Archive for the ‘Economy’ Category
Ugly construction industry forecast
Architecture News Record says economists expect construction to plunge this year:
The semi-annual forecast, which is compiled in conjunction with top economists, predicts that there will be an average 11.1 percent drop in non-residential construction spending in the first half of 2009. The rate is more than 10 times that of the last six months of 2008, when non-residential construction output was forecasted to dip 1.2 percent, for the first decrease in years.
In the current forecast, which includes data provided by Moody’s, FMI, Global Insight, Reed Business Information and McGraw-Hill Construction, some sectors fare far worse than others. Hotel construction, for example, could post a 20.2 percent loss, the largest in the survey, while power plants and factories might see a 11.2 percent cut.
No sector comes out unscathed, including publicly funded projects. To wit: even spending on firehouses and police stations, which are lumped under the “public safety” category, could shrink 3.5 percent. In contrast, in 2008, that sector was predicted to grow by 5.9 percent.
None of this accounts for the massive stimulus bill Obama is about to sign into law, of course. And we all know construction is just one facet of Caterpillar’s business. Perhaps the best indicator to watch is the Architecture Billings Index, which collapsed last fall.
Historically, architects’ billing numbers have been canaries in the coal mine for builders; if they go down, builders will suffer, too, about nine to 12 months later. And the numbers in this cycle don’t bode well.
The AIA’s Architecture Billings Index, which is compiled from statistics provided by firms, has hovered below 50 for 11 straight months, and anything below 50 represents a billing decrease. In November, the index hit 34.7, the lowest point in its 13-year history.
More on the American Institute of Architects at its Web site
(look for News and Press Releases)
Pension plans vacuuming earnings from companies like Caterpillar
Wall Street Journal’s Heard on the Street column mentions Caterpillar and a few other corporate giants that have gaping holes in their pension obligations that they must attempt to close.
The pension headache is hitting companies already under huge pressure to cut costs. Caterpillar recently announced 20,000 job cuts and warned that it may post its first quarterly loss since 1992.
Caterpillar’s U.S. pension had $10.4 billion in assets at the end of 2007 — $700 million less than its obligations. Caterpillar’s pension assets likely shrank by about $2.8 billion last year, assuming the 70% of its portfolio dedicated to equities fell 40% and, generously, the 25% invested in debt rose 5%. The company says it will contribute close to $1 billion to its pension this year. But that could still leave a hole of as much as $2.5 billion.
Did you get that? Seventy percent of Caterpillar’s investments to fund its retirees’ golden years is invested in stocks. I’m sure this is true of every other company out there still providing pensions. After all, stocks offer the highest long-haul returns, right? Except when they do fun things like lose half their value in six weeks.
Add to this the mega-billions invested via 401(k) and a troubling picture emerges: basically an entire society built on a foundation of asset inflation, from stocks to derivatives to real estate. And right now we’re experiencing massive asset deflation in a society built for prices to go only one way: up. We should be thankful the lights are still on.
Inflation results from too much money chasing too little product. Over the past 10 years in particular the new money came from two sources: China, which was actually building wealth, and Wall Street, which was papering the planet with soon-to-be worthless securities. (Remember it was the voracious appetite for U.S. mortgage paper that enabled the subprime abuses that got us here: if it hadn’t been for the absurd riches to be made in dealing this paper, none of the “lending standards are for sissies” nonsense would’ve ever happened.)
This might be the real reason the bear market isn’t going away: nobody knows where the firehose of money is coming from to start the next inflationary cycle. All those who nearly drowned in the last raging flood of cash have become too timid to turn on the tap.
