Home improvement/remodeling provides a well-timed residential construction boost

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

A timely shot in the arm for the severely ailing home construction industry has manifested itself in a boomlet for residential remodeling, upgrading and energy containment.

Spending on remodeling alone is scheduled to rise close to 10% in the first quarter, to $125 billion, from less than $114 billion a year earlier, according to Harvard University’s Joint Center for Housing Studies. A potential 13% increase forecast from April through June would generate the largest quarterly increase in five years.

Home improvement centers, such as Lowe’s, Home Depot and Sears, are already building their inventories as a majority of homeowners are staying put and maintaining their current value, rather than selling into a depressed housing market.

Also stimulating long-term home values are an abundance of energy-saving devices, such as solar panels, fuel cells and the latest methods of insulation and improved roofing materials. It’s estimated by the Harvard experts that such a combination of home improvement and a varied offering of federal government tax credits will accelerate expenditures on the overall single unit American residential sector. This would prove a welcome offset, while the depression in new home construction and dreary sales levels persist.

With the shift to rentals by a large segment of the American population further inhibiting already anemic home sales, other than foreclosure bargain hunting, there is little hope for residential construction in the immediate future. Consequently, increasing indigenous home values for the eventual return to a more balanced supply/demand/price environment would be reflective of prudence on the part of the American homeowner.

Abetting this trend is not only the federal government’s accommodative tax policy, but the technology of solar panels, insulation improvement and other cost-saving devices. The extent of the forthcoming home improvement boom will provide a good measure as to how enthusiastically the American public takes to the anticipated residential upgrading this year.

US factories ready to step into Japanese production gap

Although it’s considered bad form to dwell on the ills that have befallen others, even if they are competitors on the world stage, business and industry, like nature, abhors a vacuum.

The catastrophe that has befallen the Japanese nation at large is putting an increasingly expanding crimp into that nation’s production capacity — both for its world-leading exports, as well as for the domestic needs of its 126 million people. This not only affects consumer and producer products churned out by Japanese factories and farms but also the thousands of components that are critical to the world’s leading automotive companies, such as Toyota and Nissan.

While Germany’s Mercedes Benz and BMW automobile producers are running TV commercials overtime to fill the luxury car demands of American buyers, the large production segment of Japan’s southern and Midwestern U.S. factories are already experiencing the halting inflow of component and spare parts needed to maintain the steady stream of finished units provided by these facilities.

Since we are now in the early stages of the consequences wrought by the crippling of Japan’s economy, it would be foolhardy to put a statistical percentage on Japan’s economic shrinkage this year. Equally unknown is the U.S. gain beyond what was expected before this cataclysmic event occurred in mid-March. Thrown into this mix would also have to be the major dislocations that are wreaking havoc throughout the Middle East and North Africa.

It’s safe to say that both America’s industrial and technological, as well as its immense agricultural potential, will see the U.S. gross domestic product of goods and services increases come close to the 4% mark, which I had forecasted in my projections as the year 2011 launched its trek into the unknown.
The American business community, large and small, stands as ready to rebound from a two and a half year recessionary malaise, as it did at the end of the Great Depression to become the Allied “arsenal for democracy” during the Second World War.

The global economy as a whole is getting off its haunches this year, especially in the red-hot nations of Southeast Asia, Brazil and even Russia. Despite some political interference from the federal government, the spirit of America’s entrepreneurial business establishment is alive and well, ready to keep the global recovery momentum on track.

North Dakota — exemplar of a realistic U.S. future

It would seem curious to most that one of America’s most barren and under populated states (672,000) would become the exemplar of what’s most impressive in today’s United States.

In a superbly-crafted Wall Street Journal article by writer Joel Kotkin, the statistics speak for themselves loud and clear. Key to the unlikely surge of affluence being enjoyed by the state’s fulfilled inhabitants is the largest land-based oil potential, recently developed — the increasingly publicized Bakken Belt. It is centered on a small-sized community, Williston, which has seen more mobile vans than homes lately to accommodate the necessary employment pool. This belt of shale oil, increasingly profitable at today’s prices, also extends into Montana and the provinces of Alberta and Manitoba in Canada.

As a result of such intense energy development activity, unemployment is down to an incredible 3.8%, affording North Dakota the best job market potential in this country. As if the blessing of such new oil wealth were not enough, the state encompasses heavy coal supplies and ranks ninth in the country in wind-generated electricity. With coal benefitting from worldwide demand, this former farm-dominated state is also experiencing record agricultural export sales but now employs only 7.2% of its workforce in that once dominant sector.

Most surprising is North Dakota’s attraction of high tech graduates, due to the success of Great Plains Software, founded in the 1980s and sold to Microsoft in 2001 for $1.1 billion. The firm now employs 1,000 persons. Also located in the state are such biotech firms as Aldevron, which manufactures protein for bio-medical research. Others are also starting to proliferate.

In addition to all the supplemental benefits of such largesse, North Dakota enjoys one of the nation’s highest median incomes and business activity at the wholesale and retail level that would be the envy of just about any of the other states in the Union.

The entrepreneurial drive that is springing up in all corners of North Dakota in a multitude of sectors could be a promising forerunner of such states as Ohio, Wisconsin and Pennsylvania, whose government leadership is now concentrating on the development of new entrepreneurial businesses to displace the vacuum left by the shrinking of the once huge automotive and construction sectors.
By the way, North Dakota is a right-to-work state, with low taxes and a minimum of government interference, either from federal or state agencies.

Will stagflation rear its ugly head anew?

With nagging unemployment, lackluster consumer demand and potential supply chaos resulting from Japan’s catastrophe paramount at the end of the first quarter 2011, creeping inflation may be combining with a potentially flat economy to slide the recovery into — stagflation.

From an economic health point of view, this is a virus that combines flat consumer activity with an upward inflationary bias. Currently, this is the result of surging food and energy prices caused by global disruptions, but increasingly impacting the U.S. consumer’s pocketbook.

What is troubling this year’s fragile economic recovery even more than usual are some of the worst geo-political disruptions seen since the end of World War II. The disintegration of the rigid autocratic control by Arab and Iranian potentates over almost 50% of the world’s oil suppliers is showing no signs of resolution.

The impact of the gigantic Japan-based nine point earthquake and subsequent tsunami is only beginning to make itself felt. At stake are not only Japan’s future as the world’s leading exporter and third-largest global economy but also the retention and growth of nuclear power as a major factor in regeneration of electricity worldwide.

The shortage of a multiplicity of components ranging from semi-conductors to autos, television sets and a variety of electronic equipment has already begun to push up the prices paid component of the Institute of Supply Management manufacturing index to 84 earlier this month. This compares to 62.5 prior to the recent commodity shortages and the Japan earthquake calamity.

A continuation of this set of circumstances could lead to severe profit shrinkage by most corporations, while slack consumer demand, global unemployment and a continued residential construction depression continue to dog the economy in general.

With the last ounce of productivity already squeezed out of most businesses, there is practically no room left to cut costs further. Such a somber sum of developments will turn the possibility of stagflation into stark reality.

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