Weighing the Good, the Bad and the Ugly

 There is so much conflicting information and messages coming out right now in economic news.  If you are like me, you are picking up on the good, the bad, and the ugly and trying to figure out how that bodes for the future. Because if you are in business, it is the future that you are always trying to get a handle on.

 So let’s take a stab at this together.

The Good

Despite surging oil prices sparked by conflict in Libya and supply disruptions caused by tragic events in Japan, U.S. Stocks this past week rebounded, as the Commerce Department on Thursday reported that the economy grew by 3.1 percent in the fourth quarter.

Consumer spending, about 70 percent of the economy, rose at a 4 percent pace last quarter, the most since the same three months in 2006, compared with 2.4 percent rate in the third quarter.

The upward revision to growth was paced by an even bigger increase in business investment. Spending on equipment and software climbed at a 7.7 percent in the last quarter. Manufacturing, which accounts for 11 percent of the economy, is likely to remain at the forefront of the recovery on growing demand from fast-growing countries like China and Brazil, which is spurring U.S. shipments of machinery and consumer goods. Exports in January rose to the highest level on record.

Hey, this sounds pretty good.  Well, I got more.

U.S. commercial property sales will climb during the next three years as increased investor confidence drives a recovery in all segments of the market, according to a report by PricewaterhouseCoopers LLP.

Buyers will jump into the market before interest rates move higher and competition pushes up prices of office, industrial, multifamily and retail properties, according to the quarterly survey of real estate investors by the company’s New York-based unit.

And this really had me doing a double take. Commercial real estate prices surged 19 percent in 2010, the second-biggest gain on record, according to an index from the Massachusetts Institute of Technology Center for Real Estate. Transactions for commercial properties may increase 40 percent to $135 billion this year, according to Chicago-based Jones Lang LaSalle Inc.

PricewaterhouseCoopers agrees that most industrial markets will improve during the next two years, with 86.2 percent expected to be in recovery by 2012 as tenant demand increases. The survey defines recovery as a phase of tightening market conditions and a shift in supply and demand balance leading to reduced vacancy rates, more balanced rental growth and a stabilization of overall cap rates.

Still, I have to wonder how commercial real estate can be predicted to do so well when residential real estate remains in the toilet. Both are based on consumer confidence. Now consider these facts, which give me great pause.

The Bad

Purchases of new U.S. homes declined in February to the slowest pace on record and prices dropped to the lowest level since December 2003. The median sales price fell 5.2 percent to $156,100, the lowest level since April 2002. In February, U.S. housing starts experienced their largest decline in 27 years

Nearly 40 percent of the sales last month were either foreclosures or short sales, when the seller accepts less than they owe on the mortgage. One-third of all sales were purchased in cash — twice the rate from a year ago. In troubled housing markets such as Las Vegas and Miami, cash deals represent about half of sales.

As of the end of 2010, 23.1 percent of all U.S. homeowners with a mortgage owed more on their homes than their homes were worth. At least 8 million Americans are at least one month behind on their mortgage payments.

In total, about 11 percent of all homes in the United States are currently empty. It’s 18 percent in Florida, and 16 percent in Arizona. Since the real estate peak, U.S. home values have fallen by a staggering 6.3 trillion dollars. Deutsche Bank is projecting that 48 percent of all U.S. mortgages could have negative equity by the end of 2011.

Gulp.

The highest gasoline prices in more than two years is weighing on families already dealing with rising grocery bills. The Bloomberg Consumer Comfort Index showed confidence among households with annual incomes exceeding $50,000 fell to the lowest level since March 2010, representing a risk to consumer spending, the biggest part of the U.S. economy.

“Households continue to operate under duress,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. “Inflation may prove both higher and more persistent than desirable.”

Now let’s add Japan to the mix.

The Ugly

Two weeks after a 9.0 magnitude earthquake and 10-meter tsunami struck the northeast of Japan, manufacturers are still grappling with power cuts, crippled infrastructure and a shortage of parts.

Such is Japan’s position in the global supply chain that companies worldwide are feeling the impact.

Toyota, the world’s largest automaker, said all 12 Japanese assembly plants would remain closed until at least Saturday, because of difficulty securing components. Production lost between March 14-26 would be about 140,000 units.

In the U.S., General Motors said this past week it would lay off workers at a Buffalo, N.Y., engine plant, following the announced shutdown of its Shreveport, La., pickup plant  because of a shortage of parts from Japan.

 “All automakers are just now figuring out who supplies every little part,” said Michelle Krebs, senior analyst for Edmunds.com, an auto industry pricing and data service. “The shortage of any one could shut down an assembly line. Toyota isn’t the only one vulnerable; virtually all major automakers have some risks.”

Volkswagen AG, PSA Peugeot Citroen and other European automakers may be forced to halt production in coming weeks as Japanese component suppliers struggle to restart factories. The recovery to normal production levels may take months and cost the industry “billions of euros” in lost revenue, said Lars Holmqvist, head of the region’s Clepa auto suppliers association.

The Japan disaster may hurt the production of “thousands of companies” in Germany for several months, insurance broker Marsh & McLennan Cos. said.

