Housing prices on upswing
while commercial occupancy lags

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

While office space vacancies throughout the U.S. are generating double digit percentages, new leases are reflecting a continuing downward spiral. This is especially true of condos, shopping centers, and hotel occupancies. However, assisted living structures and hospital-oriented expansion are leading the charge toward greater construction opportunities as the second quarter gets underway.

Also, the housing market which played a major role in precipitating the building construction and ownership crash in late 2008 is finally indicating the beginnings of a turnaround.

This is manifesting itself in a slow but steady increase in prices, even at the high end of multi-million dollar estates. However, this is not due to any appreciable increase in demand, but the steady decline in inventories, which is manifest in all aspects of the overall economy.

Although some of the nation’s regions are faring better than others, in both housing and commercial sectors, the construction industry as a whole is mired in deep doldrums. With unemployment showing little signs of improvement, and the ominous implementation of new taxes and regulations yet to come, employee expansion on all fronts of the U.S. economy has come to a screeching halt.

Repair maintenance and projects on order are the main stimulus driving the sputtering construction sector. Although a slow and deliberate increase seems to be in the cards, the mid-term Congressional elections seem to loom ever larger as a watershed to the next stage of future planning.

World Trade Organization forecasts banner boom in 2010-11

The World Trade Organization, not known for optimistic hyperbole, is predicting a major comeback in global trade this year, and picking up momentum going into 2011. This universally recognized organization has even indicated that such world import-exports will elevate revenues by close to 10% in 2010, with an even greater expansion in the offing in 2011.

Although it would take an additional 14% increase next year to return global interchange to 2008 levels, the WTO’s optimistic tone is derived from the current rebound generating in Southeast Asia, which had been hardest hit by the crash of September 2008.

With the developing nations leading the global recovery for the first time in recorded history, there is a need for the tools to develop these agrarian nations into more balanced economies such as the U.S., Japan, and Western Europe. These will be made available from the more mature industrial powers.
This trend will engender export sectors in the industrialized West. It will particularly benefit America’s export sector, which is dominated by the predominance of aircraft, armaments, machine tools and mill supplies.

Also benefiting will be the Mideast oil monopolies, as well as such commodity-rich nations as Australia, Canada and Russia. The fear of protectionism, if it should become reality, is that both developed and emerging nations will attempt to protect indigenous producers, both agricultural and industrial.

However, world dynamics today seem to be more in tune with benefits derived from global interaction than the disastrous economic isolationism that prolonged and magnified the Great Depression of the 1930s.

If the World Trade Organization (wto) turns out to be correct in its prognostication, the increasing momentum of international trade interaction will sweep away diminishing protectionist trends. Based on preliminary first quarter results, the wto targets seem on the right track.

Productivity trumps employment in recovering economy

Although the leading Administration voices trumpeted the minuscule March job creations as signaling an employment turnaround, Secretary of the Treasury Tim Geithner was right on the money when he painted a pessimistic picture regarding a significant jobs turnaround this year.

What makes the current economic recovery different from its predecessors is that this expansion is literally jobless. The statistics speak for themselves. Although the overall business/industry downturn in comparison to the first six months of 2008 is only 3%, the number of employees working full time has been reduced by more than 15%.

My anecdotal surveys, taken over the last six months, reveal that most companies are opting for mechanization, automation, and upgrading on the shop floor as well as the back office, to maximize productivity. Inventories have been reduced to the bare minimum required to meet current demand. The almost one-to-one ratio between sales and inventory is the lowest level in 50 years.

This has provided U.S. business/industry coffers with maximum dollar liquidity with which to insure survival, buy back stock, and increase dividends.

Ironically, fear of further government expenditures following the multi-trillion dollar takeover of universal healthcare, and the anticipation of onerous tax increases and stifling regulations has served to instigate a defensive posture by an increasingly untrusting number of ceos.

It has also convinced most businesses that they can get the job done without adding to company payrolls. When hiring today, such businesses are much more discriminating in the caliber of personnel hired. In years past, such care in hiring even shop workers was never a factor at a time of business expansion.

To make this scenario even more somber, the two leading economic production sectors, manufacturing and construction, have significantly decreased in scope, making job reduction a permanent fixture within a recovering U.S. economy.

Only an inflated increase in government job rolls will make a significant difference for the rest of the year.
Corporate profits reach pre-recession highs

As expected, 2009 fourth quarter corporate after-tax profits reverted back to pre-recession highs, reaching 7.6% of U.S. gross domestic product. This was up from 6.3% a year earlier, indicating that this year’s first quarter should at least equal or improve on such stellar results.

However, policy experts’ opinions that this trend will start cutting into current high unemployment may be presumptuous and premature. The substantially higher cost base that Obamacare is expected to saddle most corporations with, is already being slotted into such companies’ financial planning. This will manifest itself not only in future shrinking profit margins, but even greater efforts to shift costs away from personnel salaries and benefit packages to greater mechanization, automation, and upgrading through expenditures on the latest technology.

Corporate managers are expressing grave concern that the Obama Administration’s “redistribution of wealth” direction will leave them holding the bag of ever-increasing costs, saddling the bottom line as the year wears on. This shift in managerial direction will prove a boon to makers of communications paraphernalia/appurtenances and the latest equipment development for the shop floor.

Recent interviews with a substantial number of manufacturers, distributors, contractors and retailers revealed severe misgivings about the new healthcare law, and its multi-faceted negative ramifications on business establishments as a whole. Practically all are waiting for the next “shoe to drop.”

Based on these contacts, I’m concerned that this backbone of America’s economic strength is more apprehensive than ever about the rash of new taxes and restrictions they feel will be forced on them in the foreseeable future.

Although there is practically no interest in protectionism, there seems to be a new wellspring of patriotism. This is manifesting itself in focusing more on the purchase of products offered by American-based companies. This is supported by a perception of superior quality, increased overseas costs, and the greatest need ever for “just in time” inventory.

U.S. consumer recovery spurs post-recession spending

It’s becoming increasingly apparent that the American consumer is returning to his old buying habits, even though the dark shadows of the Great Recession haven’t yet disappeared from the scene.
Buoyed by a $5.7 trillion increase in U.S. household net worth in 2009, it seems that more Americans are dipping into some of their savings to visit the malls and department stores, a habit which had been put on hold after the financial crash of mid-2008. That resulted in the highest savings rate in more than 25 years (close to 4%), which is now dropping to a 3.1% average — still remaining in positive territory.

This upward spending shift has created a year-over-year positive spending thrust as high as four percent this year so far. Unquestionably, the impetus from “cash for clunkers,” massive discounts, and pent-up consumer demand have all reversed the disappeared deleveraged buying option from consumerism, prevalent throughout the second half of 2008 and most of 2009.

Also helping are a greater tendency for U.S. banks to open their lending lines, as their balance sheets have swelled to record levels, boosted by record low interest rates offerings by the Federal Reserve Bank.

But still weighing heavily on consumer buying power is the double digit unemployment of job seekers, plus skyrocketing household debt. But even these household liabilities dipped slightly from $14.5 trillion during the fourth quarter 2008 to $14 trillion in a similar period in 2009.

Although the outlook from an economic point of view is brightening, the current governmental power structure will make it increasingly difficult for business and industry to do their part, due to even more taxation and restrictive regulations coming down the pike.