

Eventually plastics prices will likely fall along with oil prices. Even then, however, analysts believe toy manufacturers might not see costs fall because other trends are going against oil prices.

Data source: BMO analyst Gerrick Johnson; Chart: Yuxin Gao

“Labor cost prices are going up faster,”  said Stephanie Wissink, a Wall Street toy industry analyst at Piper Jaffray, referring to the growing labor cost in China, “and labor is a bigger percentage than resin, and you still have high cost of goods inflation.”

For a typical toy company, the cost of labor is close to 20%, larger than the plastic resin cost in materials, 15%. Although 44% of cost comes from materials, for a typical toy company, non-resin materials like metal and wood take a larger role than plastic resin.

Another trend is big toy companies are embracing higher than ever content licensing or royalty expenses. LEGO is engaged in getting toy licenses from Disney movies and Marvel comics books.

The benefit is significant. Last year, LEGO had a revenue surge of 25%, which largely benefited from the hot sales of licensed sets, such as “Star Wars”, Batman, the Simpsons and Minecraft.

These trends make the impact of oil price even smaller.

For consumers, chances are slim to have oil price benefits transfer to retail prices. Businesses usually do not lower retail prices because they spend less on manufacturing; they lower their prices for excelling in competition.

Large toy companies usually do not have direct competitors, because they have have exclusive rights to their brands.

For example, if customers want to buy Barbie dolls, they have to go to Mattel. If they want Transformer figures, there is only one choice—to buy them from Hasbro. Although LEGO do not own brands as Mattel and Hasbro do, it is still less likely to have the variety of “stud-and-tube” brick forms from other toy makers.

However, it may be a different story for generic toy manufacturers. Manufacturers of a basic ball, or a hula hoop might lower their prices as the material costs decrease.

On one hand, they have no protection from branding. The market of hula hoops is much more competitive than Barbie dolls. Customers will be able to turn to other companies if they are not satisfied with the current one. On the other, resin cost might take on a larger share for genetic toy makers because they generally have no royalty expenses.

“Every year they raise their price for 2% or so,” said can expert in toy industry, referring to big toy companies, “maybe next year they won’t raise their prices.”

Contact: yuxin.gao@journalism.cuny.edu

Measuring the Economy