“The most affected industries will be high-tech, steel and automotive,” said Jochen Koerner, a member of the executive board of Marsh. “It could take a while until Japan has rebuilt its export infrastructure, and as a result there will be serious supply-chain problems for several months.”

Just-in-time inventory management means just-not-enough parts on hand to ensure a normal pace of production even at functioning facilities. Prices are behaving as expected, with computer chips spiking. Japan produces about 20 percent of the world’s semiconductor chips and 60 percent of the silicon wafers that go into them.

The official death toll resulting from the earthquake-tsunami has now surpassed 10,000, with more than 17,000 listed as missing. Japan’s government said the financial cost could reach $309 billion, making it the world’s most expensive natural disaster on record.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Red Oak, Texas — www.barberadvisors.com

 

Supply Chain Vulnerabilities May Prompt U.S. Investment

They are called “supply chains” for a reason.

 When a link is broken in a supply chain, people, companies and commerce are affected downstream.

 Time will tell if the disastrous events in Japan, also linked to one another, will have a deleterious effect on the economic recovery now taking place in the United States.

There have been dire predictions, but leave it to say that when the third largest economy in the world takes a hit of this magnitude, there will be ramications elsewhere. And for the United States, it will be more than a run on potassium iodide pills on the West Coast.

Most of Japan’s automakers and parts suppliers halted domestic production after the earthquake and tsunami, as they grappled with supply shortages, damaged facilities and power outages.

As a result of the disrupted supply, General Motors announced that it would shut down its Shreveport, Louisiana truck plant for at least one week, because it is unable to get certain critical parts sourced in Japan.

A spokesman for General Motors Co.’s European subsidiary Opel says a shortage of electronic parts from Japan will force the company to halt car production at plants in Germany and Spain next week.

Apple Inc. says it may face shortages of key components for its newly-released iPad 2 as a result of the earthquake in Japan.

A Vulnerable Three-Tiered System

Most global IT companies have a three-tiered supply network. Japan supplies the materials and core components, Taiwanese and Korean companies import them and turn them into intermediate goods, and manufacturers in China and Korea assemble them into finished products.

So when Japanese parts and materials makers face shutdown, which has happened, the global supply network is disrupted. Companies get hurt. People get hurt.

 The severity of the economic impact of broken supply chains is anyone’s guess right now. I don’t believe this will spark a second phase or a double dip recession. These problems will be worked through, but not without pain. Plant shutdowns are always painful.

 But it does highlight vulnerability. When a supply chain is long and complicated, there are more chances for problems to arise.

It is specifically for that reason of vulnerability that some manufacturing may “re-shore” – that is bring back, re-establish and invest in manufacturing operations in the United States. I believe this is inevitable.

Ultimately, these are decisions are based on risk management and cost. This is especially true at a time when fuel prices are again spiking as the world economy recovers and labor costs in Asia are rising.

Tim Feemster, senior vice president and director of global logistics at Grubb & Ellis Company, says more U.S.-based manufacturers will return operations domestically in a re-shoring trend after weighing all the costs and the risks involved.

 “Many of them would like to be in Mexico were it not for the ongoing violence that is now taking place there,” he said.

 Feemster said the big question is whether a  trend of manufacturing returning to the United States “will be a trickle or a flood, and at this point, we just don’t know.”

Manufacturing Is Not Out for the Count

 What is clear is that manufacturing is far from dead in the United States. Indeed, it is more efficient than ever.

 Which brings me to my next related topic.

 While the world has been rightly focused on a series of disastrous events in Japan, a little noticed report came out last week that confirms a sea change that most of us may have been sensing.

After more than 100 years of dominance, the United States gave away its place as the world’s top manufacturer to China last year, according to data released by IHS Global Insight.

China accounted for 19.8 percent of global manufacturing in 2010, compared with 19.4 percent for the U.S. — $1.995 trillion worth, compared with $1.952 trillion, according to IHS. Japan remained a distant third last year, generating $1.027 trillion by manufacturing, followed by Germany, with $618 billion.

No Hand Wringing Please

Before you start hand wringing, please understand that the U.S. remains a robust manufacturing power, despite what is going on in China. Indeed, American manufacturing remains far ahead of China in terms of productivity.

The IHS report said China required 110 million workers to produce approximately the same amount of goods that 11.5 million American workers could produce.  You may want to read that again.

In 2009, productivity in U.S. manufacturing increased by 7.7 percent, more than any other country followed by the Bureau of Labor Statistics.

Many of us don’t see many of the things made in America because retail has been flooded with consumer goods made abroad in which American labor cannot compete. Stuff like clothing, toys and electronics.

But if you were in the market for planes, machinery and semi-conductors – things that demand a high level of technology — well, you could be very well be buying made in America. Because it is in these areas where in expertise, technology and innovation take a front seat and labor rates take a back seat.

Gobbling Up the Low Hanging Fruit

That China has so far gobbled up the low-hanging fruit of the global manufacturing sector – the low-end, labor-intensive goods – should be expected to some degree.

