Economy to Remain Strong
I always like this time of the year. There’s the unique hustle and bustle of the holiday season, tons of good food, and time to fellowship with family and friends, not to mention the gifts given and received that are now being enjoyed.
This year our family is having the opportunity to add something special to our festivities—the marriage of my oldest daughter on New Year’s Eve.
But even with all these old and new activities on my schedule, there’s another reason why I look forward to the end of the year. It’s the time when I develop my short-term forecast for the US and Texas economies, something I have been doing for 30 or so years (ugh!).
Over the span of three decades, I have observed and analyzed various cycles that have honed my ability to see past the sometimes boisterous daily media presentations and to zero in on the pertinent aspects of the economy. I’ve examined periods of relative calm and times of extreme uncertainty. The current environment, of course, is marked with an unusually high level of concern and anxiety and is probably one of the most volatile I have ever studied.
The energy sector is in a general state of flux. The dollar is taking its licks in the currency markets. Turmoil is ongoing in the mortgage and credit markets. A workable policy for immigration has not yet been developed.
In addition, health care costs continue to escalate with no apparent solution. The war on terror drags on, draining resources and limiting domestic agenda options. And the presidential race is creating numerous possibilities.
All of these matters, along with others, are impacting the national economic view, some to a significant degree. Yet in spite of these challenges, I am optimistic about the days and years ahead, and I predict that economic growth will continue to occur over the short term, though the climb will be rather modest compared to gains in recent years. Still, the overall outlook for tomorrow is positive.
Cuts in interest rates by the Federal Reserve are helping prevent a general slowdown of the economy in the future, and acceptable inflation trends are providing time for the economy to become steady. In addition, job growth has been encouraging, and consumer spending (although vulnerable to oil price increases and credit concerns) remains stable.
Moreover, recent improvements in foreign trade, an increase in inventory and capital investment, and a boost in orders for durable goods are proving advantageous to the overall strength of the economy.
Of course, the degree of expansion of real gross domestic product, forecast to be about 3.32% per annum over the next five years, hinges upon the impact of the challenges at hand. Employment will likely achieve a yearly hike of about 1.38% from 2007 to 2012, and real personal income (by place of residence) is expected to attain an annual growth rate of 3.29%. I should point out, however, that I only expect the gain in output in 2008 to be about 2.8%, well below the pattern of the past few years.
Although economic growth will certainly vary at times, an encouraging signal is the fact that the nation’s economy continues to grow in spite of the difficulties we have been facing. Such ongoing expansion provides a solid foundation for the future.
As for the economy of the Lone Star State, it appears strong enough to weather current problems and uncertainties, with more than 204,400 new workers added over the past 12 months. The climb in oil prices has resulted in the creation of more jobs in the mining industry, and refineries have returned to almost 90% utilization rates.
In addition, manufacturing activity in Texas is doing better than the nation as a whole. Output in this key export sector continues to expand.
Total Texas exports, which experienced a slight decline in the first quarter of the year, are now running about 11.8% above 2006.
The construction sector continues to undergo slippage in the residential real estate market (permits for new housing have dropped to late 2003 levels). Still, as a result of ongoing commercial and infrastructure projects, the industry added some 6,300 new workers from August through October (though I suspect these numbers may be revised downward in the future). Even so, the upward movement of prices for building materials and land remains a concern.
Key economic indicators for Texas reveal that the state is projected to do better than the nation in almost every category. Real gross product is likely to experience a per annum growth rate of 4.18%, with wage and salary employment increasing some 1.70% annually. Real personal income (by place of residence) in Texas is predicted to achieve a 4.35% yearly growth rate over the 2007-2012 timeframe. Retail sales during the same period should climb 7.09% per year.
While the upward tilt in the Texas economy may lose a little steam over the next several months, expectations remain optimistic for future advancement. Thus, the short-term outlook for the state’s economy is one of slowing expansion relative to this year, but positive performance nonetheless. Happy New Year!!!
Time Is Almost Up
Men are notorious for being last-minute Christmas shoppers, and I must admit, I fall into that category. However, this year, it appears that last-minute shopping symptoms are being demonstrated by more than just the male population.
Holiday shopping got a good boost on Black Friday and Cyber Monday (the Friday and Monday following Thanksgiving) with a 5.1% increase in retail industry sales (exclusive of autos, gas stations, and restaurants) over 2006. Although consumer outlays have dropped a bit since then, aggressive marketing promotions and price reductions during the past few days have resulted in an upward tick in sales.
Still, the purchasing of women’s clothing, which is a common barometer of holiday shopping expectations, is down about 6% this year. The decline could be due to concerns about the economy or even the perceived lack of compelling fashions. Whatever the reason, some market analysts are afraid such a decrease in sales could portend a less-than-banner holiday shopping period, especially since women make the majority of retail purchases.
