Tags: green | brown | shoots | recovery

Green Shoots and Brown Shoots

Thursday, 25 Oct 2012 01:30 PM

By Robert Wiedemer

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With the latest housing numbers comes another chorus of “Green shoots! Green shoots!” Although the headline statistics show a nice increase in housing construction, that boom isn’t reflected quite so well in single-family home sales. Single-family home starts were running at an annual rate of 533,000 in September, whereas single-family home sales were only running at an annual rate of 389,000. The builders are likely getting a bit ahead of themselves. However, it is a nice jump from the annual rate of single-family home sales of 306,000 last year. Of course, last year’s sales were the lowest on record. So, the housing market is still abysmal — well below the 1.4 million-unit rate of July 2005, but it is a green shoot right now.

Another big part of the housing boom is multi-family construction. Unlike the past, that boom is in apartments for rent, not condos or townhouse to buy, reflecting much reduced demand for home purchases. The boom in apartment construction is obvious in the Washington, D.C., area. There are more than 30 major (over five stories) apartment buildings under construction. This is occurring even though job growth in the D.C. area is slowing due to much slower growth in military expenditures. In fact, business growth is so slow in downtown D.C that it has had negative absorption of office space this year. That’s a pretty rare occurrence in D.C.

This is typical of a real estate boom-and-bust cycle. Demand for apartments has increased in the past two years. Builders respond by building lots more apartments. Just as those apartments come on stream, apartment demand starts to slow.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

Actually demand for these new high-priced apartments is already starting to slow in many areas of the country, not just D.C. Remember, young people, who most often move into apartments, might be getting jobs coming out of high school and college, but not that many are getting high-paying jobs. Just ask your friends who have kids who are graduating. There are new jobs being created, but most are not high paying. Many are temporary or restaurant jobs and don’t pay enough money for these new high-priced apartments. The apartment boom is a green shoot that is likely to brown in 2014.

Most importantly, even with the housing green shoot, overall construction remains fairly flat. Declines or lack of growth elsewhere, such as in office, hotel, retail and government building, means that construction is up 2 percent from last year (not adjusted for inflation), excluding electric-utility construction.

I exclude electric-utility construction because it is undergoing a historically unusual growth spurt. Now it is a huge green shoot. Construction on electric utilities rose over 100 percent last year and has grown 26 percent from that huge increase this year. This construction is heavily driven by wind and solar power plant construction, as well as some natural gas-fired plants. Most certainly, some of this construction will continue, but not at the torrid growth rate of the last two years.

Because electric utility-construction growth was so great in 2011 and 2012, it is quite possible it will go negative next year, following the enormous slowdown in growth this year. Electrical-utility construction will remain high, but the growth will slow or go negative. Also, wind and solar remain very dependent on government largesse (big subsidies), which quite likely will be reduced in the United States, as it has been in Europe (much of the subsidy for wind and solar power are set to expire unless renewed). It is a big green shoot that will brown out completely next year. Even with the electric-utility boom, construction has only increased 5 percent this year, not adjusted for inflation. With inflation at almost 3 percent, that makes a big difference in a 5 percent growth number.

So, the housing construction green shoot is being offset by continued construction weakness in other parts of the economy. In addition, other earlier green shoots have browned. Exports, which were growing at a rate of 15 percent a year ago, have dropped dramatically to almost no growth today. Exports have been a big part of the growth story in manufacturing, and manufacturing has been a big part of the growth story in the United States for the past few years.

Another green shoot that has browned out is the growth in revenue for large companies. This is partly related to the decline in exports and slower growth overseas, but it is also due to a slower U.S. economy. Revenue growth for the Standard & Poor’s 500 companies was over 10 percent a year ago but might actually go negative this year. That’s a big brown shoot.

Another green shoot, the oil and gas industry, which has seen massive growth in the last few years due to shale oil and gas, has seen that growth stop completely. In fact, the drilling-rig count has declined about 10 percent from a year ago. The decline is driven by a more than 50 percent decline this year in the number of rigs drilling for natural gas. Natural gas drilling is down because prices for natural gas are way too low to be profitable. An increase in oil drilling has offset much of the decline earlier in the year, but oil-drilling growth is now starting to slow. The rig count might even continue to decline next year until gas prices recover. But even when the current decline reverses, the massive growth levels of the past will be hard to maintain.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

That growth in any part of the economy is the key. We don’t just need old green shoots to recover or maintain themselves; we need growth for the economy to grow.

The bottom line is that growth is being propelled by some small green shoots in the economy that are offset to a large degree by earlier green shoots that are turning brown. Maybe other green shoots will take their place, but all this is not a recipe for big growth. Gross domestic product growth in the 2 percent range is likely this year, and there is no reason to expect it will be much higher next year, even if new green shoots appear. What we are seeing is small green shoots that are easily offset by other small green shoots browning out or by continued weakness in other parts of the economy.

What the economy is lacking that it had before the financial crisis is a big new bubble and, more importantly, a big new set of interacting bubbles. Without that, the overall economy is dependent on government stimulus in the form of money printing and money borrowing to keep it from declining. Although I don’t see that changing much next year, even with the fiscal cliff, such continued dependence on stimulus bodes very poorly for the long term.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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