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Posts Tagged ‘consumer confidence’

New Housing Starts: A Sign of the Times

 Real Estate has become a major component of wealth and the economic engine of the United States.  A robust construction and real estate sector fueled economic growth for over a decade. The true significance wasn’t understood until the housing market started to unravel in 2007.

Delinquent mortgages and foreclosures nearly collapsed the world financial system.  Plummeting real estate values, and the related property taxes, have created substantial fiscal challenges for state and municipal governments.   And… the dramatic reduction of new construction projects has rippled throughout the economy… in a harsh manner.

Consequently, the number of new housing starts is a closely monitored statistic.  The Conference Board’s composite index of ten economic statistics, includes housing starts.  Their number includes both permits and the actual start of construction for single-family housing units.

Real estate activity comprises nearly 10% of GDP.  The current real estate crisis therefore is contributing to the continued economic recession, and its slow recovery is one of the reasons that the economy is not likely to rebound anytime soon.

New home construction affects many areas of the economy.  The most direct impact is on building supplies and labor markets.  I recently heard one analyst state that the U.S. manufacturing jobs lost over the past two decades essentially transitioned to construction jobs.  This statement seems to be validated by the unemployment rates of the states hardest hit with distresses properties – Arizona, California, Florida and Nevada.  All except Arizona had unemployment rates well above the national average.

Consumer spending also accounts for 70% of GDP.  While it may not be easy to measure, new housing indirectly affects consumer spending.  Appliances and fixtures are often part of the new home cost.  However, there is a lot of indirect spending related to occupying a new home.  If you’ve ever moved into a new home, you know the amount of money you spend for new drapes, curtain rods, furniture and décor decking out your new digs.

In short, new housing construction is significant in the overall contribution and strength of the current U.S. economy. The glut of existing homes on the market, combined with a tight credit market and millions of Americans with poor credit, doesn’t create an environment conducive for new housing construction.  Therefore, do not expect to see any significant improvement in new housing starts anytime soon.  As such, the road to economic recovery will likely be longer and slower as a result of the lack of new housing starts.

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The Economy Built on Confidence

You may have heard the term consumer confidence bantered around by economists and journalists.  The consumer confidence index is an attempt to determine the opinion of the public at-large regarding the economy.  It’s supposed to be an indicator of spending and savings habits.  In a consumer-driven economy, consumer spending has a tremendous impact on the overall state of the economy.

Confidence has a much larger impact on the US economy than the number of new cars, flat-screen televisions and iPhones that will be purchased.   To a certain extent, the entire economy is built upon confidence.

It starts with confidence in the US government, or at least in the money they print.  If you read my prior article on the Value of Money – Part III, you’ll recall that US currency is fiat money.  Since value is not determined by gold or any other asset, its value is solely derived from the full faith and credit of the US government.  Consequently, the confidence that people and investors have in the US government affects the value of the dollar. Should people lose confidence in the US government, the value of the US dollar will drop.  Considering the size of the current foreign trade deficit, it would instantly result in higher prices of things like oil and gasoline.  It would also raise the cost of borrowing, further exacerbating the current annual budget deficit and total debt obligation.

Confidence also plays a huge role in the banking and financial sector.  How would you react if you seriously questioned the long-term viability of the bank that holds all of your money?  You may be a loyal customer, but no one would be surprised if you transferred your funds to another institution.  Even if all of your money was FDIC insured, would you want to take the risk that some of it could be unavailable while the regulators sort through the mess?

The entire financial system was facing a crisis of confidence in September 2008.  Lehman Brothers declared bankruptcy on September 15, 2008; on the next day, the Federal Reserve Bank put up $85 billion to save AIG from a similar fate; and the Reserve Primary Fund money market broke the buck later in the day.  These historic events happening in a matter of days caused many people to speculate that it was the beginning of another Great Depression. The lack of confidence in the financial market was causing paralysis.  Everyone wanted their money to be safe but didn’t know where to put it, for fear that any institution could be the next to fail.

To instill confidence back into the markets, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke rolled out the Troubled Asset Relief Program (TARP) on September 19, 2008.  We can debate the merits of TARP, but at the time, it did appear to bring enough confidence back into the markets to stave off a complete meltdown.

A lack of confidence can also wreak havoc on a company.  General Motors and Chrysler are two good examples.  As they were teetering on the brink of bankruptcy, potential buyers questioned the survival of the automakers and were very reluctant to buy their vehicles.  People were concerned about the companies’ ability to honor their warranties and the future availability of repair parts.   Once again the US government intervened in an unprecedented manner and guaranteed the warranties of all new cars being purchased.  The government guarantee provided consumers with the confidence they needed to make the purchase.  Again, we can debate the propriety of this move, but would you want to buy a product from a company you didn’t think would exist in a few months or years?

Confidence has become the underpinning of the entire economy.  Confidence determines the value of your money.  It determines the security of your savings and provides you with the ability to save, spend and transact business with others.  It also can determine the success or failure of the company you own or work for.  

Now you can understand why the President, government officials and business leaders do their best to instill a sense of confidence in the economy.  It’s more than politics and positive thinking.  Once you witness the downward spiral that a lack of confidence brings, you get a better appreciation why consumer and economic confidence, whether real or perceived, is necessary.

Like trust, confidence is hard to gain and easy to lose.  In an economy built on confidence, maintaining a sense of confidence becomes the most significant economic indicator of success or failure.