a new casino for Connecticut, good or bad?

Shortly after I retired as a portfolio manager, I went to work part-time at the Rutgers business school in Newark.  No, it wasn’t to teach investing or portfolio management–accreditation rules effectively rule this out for anyone without a PhD in (the alternate reality of) academic finance.  Instead, it was in a practical management consulting class run by adjuncts with real-world experience and advising mostly small businesses.  (We were all fired several years later and the program–the only profitable area in a school dripping red ink–dissolved.   …but that’s another story).

Anyway, one of the projects I mentored involved a casual dining restaurant.  A student had a connection with a very successful pizza restaurant whose approach might serve as a model for our client.  The pizza owner said he had superior results.  How so?  …he had cloth tablecloths and fresh flowers on each table; the food was good;  he spoke with every customer himself to make sure everyone knew they were welcome.  In fact, he drew customers from as far as 15 miles away.

How far was the closest competing pizza restaurant?   …30 miles.

Put a different way, in this state customers hungry for pizza went to the closest restaurant, despite what this owner thought was his special charm!

It’s the same with a lot of other things, including local casinos.

In the case of Connecticut, the two existing operators are coming under threat by the decision of Massachusetts to legalize gambling in that state.  In particular, it’s allowing MGM to open a casino just on the northern border of Connecticut in Springfield, MA.

Hartford has just responded by authorizing a new casino in East Windsor just on the Connecticut side of the border from Springfield, to be jointly run by the two incumbent operators.

This is an interesting case.  Let’s take a (simple) look:

My pizza rule says customers go to the closest casino.   If that’s correct, the new Massachusetts casino will reduce the existing Connecticut casinos’ revenue by a substantial amount.  Hartford estimates that amount at a quarter of the current business, about $1.6 billion.   If they want to keep the remaining 75%, however, it seems unlikely to me that the casino operators will be able to reduce their costs by much.  So their profits could easily be cut in half.

And when the proposed East Windsor casino opens?

Figure that East Windsor will take back from Springfield half of the revenue initially lost.   That’s $200 million a year.  From the state’s point of view, any revenue gain means higher tax collections–in this case, about another $35 million a year.  So it’s understandable why East Windsor has gotten a legislative seal of approval.  It’s not clear, however, that the casino operators are going to be better off–because they’re taking on the expense of a third location in order to protect 12% of their current revenue.

 

We’ve also seen this movie before in the northeast US, with the effect on Atlantic City of gambling legalization in Pennsylvania, and on Pennsylvania of legalization in Ohio and Maryland.  One additional complication in this instance is that both of the incumbent operators are Native American tribes, for whom maintaining/expanding employment may be more important than profits.  A second is that the new CT casino will be run by two in-state rivals.  That should be interesting to see.

 

 

 

 

 

 

Employment Situation, February 2017

This morning at 8:30 est, the Bureau of Labor Statistics of the Labor Department issued its Employment Situation report for February 2017.

The Bureau estimates the economy added 235,000 new jobs last month.  This is a very strong result.  However,it is most likely influenced by unseasonable warm temperatures in February, which typically allow outdoor construction work to get started earlier than  usual.  So maybe the “real” figure should be 200,000–which would still signal significant economic strength.

Revisions to the prior two months’ data were +9,000 positions.  Most other data–like the labor participation rate, the number of long-term unemployed…–were relatively unchanged.

The unemployment rate fell to 4.7%, a level that twenty years ago would have set off alarm bells warning of incipient wage inflation.  Nevertheless, wages grew at the same steady yearly rate of +2.8% we have been seeing for a while, and are showing none of the acceleration that labor economists fear.

We know from the BLS’s Job Opening and Labor Turnover (JOLT) survey that the number of current job openings is more than 20% higher than at the pre-recession economic peak in 2007.  This makes the lack of wage acceleration look even more peculiar (more about this on Monday).

Nevertheless, the Fed has made it clear that it thinks there’s nothing further that maintaining emergency-room low interest rates can do to stimulate the economy.  That ball in in the court of fiscal policy, the province of Congress and the administration, where it has resided unmoved for several years.