World of Concrete conventioneers unconvinced on stimulus plans
Engineering News-Record’s correspondents at World of Concrete in Las Vegas have been gleaning folks’ opinions on the prospects for the federal stimulus package. My favorite quote:
Reviews were mixed on the show floor. James Hughes, executive vice president of Little Ferry, N.J.-based exhibitor Doka USA, said “the jury’s still out” on the stimulus issue. “Everyone’s hoping.” But in one of the outdoor booths, Ahern Rentals President Don Ahern said the company is not pinning its hopes on stimulus. Despite a global credit crisis, the Las Vegas-based manufacturer of Xtreme telehandlers is plowing ahead with expansion plans in 2009. “The stimulus package is a joke. I have zero faith in our government,” said Ahern. “We are going to have to stimulate ourselves. Every businessman will have to get it done.”
Hmm, I bet Ahern still flies into airports regulated by the FAA, but his final point bears repeating: all this talk of government bailouts has everybody sitting on their hands playing wait-and-see when they need to be redoubling their efforts to find new markets, find new customers, build better stuff.
Opportunities, much like Cat’s stock, are much cheaper in a down market.
What I think is wrong with the banking sector
Major banks around the world hold trillions worth of “toxic” securities that they need to get off their balance sheets. The U.S. government thinks it might be able to rescue U.S. banks by finding a market for these securities. Here’s the problem: Most of this paper is deeply illiquid — when it was written there was most likely only one plausible buyer and one plausible seller — and the transaction was a function of the inflating credit bubble.
Here’s an analogy: Imagine you invested $100,000 in a hotdog cart on Wall Street, reasoning that with thousands of hungry traders passing every day, you’d have a constant stream of customers and profits. This is a highly liquid transaction because any sane capitalist would be glad to take this business off your hands and earn the same money you were earning. Here’s the thing: the constant stream of customers is a fundamental function of the transaction: without it there is no business.
Say al-Qaida sets off a dirty bomb on Wall Street and makes the area poisonous to human occupation. Your $100,000 hotdog stand is still sitting there, waiting for customers who will never return. Your 100 grand is now 100 percent illiquid, and you have to write off the investment because the conditions enabling the original transaction don’t exist anymore.
My theory (refutations welcome): the recently collapsed credit bubble was the stream of customers that enabled the market for these now-toxic securities. No credit bubble, no market for toxic paper.
Everybody on Wall Street knows this, especially the banks. They know they have to write these assets off as lost causes, but they cannot bear the damage such write-downs will inflict on their credit ratings, because if their credit ratings sink too low, they risk a run on their assets that are still worth something.
In a way I’m glad that I can visualize simplistic, hotdog-stand scenarios that seem to make sense. In reality, these securities are a radioactive Brillo pad the size of Manhattan. Think about being charged with trying to clean that up for awhile and you’ll be first in line for the next opening for a greeter at Walmart.
Senate passes stimulus package
Now the trick is reconciling the House and Senate versions, Washington Post reports. Obama thoughtfully reserves the best quotes for himself:
“When the town is burning, we don’t check party labels,” Obama said. “Everyone needs to grab a hose!”
Mitch McConnell, the Republican senator from Kentucky, summarized what must’ve been on a lot of people’s minds, even those of us who don’t listen to Rush and company:
In debate before today’s Senate vote, Republican leader Mitch McConnell (Ky.) sought to distance the legislation from Obama, who is riding a wave of post-inauguration popularity. He said Republicans had expected Obama to be the author of the stimulus plan. Instead, “it ended up being written by some of the longest-serving Democrats in the House of Representatives, and it showed,” McConnell said.
The outlines of the plan I’ve seen seem primarily larded up with Democratic pet projects. Perhaps the GOP objections have been overblown for partisan purposes (imagine that) — the money will get spent; it’s not like it’s being fire-hosed into space — but I need to see more evidence that borrowing all this money gets the gears of the economy moving again.
Commodities bottoming?
Mining Weekly notes a Barclays Capital commodities analyst told a convention in South Africa that the first quarter of 2009 is likely to see the worst of the current downturn, but that things should pick up by the end of the year.
Norrish expected the first quarter to prove the bottom of the price cycle, and expected growth to improve in the second half of the year.
