Source: John D. Anderson, Deputy Chief Economist, American Farm Bureau Federation
Last week, Jim Robb used this space to discuss the supply side of the supply/demand equation in the cattle market. Let’s take a quick look this week at an issue of some relevance to the demand side of the market: the direction of the general economy. A couple of recent reports indicate that the economy appears to be – still – fairly fragile.
Last week, the National Restaurant Association released their widely-followed Restaurant Performance Index (RPI) for October. The RPI is of particular interest to the beef industry since so much beef is consumed away from home in food service settings, but it is also of more general interest as an indicator of consumer sentiment in the broader economy. The most recent RPI release generated a bit more attention than normal because the RPI fell to a value of 99.5 – its lowest level in 14 months. RPI values below 100 suggest that the restaurant trade is experiencing or is anticipating a contraction in business. The press release from the National Restaurant Association accompanying the RPI indicated that restaurant operators had become decidedly more pessimistic in their short-term outlook. Also on the topic of pessimism in the short-run outlook, the Institute of Supply Management released a widely-followed monthly indicator on Monday this week: the ISM Purchasing Managers Index (PMI). This index summarizes the activities of the purchasing managers (the people who buy the raw materials) for manufacturing firms and is thus considered a leading economic indicator. The PMI for November fell below 50 in November, indicating contraction in the sector. At 49.5, the PMI posted its lowest reading since July 2009 and was well below expectations that it would hold steady for the month at just under 52.
One of the major sources of uncertainty in the economy right now is the direction of federal fiscal policy. As anyone who has not just awakened from an 18 month coma knows by now, the federal government is facing the automatic implementation of substantial tax increases and spending cuts at the end of the year – the Fiscal Cliff. The fiscal cliff actually results from the convergence of a number of related policy tracks. Partly it is the endgame for the Budget Control Act of 2011 (BCA). According to the terms of the BCA, if an ad hoc congressional super-committee (the Joint Select Committee on Deficit Reduction) failed to devise and pass through the full Congress a revenue package that would reduce the deficit by $1.2 trillion dollars over ten years, a pre-established set of spending cuts would automatically kick in on December 31, 2012. Shockingly, Congress did, in fact, fail to agree to an acceptable package, and now the automatic provisions are about to kick in. Partly the fiscal cliff is a consequence of the scheduled expiration of the Bush-era tax cuts and of the temporary payroll tax cut. These cuts weren’t part of the BCA, but due to some perplexing policy choreography, their expiration coincides with the BCA’s sequestration provisions. Finally, the Affordable Care Act included some revenue-raising tax code changes that were scheduled to kick in at the beginning of 2013, just in time to join the Bush tax cut expiration and the BCA’s automatic spending cuts.