Especially given Mr. Trump’s promises of corporate income tax reform and renewed infrastructure spending, the biggest economic hazards lie in not continuing to normalize interest rates.

So I think we can pencil in three hikes of 25 basis points each in the Fed Funds rate both this year and next.

 

 

Employment Situation, January 2017

This morning at 8:30 est, the Bureau of Labor Statistics of the Labor Department issued its monthly Employment Situation report for January 2017.

The important parts, in my view:

on the positive side

— the +227,000 new jobs added is an above recent trend figure

–the workforce expanded by around half a million people during January, implying that sa significant number of previously discouraged workers are resuming their search for employment

–wages are rising at a 2.5% annual rate.  Some have expressed disappointment that wages aren’t rising faster, pointing out that the ES estimate of wage gains was higher a month ago.  On the other hand, the overall trend is in the right direction and these numbers can be quirky month-to-month.

on the negative

–the situation for the long-term unemployed is little changed over the past year

—-The number of long-term unemployed (those out of work for 27 weeks or more) is down by about a quarter-million.  But it’s still 1.9 million people, and makes up about 25% of all unemployed

—-The number marginally attached to the workforce (meaning have looked for work sometime within the past year, but not within the last four weeks) is down by 15%.  But their number is still 1.8 million.  Of that figure, 532,000 are discouraged workers (people not looking for work because they think no one will hire them), the same as this time in 2016.

 

As I’m writing this, the reaction of Wall Street is to emphasize the positive.  However, as the presidential election results show, the economically left behind are increasingly making their voices heard demanding help.

 

 

disappointing 4Q16 sales for Target (TGT)

TGT just announced that its 4Q16 sales (the fiscal quarter ends in about two weeks, on January 31st, which is normal retail practice) will fall below its previous estimate of +1/- 1%.  The company now figures that sales will be down by -1.0% to -1.5%.

Online sales grew year-on-year by 30%+ during November/December, while sales in physical stores fell more than -3%.

In its press release, TGT also gives a breakout by major categories.

The company doesn’t say explicitly what the split is between online and physical store sales, but a little arithmetic will will get an approximate figure.  And that’s the core of the company’s sales growth problem, in my view.

The Commerce Department hasn’t yet released its calculation of the percentage of retail sales in the US that occurs online.  We can safely assume, though, that the number–which continues a steady upward march–will be around 9%.  This is the portion of overall retail that’s growing, and carrying the waning physical store business.  The TGT online figure, in contrast, is just slightly over 1%.

how do tariffs affect selling prices?

The purpose of tariffs on imported goods is to discourage their use and to encourage the development of domestic substitutes.  It sounds good in theory but may not work in practice.

A recent example of the latter is the imposition of tariffs by the Obama administration on truck tires imported from China.  The tariffs made the Chinese tires affected noncompetitive in the US.  But US tire makers regarded this market as not lucrative enough for them to enter.  So trucking companies began to import more expensive tires made in Thailand.  Economists estimated at the time that because the tariffs raised the cost of doing business for truckers it lowered their profits and overall cost the country about 3,000 jobs.  And then, of course, China retaliated by placing an import duty on poultry source in the US, hurting that industry as well.

The key points:

–tariffs raise the cost of doing business for the industries affected.  That extra cost must either be absorbed by the buyer of imported materials or passed on to the customer.  Theory says that if the end product is unique, the burden will be mostly borne by the end user;  if it’s a commodity, the importing company will have to absorb most of the extra expense.  An interesting case in this regard is toys.  Most of the toys bought in the US are made in China.  A tariff on run-of-the-mill imported toys (which probably means 90% of them) would mostly raise the price to consumers, in my view.

–tariffs may not promote domestic industry, and may do significant net damage, as the truck tire example shows.

–in addition, decades of protection against foreign competition did little to protect US carmakers from the long-term threat of imports.  On the contrary, Washington’s protective umbrella shielded shoddy manufacturing and lack of innovation that ultimately ended with two of Detroit’s Big Three declaring bankruptcy.  To be sure, government action forced foreign carmakers to establish manufacturing operations in the US.  However, the sad case of General Motors, which controlled 40% of the US cara market at one time, makes it hard to argue, I think, that government protection of domestic industry against foreign competition is the best thing to do.

