Special Report: 2.4.2010

Posted by Joe Salimando on Tuesday, February 02, 2010

OVERSIZE BEACH BALL KEEPS LOSING AIR

Should we reinflate in a heated rush?

By Joe Salimando

Construction spending data for 2009 came out the other day. To make a long story short: Adjusted for inflation, 2009 showed a 1% gain -- on 1998! Inflation-adjusted, all of the years between (there were 10 of 'em!) exceeded -- in some cases, by a significant percentage -- what happened last year.

What's going on? Imagine that the U.S. economy of 2003-07 as an oversize beach ball. It was damn big. It was soft, very soft (the softest beach ball you've ever felt) -- overly full of air. Someone pumped it up way beyond the "regulation" size for one of these things.

And: In 2007-08, the air began seeping out of the thing. In 2009, the whoosh of air leaving the balloon seemed to accelerate (beyond belief). For those of us who keep at least one eye on construction, things didn't get better in last year's 2nd half.

Here's the question: Do we, as a nation, go find new air supplies, and immediately (and repeatedly) pump those into the thing, in an attempt to reinflate the ball to the ridiculous size . . . the one at which we all had such a wonderful time? We might be able to do it, actually (for at least a little while) -- creating an "economic recovery" of some sort.

Or do we instead accommodate the thing now, at its shriveled-up, air-deprived size? Do we choose to take steps as individuals, as corporations, and as local/state/national governments, to grow slowly but surely? It's worth thinking about this: If we choose the slow-but-sure route, we might not match the boom times of 2005 until 2015, 2017, or even 2019.

 

Residential Goes Pfffffft

Over on the EleBlog, the first five posts of February dealt with data from the 2009 construction spending report, so I won't regurgitate all that here. The thing that's going to whack you over the head, should you wander over there, is the decline in residential construction over recent years. It was $642 billion in 2006 -- and $252 billion last year.

Did someone say whoooooooosh?

Lots of energy has been expended (and a bunch of recent books are out) trying to identify exactly what happened, how things went so awfully bad so fast, and which person or persons we should blame. After all, this isn't some historical event; none of us were around to see Moses turn a rod into a snake, but we were all here for the recent debacle; we should KNOW what happened to us.

Instead of worrying collectively about whether we should cut off all of Hank Paulson's limbs (or just two of them) -- or which comes first for Alan Greenspan, burning or hanging -- the nation's way forward should be our prime concern. It seems clear that we need to avoid certain idiotic things in housing finance (125% loan-to-value, annual cash-out refinancings awarded just because houses in the neighborhood were sold at higher prices, home equity lines of credit with big balances, etc.). And, of course, 33-to-1 leverage for financial houses should be a thing of the past.

Let's say, for the sake of argument, that we decide to Return To Sanity. Someone will tell the FHA to stop making loans to people who can put only 3.5% down on their mortgages (that's happening right now, you know!). Perhaps we'll have legislation that yanks access to federal housing money (and bail-outs) from any financial organization that is even suspected of playing fast-and-loose with appraisals, loan-to-value nuttiness, "no doc" loan baloney, and such.

Sounds good? Think about it. Do you know what would follow? It might well take a 20% downpayment to buy a house. At the very least, the prices of some homes would have to keep falling; at the very most, young people would come to ROUTINELY live with their parents until a time at which they had saved (Saved Money!) to slap down such a downpayment.

Does all that sound like a hardship? It's pretty much the conditions I remember from my childhood (which was a pretty good one). We lived upstairs from my mom's parents; my mom and dad scrimped to build the balance they had in the bank. They borrowed a piece of the downpayment for their house from grandma and grandpa; to pay it back quickly, we ate a lot of fish sticks and Kraft macaroni-and-cheese out of a box.

People back then clipped coupons out of newspapers. My dad's car always needed a paint job, and was subject to his hand-applied fixes, such that it always had spots on it . . . as a kid, I called it "the leopard."

Was all of that awful? I don't remember it being that way. I don't remember the people who raised me feeling deprived (if they did, they kept it well-hidden). Their parents, after all, had lived through The Great Depression; this was a walk in the park in comparison.

Among other things I don't remember; I don't recall anyone in my family having to go through a foreclosure.

 

Nonresidential Slows

Unlike the housing market, the 2009 nonresidential construction total wasn't all that far from that of better times. Of course, 2010 threatens to be a miserable year in nonres, so perhaps the numbers we'll see at this time next year will really, really suck.

However, that might just be part of the story if we are going to keep the beach ball from a Zoom Reinflation. It might be that we have to make do with an economy that (relative to the size of a stupendously huge beach ball) is sized along the lines of one of those 16-inch softballs.

What if this happens? What does this mean for your company?

Over time, we'll fill up much of the now-empty retail space. As employment recovers -- very slowly, apparently -- vacancy rates in office buildings will return to a place where, in specific cities, developers will once again build "on spec." And so on.

 

Hare Loses To Tortoise

Does all this sound like SLOW TORTURE to you, as an electrical distributor? I'm afraid that is how it will feel, if that's how you see it -- and you don't change the way you run your enterprise.

From the vantagepoint of 2010, we must see the years 2003-07 as some sort of illusion (we lived through it, we were obviously all intoxicated, we can't remember why we did it -- it happened). Realistically, we know that beach balls just DON'T get that big! As we get into the next years of the Twenty-Teens, we'll experience slow growth . . . but it will be reliable, sustainable, not-high-risk.

Some might read what's above and say -- this is a bunch of Gloom and Doom crapola.

But what I think it is, actually, is Optimism, It's the expression of a belief that our country can right itself, and can grow without fogging up the debt market, the housing market, and other construction markets. It's written by a believer in the republican form of government that we now have in place, and in the regulated version of capitalism into which we've evolved.

Does that faith, and the vision outlined above, earn the label of "gloom and doom" these days? If so, then what's coming is going to make what we've been through in 2007-09 like a pleasure cruise.