However, conditions were unlikely to be in play for a sustained recovery until late 2009.
Norrish listed three factors that encouraged the belief that the commodity sector would begin to improve later this year. These included the fact that Chinese business confidence was bottoming out, dry-bulk rates were moving up and the decline in US home loan applications has stalled.
In addition, he argued that China’s spending package would support economic growth and increased demand for metals, particularly copper, aluminum and zinc.
In the mining sector, commodity prices have to recover before Caterpillar’s “replacement cycle” argument kicks in: lots of operators have old Cat equipment that needs to be replaced, but the only way it’s affordable is if the metals and minerals bring in significantly more than they cost to produce.
Factory orders tanked in December
Not a huge surprise: Factory orders dipped 3.9 percent in December, according to the Commerce Department. Associated Press reports:
Analysts are forecasting that manufacturers will continue to face hard times in the coming year because of a deepening U.S. recession and weakness this has spread worldwide, cutting sharply into demand for U.S. exports.
For December, demand for durable goods, products expected to last at least three years, fell by 3 percent, even worse than the 2.6 percent drop that the goverment initially reported last week.
Demand for non-durable goods, products such as food, paper and petroleum, fell by 4.8 percent in December following an 8.7 percent fall in November. Some of this decline reflects the big drop in energy prices that has occurred in recent months.
Be glad you’re not Boeing: Demand for commercial aircraft fell by 43.8 percentt.
More on “free trade” vs. “protectionism”
The BBC wades into the debate over “Buy America” provisions in the U.S. economic-stimulus legislation. This is my favorite quote on the issue to date:
Protectionism is the crack cocaine of economics. It provides an immediate high that leads to economic death. — Richard Fisher, Dallas Federal Reserve president
Interesting link: “Reckless stupidity of Buy American.”
ISM manufacturing still contracting, but January improves on December
The Institute for Supply Management’s Manufacturing Index came in at 35.6 (anything under 50 means manufacturing is contracting), but that’s an improvement on the 32.8 notched in December. The index has been sub-50 for 12 months. One interesting tidbit from ISM’s release:
Commodities Up in Price
Corrugated Containers*; Electrical Components; Polypropylene*; and Steel* (2).
Commodities Down in Price
Aluminum (4); Aluminum Extrusions; Copper (6); Corrugated Containers*; Diesel Fuel (6); Gasoline (3); Natural Gas (6); Oil (2); Polyethylene (3); Polypropylene* (4); Scrap Metal (2); Stainless Steel (4); Stainless Steel Products (2); Steel* (5); and Steel — Cold Rolled.
Commodities in Short SupplyNo commodities are reported in short supply.
(The asterisk is for stuff that’s going both up and down.)
One bit of borderline-positive news: inventories were not piling up in January.
Washington Post: 8 questions on the stimulus package
A nice Washington Post overview that starts with the most obvious question: do we really need a stimulus package? Answer: a qualified yes, though taking on long-term debt for a short-term problem can hurt economic growth down the road. Also:
Where would the jobs be?
5. The Obama administration says that the vast majority — as much as 90 percent of the jobs — would be created in the private sector. The jobs would be heavily weighted to construction and manufacturing, which together would account for almost one-third of the new or saved jobs, according to the administration’s analysis. Both of those sectors have been hit hard by the economic downturn, with the construction industry shedding more than 600,000 jobs in 2008 and the nation losing nearly 800,000 manufacturing jobs in the same time period. The administration estimates that more than 600,000 of the jobs saved or created under the stimulus plan would be in retail and 500,000 would be in leisure and hospitality industries.African Americans, Hispanics and workers with lower levels of education, who have suffered most during the downturn, would see the most substantial benefits. The Obama administration estimates that more than 40 percent of the new jobs would go to women.
Ah, jobs for women and minorities, no wonder the Republicans hate it so much (sorry, couldn’t resist).