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.
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.
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.
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.
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