 Naturally, China hopes to move up the value chain and make the technology complex products, but Chinese manufacturing continues to lag in technology, quality control, managerial and engineering expertise, areas where U.S. manufacturing continues to improve.

And with the acceleration of technological manufacturing processes, the cost of labor – China’s big advantage – becomes increasingly irrelevant. Moreover, the challenge for America, one that will require a partnership between government, education and business, is to keep pace with the changing skills required by manufacturing by having an educated workforce equal to the task. This is paramount if the United States is to remain a global power.

 But the hard if not simple truth is that fewer people will be needed to man future manufacturing plants in the U.S. because of innovation, automation and high-tech investments. Indeed, in the future, robots will be doing much of the work being done by people today.

But those “survivors” who will be left on the island, those people who will be inside the plants to ensure that all the automation and equipment is working according to purpose, will be super skilled and probably making very good money.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Red Oak, Texas — www.barberadvisors.com

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Is Your Community Really Unique?

At a recent conference sponsored by the Texas Economic Development Council, I attended a breakout session in which a marketing executive, whose firm builds websites and plans marketing campaigns for economic development organizations, told about visiting a particular community in another state.

The marketing exec said it was a very nice community but that she had become a bit frustrated in asking a question in several different ways to several different people and not getting a truly satisfying answer. Her question was this: What makes your community different? How is it unique?

 Her point, one which I did not and will not dispute, was for a website or any marketing effort to be effective, the community must differentiate itself from the competition. To me, that makes perfect sense and sounds all very good. But then I thought more about it.

 What if, and I asked her this question not trying to be funny or parse words, what if you have a community, which has some very good assets, but there really isn’t anything particularly “unique” about it?

 Rewind to an earlier career when I was the skeptical (and cynical) business editor for a daily newspaper. My reporters and I were often pitched stories by people who wanted us to write about their businesses. Whether they realized it or not, most were seeking free advertising or publicity for their respective businesses. Often, they used the word “unique” in making their story-line pitch. I came to view that word as more often than not as being misused.

 As journalists, we had to decide whether this story line would have value to our readers. To us, it was a matter of credibility. Do we roll over and write stories that anyone wants us to write, or do we as professionals make decisions on the value of news or the value of this particular story?

 Frequently, that word “unique” would trip us up. Often we would find there was nothing unique at all about the business, no real news hook as to why we should write the story. Sometimes the business owner would look at me plaintively as if saying, “But we’re nice people.” Unfortunately (for the business owner), that was not the criteria for getting a business story in our newspaper.

Now back to economic development marketing and branding. It probably should be story-based because people like stories. People are drawn to narratives and history, whether they know it or not. It is in our DNA.

 And by telling our story or stories, as economic developers we want our particular community or region to stand out from the competition, to be noticed and judged favorably.

 Indeed, our community story may demonstrate that we may have certain assets that some of the competition does not have. It could be an interstate highway, an airport, a community college, a university. That does not make our community necessarily unique or even different, but it still could comprise a formula for success.

 I have been in communities difficult to brand. Not that they were bad places. They were not. I learned plenty about the community — its demographics, history, the skill sets of its work force. But nothing really jumped out at me in terms of branding this community different from others, even if it had certain advantages.

So therein lies the quandary. How do you market a community as being different or, gulp, “unique,” when in all actuality it may not be so different or unique.

 Ed Burghard, executive director of the Ohio Business Development Coalition, says doing so in most cases is “a fool’s chase.”

 “Instead, you need to understand the points of parity, points of negative difference, and points of positive difference versus the competition,” said Burghard, a retired executive from Procter & Gamble with over 30 years of brand building. In short, your community may not be unique, but it may still compare favorably against the competition.

 Burghard says a brand is a promise, setting an expectation of what it would be like to work, live or even visit a community. Ultimately, it is the target audience that decides if your brand or promise hits the mark.

 We have all seen the cliché attributes by now, those that probably make the eyes glaze over for many site selection consultants – central location (relative to what?), a fine work ethic and a superior quality of life.  Mind you, these can be very real factors involved in the site selection process, but virtually all economic development organizations cite these same attributes, thereby deflating the power of their claims.

 Too often, communities make the outlandish assertion that they are simply the very best site location for all businesses on planet Earth, period, end of story. They may not be using that exact same language, but they tout themselves in such a manner that their credibility is damaged. And they don’t even know it. It is not just newspaper editors who are skeptical and cynical in this world.

As an economic development practitioner and consultant, I have come to realize that it is what others say about you that has more impact than what you say about yourself. So if you have a good story to tell, one that is interesting, by all means tell it and find those storytellers in your community. If you are lucky, journalists from inside and outside your community will take notice and pick up on that story. And that is when you start getting third-party credibility.

 Every community has a story to tell. The storyline may not make the community resoundingly unique or different, but it can nonetheless matter. In short, very few things in this world truly are unique. But if you play to your strengths, and are cognizant of your weaknesses, chances are that you and that marketing professional can devise an effective message for your community.

 Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Red Oak, Texas. He can be reached at dbarber@barberadvisors.com