Online retailers, most of which have limited time left if shoppers want delivery by Christmas, anticipated 26% growth in holiday spending, but purchases have not lived up to expectations. The increase has been only about 18%, primarily because of the pull back by those with concerns about economic issues such as the housing market, higher food and energy prices, and unknowns related to mid-East military operations and US presidential politics.
Even so, when the results are tallied from online purchasers, early bird shoppers, and those who wait until the last minute, the National Retail Federation expects that aggregate holiday spending will be approximately 4.0% more than last year. I expect it to be a bit higher.
With just a few shopping days left before Christmas, many retailers are hoping sales will climb. Shoppers, on the other hand, are waiting and hoping that discounts will increase and prices will fall lower and lower. If stores make substantial bargains available, it’s more likely they will attract shoppers, even those who are being especially frugal this year because of worries about the economy. Still, shortages of some of the “hot” toys and electronic gadgets will probably impact shoppers negatively, because of the difficulty they are having in locating “must have” items.
For those who cannot find the right gift, are facing time constraints, or just want to lessen the stress of holiday shopping, there is always the gift card, which is experiencing a significant increase in popularity. Because of greater personalization and wider availability, sales of gift cards are expected to total some $26.3 billion this holiday season, compared to $24.8 billion last year.
On average, gift card purchasers are projected to spend upwards of $122.59, about $6.00 more than expended in 2006. Even so, the purchasing of cards is affecting many stores since it often puts a dent in impulse buying. On the other hand, because gift cards enable the recipients to make their own choices in merchandise and services, stores are experiencing a lower percentage of returns.
Over half (57.5%) of the holiday shoppers this year have indicated they plan to provide a receipt in most or some of their gifts in order to make returns—should they be desired—more convenient, for both the recipient and the stores. Yet only around one-third of consumers are anticipated to make any returns at all.
Although retailers might be wishing for an even better 2007 holiday season, there is still time, albeit a limited amount, for last-minute purchasers to make a difference. And for those who are not quite sure what gift to buy or can’t find the one they want, I understand most retailers are keeping an extra supply of gift cards on hand. That’s good news for people like me.
posted @ 08:10 PM CST [link]
Friday, December 14, 2007
Homeowners Receive Helping Hand
The desire to own a home is almost as American as “baseball, hot dogs, and apple pie.” Perhaps that’s at least one of the reasons why over the past few years, so many people took advantage of lending opportunities with variable rates even though the potential homeowners’ financial resources could be at risk should rates increase.
And, of course, that is what has been happening. Many of those who acquired subprime mortgages have defaulted and suffered foreclosure; some have even declared bankruptcy because of their inability to make the increased payments required.
The Mortgage Bankers Association recently indicated that in the third quarter of this year, the foreclosure rate jumped to 0.78%, a record high, and that the delinquency rate for all mortgages rose to 5.59%, the highest level in two decades. Seventeen of the top 25 metro area foreclosure rates are in cities in California, Florida, and Ohio. Borrowers in the Lone Star State, even those with subprime loans, are not facing difficulties as severe as homeowners in those and many other states. Home prices are continuing to climb in Texas, thereby aiding to a significant degree those planning to sell or refinance. However, like everyone else, Texans are finding it more difficult to get a mortgage and are seeing some slowdown in the residential market.
The housing difficulties began to surface in late 2005 and 2006 near the end of the nationwide housing boom. To get in on the rising opportunities, many lenders had allowed borrowers to take out no-documentation loans or to obtain funds based on inflated annual incomes. As the variable rates eventually increased, so did the mortgage defaults, causing billions of dollars in losses for major banks, hedge funds, and other investors. The domino effect rumbled across financial markets worldwide.
Nearly eight out of every 10 mortgages in the US are prime (for borrowers with good credit) while approximately 14% are subprime (individuals deemed less creditworthy because of low credit scores or unstable income prospects). Another 6% fall into the near-prime category (those who are unable to fully document income or make traditional down payments).
While the picture painted by those numbers does not look too bad, it’s not complete. To understand the current situation, it is important to note that subprime and near-prime loans have increased from 9% of new mortgages in 2001 to 40% last year.
Because of the unusual difficulties posed by these occurrences, a national mortgage-rescue plan for troubled homeowners has been authorized by the President. The plan temporarily freezes the rates of some homeowners who are likely to face a hike in their adjustable-rate mortgages next year. Others would receive assistance in refinancing with their lenders or in obtaining funds secured by the Federal Housing Administration. The plan is also designed to help state and local governments issue tax-exempt bonds to pay for mortgage refinancing.
For those eligible for the freeze, the plan puts a hold on interest rates for many subprime mortgages (loans granted to those with poor credit histories) at the present level and prevents them from resetting to higher rates for five years. Loans obtained in this manner could have been reset upwards of 4 percentage points, thereby adding hundreds of dollars to typical monthly payments, a cost many families cannot afford.
