Friday, September 21, 2007

Mixed messages for Arizona's economy

The housing boom has gone bust and there are worries that the whole economy of the state will go down with it.

It could take three to five years before the Arizona economy fully recovers from the current housing crunch, Valley economist and real-estate investor Elliott Pollack said Thursday.

"How do I define a full recovery?" he asked a packed ballroom at the Arizona Biltmore Resort & Spa. "Supply and demand is back to normal. We've absorbed that excess supply (of housing stock)."

Pollack estimated that an excess inventory of at least 40,000 homes exists in the Valley. Real-estate experts say decreasing that number by even 5,000 or 10,000 would improve the market dramatically.

On the other hand, the hotel industry in Phoenix is expanding at a rapid pace.

Hundreds of new hotels are rising across the USA as the lodging industry seeks to cash in on rising room rates and strong demand from travelers.

The number of hotel rooms under construction in July jumped 20% from a year earlier, a report from industry tracker Smith Travel Research shows. More than 196,000 rooms — more than 2,000 hotels — will open within two years. That's the highest number of new rooms in the pipeline in more than seven years.

With 6,041 new rooms, Phoenix comes in fifth on the list of places adding the most new hotel rooms (second in terms of percent of current supply.)

Labels: ,

I'm OK but my neighbor's in trouble

People have a bias when they respond to surverys. They always think that they will do better than their neighbor. Ask them what they think of congress and they hate it. Ask what they think of their own congresscritter and they tend to like them

We got that again today in a survey on the Arizona economy. (See box on the right) While people tend to think that this year will be worse than last year, note the difference between what they think of their own financial situation versus the economy as a whole.

How do you expect the economy to perform this year compared to last?

2006: 22 percent.
2007: 20 percent.

2006: 44 percent.
2007: 35 percent.

2006: 34 percent.
2007: 45 percent.

How well off do you expect your family's finances will be this year compared with last?

2006: 28 percent.
2007: 26 percent.

2006: 44 percent.
2007: 37 percent.

2006: 28 percent.
2007: 37 percent.

Since individuals make choices based on what they expect in their personal lives, the second question provides a better prediction of the future than the first question.


Sunday, September 16, 2007

A Run on a Bank

OK, so this isn't about Arizona Economics, but a run on a bank is awfully rare so this merits taking notice.

LONDON (AP) - Hundreds of customers lined up to withdraw their savings from a British mortgage bank Saturday, ignoring government assurances that their money was safe despite the bank's request for an emergency loan.

Police were called in some cities to steer panicked crowds away as Northern Rock bank branches closed for the day.

Fears have spread over the bank's request earlier in the week for an emergency Bank of England loan amid the global credit crisis. Northern Rock, Britain's fifth-largest mortgage lender, is the first British bank in 15 years to be bailed out by regulators.

Customers withdrew $2 billion from the bank Friday, The Financial Times reported, citing an unidentified person described as close to the situation. The bank declined to confirm the figure, which represents 4 percent of its deposit base...

A run on a bank is usually caused by a crisis in confidence rather than a real solvency issue. Note that they still expect to make a substantial profit this year.

Northern Rock has around £24 billion of customer deposits, though some of the money is locked up for months in long-term accounts. It said yesterday that it still expected to make an underlying profit of £500-540 million this year.

We'll cover money and banking in macro in about 3 weeks.


Europe's low fare airline

Europe's low cost airline Ryanair came up in class last week. I don't know much about the company, but for those that are interested, the Wall Street Journal did an interview with the CEO.

DUBLIN--There's a bit of P.T. Barnum in Michael O'Leary, the chief executive of Irish low-fare air carrier Ryanair. He's pulled such stunts as driving a tank to a competitor's headquarters to declare a price war and dressing up as the pope to promote new routes to Rome. Most recently, when Britain's Advertising Standards Authority said Ryanair was incorrectly claiming that its flights were faster and cheaper than the Eurostar train for traveling between London and Brussels, he sent the frowning officials a copy of "Mathematics for Dummies."

