Rental dwellings lead housing unit construction surge

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

At first glance, September U.S. home construction of 658,000 housing starts, up smartly from August’s 572,000, and the most since April 2010, seemed like a significant residential rebound.

Unfortunately, this report was a misleading reading, bolstered by a recent high in apartment unit building starts. The sharp drop in September existing home sales painted the realistic panorama of declining individual residential ownership.
As first indicated in these columns more than a year ago, a full swing to rentals over ownership is now underway. It’s safe to say that this is not a transitional expedient, but a permanent sea change in the habit pattern of the American shelter-seeking public.

Anecdotal evidence indicates a major swing from considering a permanently-owned residence a prime asset to one that is becoming an increasing liability. The fierce price collapse of even the top-of-the-line villas throughout the nation guarantees that the busted housing bubble will not come back, even in the more distant future.

But in the zero-sum game of residential needs, apartment building and rentals are destined to go ever higher. Multi-family buildings, especially in the nation’s major cities, are springing up at a record pace. In the meantime, rents have risen sharply, and waiting lists for openings are lengthening. Even big city units, allocated for condos and co-ops, are switching to rentals with accelerated speed.

To put the 180-degree turn against residential home ownership in long-term perspective, potential purchasers are frightened of the rising number of foreclosures. With income levels stagnating, even mouth-watering prices and record low mortgage rates are proving limited incentives to potential home buyers. Lending institutions’ reluctance to extend home loans also has kept the brakes on.

The idea of flipping (which saw housing prices often double in the last decade) is relegated to the past. However, the switch to the heavier construction and more prolific systems development is proving a boon to mechanical contractors and installers as well as suppliers to this growing sub-sector of commercial/industrial craftsmen.

EPA regulatory oversight slowing current U.S. energy development spurt

House Budget Director Paul Ryan (R-Wisc.) has graphically accused government regulatory intensity as the main culprit in current business development stagnation and lingering unemployment.

As repeatedly mentioned in these columns, decrees by the Environmental Protection Agency, headed by Lisa Jackson, have become a partisan issue. The controversial stoppage of water to the agriculturally dormant Central Valley early in 2009 to save an endangered fish specimen from extinction highlighted the political volatility of the arguments. This often quirky, but increasingly vigilant, action on anti-environmental activity has resulted in intense scrutiny by the EPA of all renewed domestic energy development.

After the BP Gulf of Mexico drilling disaster last summer, the EPA stopped unrestricted offshore drilling, and the administration only now is slowly issuing drilling permits after more stringent review of the proposed activity.

The EPA’s increased attention to nationwide “fracking” of oil and gas fields (an activity that environmentalists claim releases toxic substances into ground-water supplies), and even accelerated development of previously abandoned “dry holes” because of profitable global oil prices, has created greater resistance from the Obama administration. The EPA currently is reviewing plans for the controversial Canada/U.S. oil pipeline, which would pass up to four million barrels of oil into U.S. refineries in the Louisiana and Houston areas, as well as those located around the Gulf of Mexico.

With the final decision for this critically-needed oil supply input needed by U.S. commerce and industry, not to mention the positive impact on the America’s trade deficit, the EPA is assessing the proposed pipeline route with an eye toward environmental impact and groundwater quality issues. The administration has halted construction of the pipeline and required rerouting to avoid environmentally sensitive areas in Nebraska, a move which will delay final approval until after the 2012 elections, adding grist to the partisan wrangling over the pipeline project.

However, the potential employment of thousands of construction workers, in addition to less Mideast energy dependence, provides a strong counterweight. While the U.S. stalls, China is continuing to acquire additional Canadian oil and gas properties, with the pending acquisition of Canada’s Daylight Energy Ltd. (an oil and gas producer) by China’s Sinopec Industries the latest development.

Retail sales swim against economic tide

At first glance, the 1.1% September retail sales increase and the upward revision for July and August should prompt a ray of sunshine in an overall dreary economic outlook.

With consumption providing close to 70% of America’s overall gross domestic product formation, it would appear that the U.S. consumer is leading the way out of the current recessionary maze. However, overshadowed by this glowing report was the University of Michigan consumer sentiment index, which reached the level of pessimism last experienced in the darkest days of the post mid-September 2008 recession.
Based on the belief of the majority of average American consumers, this recession is still enveloping the attitudes of the American public, depressed by an actual double digit unemployment figure and no improvement in job availability on the horizon.

Even though September retail sales were generally broad-based, they were heavily weighted toward such necessities as motor vehicle replacement parts, as well as new cars purchased to replace those having been held longer than usual by American drivers. Also exceeding the average was clothing and other accessories needed to fulfill the public’s needs, rather than discretionary purchases.

Significant in analyzing the detail of September purchases is that they showed a distinct shift toward value buying, with discount stores thriving well above up-scale department and specialty stores. However, recent improvement in consumer-confidence figures offer a ray of sunshine.

Online purchases, although still relatively small in the context of total retail sales activity, are growing at a double-digit rate, and “Cyber Monday” sales broke last year’s records. Further complicating the future outlook are import prices, which are running 13.4% over September last year. While this is slightly closing the gap with comparable U.S.-made products, this has somewhat shifted the balance toward “Made in America”. This trend could increase in the foreseeable future, as both available inventory and overall value swing toward U.S. production capability, quality and service reawaken the public’s interest in “homemade goods”.

Internal corporate capital expenditures hit all-time high

Non-defense capital goods orders, excluding military and commercial aircraft, hit an all-time high of $68.9 billion in September, surpassing the previous high of $68.5 billion in April 2008. The latter came at the peak of the pre-recession boom preceding the global financial disaster of September 2008, ushering in the most recent recession.

These numbers represent the investment dollars that U.S. companies, large and small, spent on capital equipment expansion and replacement. What makes these gross expenditures so phenomenal is that an overwhelming majority were allocated to automation, upgrading and mechanization of existing facilities, rather than expansion.

It ratifies what these columns have attested to in the past year; that business and industry are focusing on greater unit productivity, in markets that are squeezing profit margins between higher raw material costs on the one hand and customers’ low demand and non-acceptance of price increases on the other.

As often repeated here, it is also part of a widespread resistance movement against federal, and even state and local, governments to impose greater costs on America’s independent business sector. Since the overwhelming percentage of such non-publicly traded companies produces their goods and services within the borders of America’s 50 states, shifting production abroad is generally not an option. In fact, our surveys indicate that maintaining domestic control over quality and inventory levels ranks high in priorities that such manufacturers, distributors, contractors and retailers impose on themselves.

This ever-hardening position, in the face of perceived government hostility, has increasingly negatively impacted employment. It has further shifted the relocation within the U.S. from such high tax states as New York, California and Illinois to Texas, Nevada and the Carolinas, where state governments have made the hiring climate more propitious.
The insensitivity of U.S. government-controlled agencies like EPA, SEC and FTC in coagulating the arteries of businesses desperately desiring to prevail in a stagnant economy, will make it difficult for America’s private employment sector to absorb new entries into the labor pool, much less reduce the high recession level employment rate.

An American economic decision showdown will have to await the November 6, 2012, general elections to determine this nation’s economic course.

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