Is commercial/industrial construction dodging a bullet this year?

 

BY MORRIS R. BESCHLOSS

PVF & economic analyst emeritus

 

With Arab Emirate Dubai opening the highest building in the world in January, thereby incurring multi-billion dollars of debt, which it was in danger of defaulting, the Arabian Peninsula’s Golden City was lucky in being temporarily bailed out by the Sheikdom of Abu Dhabi, swimming in oil.

 

This playground of the universe could well become the paragon of the massive commercial overbuilding which saw gleaming edifices spring up in such disparate locations as Macao, Malaysia, Las Vegas, Singapore, and Taiwan.

 

Although these massive construction jewels represented symbols of national hubris, they also deflected the gigantic spurt of commercial and industrial overbuilding that typified the highly leveraged outburst of building, unequaled in world history.

This manifested itself in such aforementioned gleaming national symbols. Such opulence also found its expenditures in office buildings, hotels, motels, medical structures such as mega-hospitals, and assisted living super structures. Also significant were shopping malls and strips and expanded power generating facilities, as well as the expansion of refineries. The boom also saw the incipient development of such renewable energies as solar and geothermal power, as well as wind farms and an expansion of natural gas extraction.

 

As long as these unprecedented expenditures could tap into the practically unlimited financing offered by large and regional banks and other financial institutions, the unlimited expansion of the past decade did not present the possibility of financial collapse.

 

But the near financial meltdown of September, 2008 sent danger signals flashing all over the financial world. Unlike the residential construction disaster, which culminated in foreclosures, and millions of underwater mortgages, the commercial/industrial fiasco still hasn’t come to full fruition. Since the firewall of such a looming nightmare is being held by the Federal Reserve Board’s record balance sheets, the showdown will be in the Fed’s ability to support the banking systems’ capability to support the multiplicity of huge as well as mid-sized developers, who have initiated these impressive developments. Without the Fed’s record low interest rates and unlimited funds, the scope of such a commercial/industrial debacle could greatly overshadow the residential breakdown in size and total cost.

 

With the Fed continuing to use its financial versatility and independence to hold the potential breakdown of this sector together, it’s likely that a potential break down will be prevented, as the economic recovery absorbs the multi-billions that could come crashing down under a less protective support base than that offered by the Federal Reserve Board.

 

High-tech employment is America's road to future development

 

It’s widely recognized today that double digit unemployment is the major obstacle standing in the way of a solid economic recovery.

 

When recognizing those working part-time, giving up looking for work, or flooding into the workforce after high school and/or college graduation, plus immigrants, almost 20% of America's employable workforce of near 160 million is now outside those capable of full-time jobs.

 

According to employment expert Ed Gordon, who recently addressed Federal Reserve Board executives at the Chicago Federal Reserve Board district headquarters on this subject, the answer lies in upgrading the capability of those job seekers, whose previous work spot no longer exists.

 

“When considering the implosion of the automotive and housing sectors, as well as steel and metal fabrication industries, new jobs must be created to lower the unacceptable double digit unemployment rate that the U.S. may be facing permanently if such remedial upgrading isn't actively pursued by a combined government/business alliance,” asserts Gordon.

 

Ironically, thousands of businesses in this country have aggressively opted for automation, mechanization, and the latest high tech capability in order to maintain profitability, or even downright survival.

 

This has resulted in shedding many thousands of personnel, adding to the swelling unemployment rolls. Gordon believes that the Administration is naive in believing that the economic recovery alone will absorb those now unemployed. “Only exports offer substantial growth opportunities at this time,” the acknowledged personnel expert concludes.

He further states that two million jobs in the U.S. alone are available for those with the necessary skills. “Only a major effort to upgrade the skills of those available for such training will put a dent in the employment crisis the nation is now facing,” warns Gordon.

 

It seems obvious that the Administration is tone-deaf to this advice, even with the knowledge that maintenance of current unemployment levels could prove disastrous to the party in power.

Still, the December Institute of Supply Management came in at a 55.9 index, higher than expected from last period’s 53.6. This continued growth reaffirms expansion in the industrial sector, which has snapped out of its doldrums in the last three months.

 

BRIC countries due for world-leading growth

 

The world’s BRIC nations (Brazil, Russia, India and China) are well on the way to world exceptionalism in this decade. With a combined global population of almost three billion (more than 40% of the world’s total), these four international giants also contain vast natural resources and are strategically located to influence most of today’s teeming masses in the world’s largest population centers.

 

Brazil dominates two-thirds of South America’s landmass, and much of its population. In addition, Brazil has an abundance of oil and agricultural products such as coffee, sugar cane, and cotton. Although maintaining a Latin American version of democracy, Brazil has shed its dependence on Washington’s political leadership, and is assuming the mantle of an overriding political power as well.

 

Its chumminess with Iran’s rampaging dictator Mahmoud Ahmadinejad and Venezuela’s Hugo Chavez is an example of President Lula Da Silva’s declaration of independence from the U.S. With the world’s fifth-largest population, Brazil has finally arrived economically, and is a dominant force to be reckoned with, in ethanol converted from sugar cane.

Russia may not be the military power it was in the Soviet days, but most European nations are predominately dependent on Moscow’s natural gas and oil, especially the former satellite states of Eastern Europe. Its military arms production is among the top three in the world, providing support to any nation, including Iran, who can pay their bills. Global morality has never been Russia’s strong suit; a worldwide approach that has not basically changed in the past two decades. Despite a shrinking population, Russia still represents close to 150 million, which makes it one of the world’s top six populated areas. Its land mass is the world’s largest, covering 10 time zones.

 

China and India (with respective populations of 1.4 and 1.1 billion) are also the world’s fastest-growing economies. China is setting new industrial production records every month, while India, concentrating on high technology, is not far behind.

Both nations are experiencing a massive gross domestic product expansion this year which adds immensely to their national influence and status as major powers. It’s practically a given that China, especially, is successful by integrating its economy into a modern juggernaut that will make that nation the world’s dominant economic power by 2050.