Last week, when President Bush announced the freezing of interest rates for selected individuals, he noted that the plan was a voluntary, private-sector arrangement and was not intended to violate normal free-market operations. He further emphasized that no government funds would be involved to bail out lenders or speculators or even those who borrowed more money than they knew they might be able to repay. Rather, the key purpose of the arrangement was to prevent massive foreclosures that could cause a strain on the nation’s economy.
The hope is that over the next five years, the economy will improve sufficiently and that a housing rebound would enable homeowners to refinance their adjustable rate mortgages with fixed-rate loans. It remains to be seen how it will work in practice.
There have been some voices declaring that the President’s unprecedented plan does not go far enough or cover a sufficient number of those in financial difficulty. Even so, it is evident that the move can have a positive impact on the nation’s fractured housing market, though it will frustrate many bond investors. Not only will thousands of homeowners receive a temporary helping hand, but lenders and investors also stand to benefit with mortgages that are being paid compared to foreclosed loans. Overly zealous markets produce these kinds of situations from time to time. When they occur, we basically muddle through until our resourceful economy works its magic. This program may help the muddling just a bit.
posted @ 07:55 PM CST [link]
Friday, December 7, 2007
Retailer Relief
n the midst of sluggish retail data and fears of a spending slowdown, shopping on Black Friday and Cyber Monday kicked off higher hopes for the retail industry during the holiday season. Millions of Americans hit the stores or their keyboards, and retailers breathed a sigh of relief.
Because it accounts for about two-thirds of our total economic activity, consumer spending is closely watched. For years, the retail industry has viewed the sales on Black Friday (the day after Thanksgiving when many retailers finally go into the “black” for the year) as an indication of consumers’ willingness to spend during the holiday season. In our modern age, Cyber Monday has emerged as an important bellwether as well.
The Commerce Department recently reported minimal expansion in spending for the month of October (0.2%—the poorest growth since June of this year). The credit crunch and high energy prices, coupled with only a modest rise in individual income during October, had analysts bracing for an off fourth quarter as far as retail sales.
However, reports on spending during one of the busiest shopping times of the year, the days following Thanksgiving, have been favorable considering the economic restraints felt by many consumers. According to the National Retail Federation’s 2007 Black Friday Weekend Survey, over 147 million shoppers were out on Black Friday, an increase of almost 5% from 2006. And while shoppers planned to spend less than last year during this time, the increased volume more than made up the difference.
Online purchases have become a growing part of consumers’ planned holiday spending. This year, almost 27% of Black Friday weekend spending was spent online, up from 23% from last year.
But a far more recent trend has retail industry analysts paying attention to what is now called Cyber Monday. The term was coined in 2005 after online retailers noticed that there was a spike in online shopping on the Monday after Thanksgiving. Although not the busiest cyber shopping day of the year, this day is now seen by many as the kickoff to the online holiday shopping season.
According to the Nielsen Online Holiday eShopping Index made up of 120 online retailers, 32.5 million unique visitors entered online to shop on Cyber Monday, well above the 28.8 million that entered on Black Friday. The rising number of unique visitors during Cyber Monday and the increase in spending online year after year indicates that cyber shopping is not just a retail gimmick. It has become a holiday spending trend.
Although online retailers work to draw people onto the Internet through special deals, discounts, and incentives like free shipping, price is not the largest driver of growth in online shopping. In a pre-holiday survey of 1,000 online shoppers, the primary reason for shopping online was the convenience it offers (81%). The second most frequent reason was saving time (77%), followed by the ability to comparison shop and find things easily (61% and 56%, respectively). And it is sensible to imagine that after battling the crowds and traffic going store to store for good deals on Black Friday, a cyber kickoff to holiday discounts seems even more convenient.
Part of the convenience factor is that online shopping can be accessed at any time from anywhere. Even though more than a half of the homes in this country have high-speed access, BIGresearch found that 68.5 million people (54.5%) shop for holiday gifts from work, an increase from 50.7% in 2006 and 44.7% in 2005. Furthermore, comScore estimates that for the first 30 days of the holiday season, 45.5% of online retail spending comes from work locations, a number slightly higher than the 44.1% from home. I am not sure what that says about worker productivity this time of year, but that’s another story.
The numbers this year for Cyber Monday have indicated a good start for online retail. Hitwise Retail 100 Index indicated that traffic to retail sites on Cyber Monday increased by 26% over last year. In addition, comScore reported that online sales on Cyber Monday reached $733 million. Even despite fears of a weakening economy, comScore predicts overall holiday season e-commerce spending (Nov-Dec) of $29.5 billion, up 20% over last year’s $24.6 billion.
While Cyber Monday is watched as an indicator to this increasingly important segment of the retail industry, the challenge is to keep people buying throughout the holiday season. Retailers are increasingly using online tools to accomplish that goal, and as the Cyber Monday numbers indicate, consumers are indeed responding.
posted @ 08:02 AM CST [link]