 

Employment Situation, December 2016

The Bureau of Labor Statistics of the Labor Department issued its monthly Employment Situation  this morning at 8:30 est.

According to the release, the economy gained 156,000 new jobs in December, more than enough to absorb new entrants into the workforce.  Revisions to October figures were -7,000 jobs, to November’s, +26,000, meaning the net revision to the prior two months’ data was +19,000 new positions.

While this is a so-so result, we should consider how much may be due to random statistical variations in the data and, more importantly, how much comes from the difficulty employers are apparently having in finding qualified candidates who are currently unemployed.

More evidence that the latter is becoming a more significant issue comes from the rising trend in average hourly wages the BLS is also reporting.  for the 12 months ending in December, wages have been increasing at an inflation-beating 2.9% rate.  If we, methodologically incorrectly, take the December wage gains alone, the year on year increase is 4.6%.

The bottom line:  good news, and evidence the Fed will likely take as prompting it to raise the Fed Funds rate again sooner rather than later.

is 4% real GDP growth possible in the US?

the 3% – 4% growth promise

One of Donald Trump’s campaign promises is to create 3% – 4% GDP growth in the US.  Is this possible?

The first thing to note is that this is real GDP growth, meaning after inflation has been subtracted out.  I’m not sure Mr. Trump has ever clarified this–or that he wouldn’t be nonplussed by the question–but his appointees to head the Treasury and Commerce departments have said real is what they mean.  Also, 4% nominal (that is, including inflation) growth is about what the US has been churning out in recent years.  So promising 4% nominal growth would be like P T Barnum putting up his “This way to the egress” sign.

where does growth come from?

Simple models are usually the best (as in this case, feeling embarrassed when calling them “models” is a good indicator of simplicity).  Growth can come either by having more people working or by having workers be more productive, meaning churning out more output per hour.

more workers

Having more people working is a function of demographics.

Each year, the population of the US rises by about 0.8%.  Half of that comes from children being born to people already residing in the US; half comes from immigration.  If we take increases in the population as a proxy for increases in the workforce, then demographics can generate a bit less than 1% trend growth in GDP.

This also means that if Mr. Trump carries through on his threat to deport 3% of the workforce and restrict entry of immigrants, not only will the social consequences be shameful, he will make it that much harder to achieve his GDP objective.

productivity

Given that demographics will likely either not change, or will change in a negative way, getting to the low end of the 3% – 4% range will only be possible if worker productivity rises.   Let’s make the optimistic assumptions that the Republicans’ white supremacy rhetoric doesn’t discourage any potential immigrants and that there’s no increase in deportations.  If so, productivity gains would have to be at least +2.2% per year to achieve the low end of the GDP growth goal.

If +4% growth isn’t simply “marketing” in the worst sense of that word, the Trump camp must believe that productivity can be boosted to +3.2% per year.

An aside:  My first stock market boss was a vintage 19th-century capitalist.  He believed that increasing worker productivity meant boosting the workload–and making employees work longer hours for the same pay.  (No, there was no company store where we were forced to buy meals; yes, we had to basically provide our own office supplies.)

That’s not correct, though.  Productivity improvement comes through better employee education/training and by employers investing in labor-enhancing machines (back then, it would have been computer workstations, or in my firm’s case, pencils).

productivity today

Productivity today has been stuck at around +1% per year growth for about a decade.  During the housing bubble, when the US was furiously churning out many more new dwellings than the country could afford and banks were making crazy no-documentation mortgage loans (websites were also sprouting up to show low-income renters how to buy a house and scam the system for a year of “free rent” before foreclosure), we got to maybe +2.8% for a number of years.  But the last time the US rose above 3% was in the 1950s, when industry in Europe and Japan had been destroyed by war.

my take

I hope Wilbur Ross can do what he says.

I think +4% growth is simply hype–and that Mr. Ross, if not Mr. Trump, knows the situation.

The trend in manufacturing is to replace humans with robots. That’s the most straightforward way to achieve productivity gains. Output climbs steadily; output per worker goes up faster.  However, the number of employees shrinks drastically.   For many displaced workers supporting Mr. Trump, this may be a case of being careful about what you wish for.