Are We There Yet?
The Industry Wants to Know!
by John Matukaitis
How many times have you been on a long car trip with little kids? You know the questions—the ones that commence within five minutes after you back out of the driveway. Are we there yet? How much longer? Can’t we go faster? Why do we have to stop for gas? Why is
Billy getting sick? The list goes on.
During the past few months I have heard many people in the industry ask the same questions—not about a car trip, but about the economy. How much longer? When will we get there? Can we go faster?
There are, depending on the location, some companies that are going along on a nice growth curve. Too often, though, business seems to be going in the other direction.
The Economic Route
This column is intended to share some observations, thoughts and a consensus regarding the route our economic car trip is taking. I have had conversations with numerous industry veterans who, during their lengthy careers, have traveled many different roads: inflation, deflation, low and high interest rates, wild currency fluctuations, periods of economic stability, etc. It was also refreshing to talk with seasoned rookies, men and women who entered our industry in the mid-1990s, and have seen almost rampant and continuous growth (for the most part). The distillation of my notes, from my many conversations, is pointing to a scenario in which it’s going to get a lot worse before it gets better.
A Bumpy Ride
Even the casual observer sees the same headlines almost daily. Manufacturing contracted again in the last quarter. The U.S. current account deficit is growing very fast and will continue to do so. Consumers are stretched and won’t contribute significantly to near-term growth. The U.S. dollar will continue to be devalued against other currencies. The U.S. trade deficit swells to a record $136.1 billion. U.S. mortgage foreclosures hit record high.
Is there a housing bubble, and if so, will it burst or deflate? The extraordinary growth in credit is taking place in the mortgage area. The household sector remains captivated by housing as a risk-free investment, while home equity is recognized as the preferred investment for permanent wealth creation to be tapped at will. First-quarter data from the National Association of Realtors show median prices nationally were up 7 percent year-over-year to $161,500. Median prices rose 16.7 percent in the Northeast, 25.7 percent in Philadelphia and 16.2 percent in Los Angeles. Of the more than 120 metropolitan areas, only eight showed year-over-year declines. Only three had prices drop more than 2 percent.
Smoother Roads Ahead?
Let’s look at the other side of this coin—the side that is holding it up. Home ownership is at record levels, the inventory of unsold homes is expanding, and there are rising foreclosures and delinquencies nationally. There are also signs of problems in some markets (Denver, Dallas, and increasingly, in the Midwest), along with relatively high unemployment and stagnant job growth, and there is reason to question the strength of future housing and office space demand.
So, why is the economy not performing well with interest rates at 40-year lows and
with such aggressive credit accommodation?
Could it be the enormous debt weighing down the corporate and household sectors? Again in 2003, as in 2002, consumers are spending 10 percent more than they make each year. We are living with a debt-driven economy. The Federal government is now the world’s largest debtor, and it answers by printing, virtually non-stop, more money. There is a strong inflationary bias in the government sector and throughout healthcare and energy, which will probably continue.
Just some observations and comments from one of the people making the trip …
John Matukaitis serves as marketing director for Delchem Inc., based in Wilmington, Del.
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