Residential, construction spending remain in depression

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

The most shining pillar of America’s growth since the end of World War II has been "construction." From the low-cost housing of Levittown, built originally to house the families of returning GIs, to the glistening condominium towers of America’s big cities, the superior residential, commercial and industrial construction to shelter and serve America’s booming population growth made the U.S. economy and its underpinnings the envy of the world.

The implosion of this American bedrock has become the most painful and telling sign of the extent to which America’s superpower economy has fallen from grace.

Current statistics provide a searing reminder. Although U.S. construction spending bounced off the bottom in September and October, it is operating at spending levels last seen 20 years ago, when the American population was substantially smaller than today. After reaching a peak of an annualized $1.2 trillion in March 2006, overall construction spending had reached a new low of barely $800 billion annualized in August 2010. Even this relatively subdued number was only made possible by a recent flurry of repair, maintenance and upgrading spending.

Abetting the extended length of the residential subsector’s construction doldrums is the inventory accumulation of unsold homes and condos, remaining at the highest levels since the 2008 financial crash. With foreclosures continuing unabated, in spite of recent improvement, there are no indications that this backlog will be substantially reduced any time soon.

The diversion of the world’s finest talent accumulation of residential construction technicians, professionals and marketers to specific commercial and industrial projects has absorbed some of those previously active in the homebuilding and maintenance arena. All in all, the demise of America’s housing grandeur has proven disastrous for tens of thousands of specialists who had committed their life’s work to America’s once-leading economic sector.

The one bright light expected to appear in 2011 is the comeback of commercial and industrial activity. Vacancy reductions, as well as capacity utilization, are on the comeback trail. With U.S. banks continuing to hold huge loans collateralized by developers’ massive commitments, the postponement of calling such loans, as long as interest is paid, will have to be confronted eventually.

General Electric — the fading face of American business?

During the roaring 1920s, President Calvin “Silent Cal” Coolidge was noted for a singular expression, “The business of America is business.” This point of view was later expressed by General Motors' chief executive, “Engine Charlie” Wilson, who boasted that, “What’s good for GM is good for America.” Although Wilson later reversed this statement to be politically correct, there was no doubt that big business generally felt that it harbored the welfare of America’s exceptionalism as the “keeper of that world-leading responsibility.”

This principle, crystallized in the 1970s and grown continuously, has fostered the emergence of conglomerates, which are an amalgamation of specialty businesses under a single corporate stewardship. The top of that pyramid presides over companies whose synergy makes no sense. The expression “bottom line” came from such businesses, since the ability to generate paper profit became the ultimate objective of such a structure.

The best example of this concept today is GE, whose major profits have consistently been derived from GE Capital, which, ironically, was bailed out by TARP, as well as by the subsequently passed Federal Reserve stimulus.

I am an enthusiastic proponent of privately owned businesses, which hire two-thirds of America’s potential workforce. I find that the ultimate differences, conceptually, between the two approaches, publicly held corporations and privately owned entities, are as follows:

1) “Small” businesses know the sectors in which they specify, produce, market and maintain expertise, from top to bottom. Mega-corporations are primarily interested in the aforementioned bottom line and in quarterly exposure to its stockholders and equity investors.

2) Small businesses, which span the gamut from “door front” enterprises to multi-billion dollar mega establishments, focus on business sectors in which they are intimately involved, often through multi-generational exposure.

3) While CEOs of the large corporations can’t possibly be involved in the disparate interests their divisions and subsidiaries represent, the owner/president of a “small” usually keeps an eye open at all times, having become finely attuned to the areas in which he operates.

4) While large corporations are increasingly becoming multi-national, privately held entities tend to be predominantly America-based and influenced by the vagaries of the overall U.S. economy.

As the administration’s regulatory and tax policies primarily affect the fortunes of the “small business” arena, its current expansion restraint will not change until the tone-deaf, political Washington, D.C.-based policymakers begin to understand and facilitate what makes privately held businesses tick.

Global Oil industry plans record 2011 spending

Despite all the hype about “renewable energy” generating from Washington, D.C. and the “green” advocates, the world’s major oil producers are preparing to spend a record $500 billion for new projects in 2011. This is practically double what was expended early in the last decade.

Although the catastrophic Gulf of Mexico oil spill may have given deepwater drilling a bad name, much of this phenomenal expenditure will be dedicated to deepwater drilling in such disparate locations as Brazil, the African West Coast, the South China Sea and Western Australia.

With existing oil production flat and post-recession demand rebounding at an unexpected pace, the major global oil companies, the nationally-run consortiums and even wildcatters are jumping into the fray created by an anticipated oil usage growth.

The current $90/barrel price and forecasts for over $100 by the end of the first quarter have made previously untouched deepwater potentials especially profitable. Although new discoveries have been lagging behind demand for the last several years, the pessimistic energy outlook for a world in recession discouraged major international producers and makers of equipment such as drilling rigs and related appurtenances.

Since deepwater drilling will constitute an ever-larger component of new oil excavation, costs will become appreciably higher, with the resultant price increases all along the transmission, refining, distribution and retailing channels. These higher costs will also affect the multiplicity of end-use products that are derived from oil, such as a variety of chemicals, plastics and sundry consumer products.

Although such renewable sources as solar, wind and geothermal energy will play an increasingly significant role in power generation, expect oil and, possibly, natural gas to provide the lion’s share in transportation and power well past mid-century.

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