Along the way, he's built Ryanair into Europe's largest airline by passenger volume and, along with such rivals as easyJet, transformed travel on the Continent. From London or Dublin one can fly not just to Nice but to Nantes, not only to Rome but to Riga, and often for less than the price of a cab ride across town. A generation of Europeans has come of age expecting £1 flights to overlooked tourist gems hundreds of miles away--a phenomenon that arguably has done as much to aid European integration as the EU itself ...

Part of the Southwest business model is that they really compete with people driving, not other airlines. Ryanair appears to have the same philosophy.


Saturday, September 15, 2007

Fun on the road

While having nothing to do with economics, I thought I'd share a few of the license plates I've seen lately.

I saw EVLTSTR on the Scion XB. It must be an XB thing.

EZ2WIN is on the icon of American incentives, the pink Cadillac in the neighborhood.

Someone took some physics. SAFE4US was on the Ford Excursion while the license plate frame had F = M A

Tuesday, September 04, 2007

Got the physics right but the economics wrong

A year ago, the Arizona Republic published an article on how consumers weren't getting what they paid for because they were buying "hot" gasoline. Last Friday, they did it again.

Each time drivers fill their fuel tanks in Arizona's simmering summers, they likely see $1 or more evaporate.

Because gasoline expands in the heat, that's the estimated dollar amount of energy they purchase but they never receive...

"Arizona is the epicenter of hot-fuel rip-offs," said Judy Dugan, a founder of, which is calling for gas stations to compensate for the temperature of gas they sell. "With the weather Phoenix is experiencing now, every time you fill the tank, you could be losing a dime a gallon. It's an extra penalty for living in the desert imposed on you by the oil companies and oil refineries."

A year ago I sent in the following letter to the editor which they declined to run.

No, Arizona consumers probably haven’t paid $115 million extra for “hot” gasoline. Even if they have paid extra, one thing is for certain, they haven’t paid it to “big oil.”

The basic claim is that gasoline expands at higher temperatures and hence a consumer gets less mass (and energy) for the same volume of gasoline at a higher temperature than at a lower temperature. Since Arizona consumers buy higher temperature gasoline, the assumption is made that they aren’t getting as good a deal as they would at a lower temp.

That’s probably not true.

As noted in the Arizona Republic’s article, dealers buy gasoline in bulk so they pay a temperature adjusted price. This ensures that they get the mass and energy they contracted for regardless of the temperature and hence volume.

That means that through the distribution chain, up to and including the dealer, “hot” gasoline is not an issue. It is only the next transaction in the chain, from the dealer to the consumer, that may have a problem.

Let’s suppose that dealers are selling customers a “mini-gallon” instead of a temperature adjusted gallon. Since all of them are doing basically the same thing, the “mini-gallon” is essentially the same size in any given area like Phoenix. Since dealers compete with each other, they set their prices based on what their competitors are doing. If one store realizes that they are selling a “mini-gallon” and can sell it for a bit less and still make money, they will lower their price to gain market share. The competitor across the street or down the road will also lower their price in order to remain competitive and retain their customers.

In very short order, given the competition, every dealer will be selling a “mini-gallon” for less than a temperature adjusted gallon. Are you really paying more for “hot” gasoline? Probably not.

The other assertion is that “big oil” is making a killing off of “hot” gasoline. For that to happen, two things have to be true. First, the competitive mechanism I described above must not work. Second, “big oil” must own the dealers.

Most of the gasoline retailers in Arizona are not owned by the major oil companies. They may sell a national brand, but they are independent and set their own prices. You can check this for yourself by looking at the business license posted in each store. It will tell you who the owner is, and with a few minutes on the internet, you can figure out if they are part of “big oil” or not. Mostly, they are not. So if anyone is making money off of “hot” gasoline, it’s the dealers, not “big oil.”

While the Arizona Republic’s articles on “hot gas” have gotten the physical science right, they have made some incorrect assumptions about the economics.

Another (published) letter writer has a different take.

I had to chuckle when I read about how gasoline expands and contracts due to temperature, resulting in some sort of windfall for oil companies or station operators ("Not getting what you pay for at the pump," Republic, Friday):

It's simple economics that if costs to deliver gasoline are raised as the result of requiring temperature compensation, the price of gasoline will go up to pay for it. That's in the article, but you have to read the whole thing...