Battered and bruised but turning around

The masses have spoken – the weak recovery is not acceptable. The thumping the Obama administration took in the fall election can be traced directly to this issue alone – not healthcare, tax rates on the ultra-rich or the other talking points of the political pundits. And when mamma’s not happy, ain’t nobody happy.

After the last two big recessions in the mid 1970s and early 1980s, the economy grew at close to 6 percent in the aftermath. This time around, the nation has averaged less than half that rate. As a result, the unemployment rate, which is typically falling by this point in a recovery, has remained stuck near 10 percent. The sources of the weakness are primarily consumer spending and housing. This shouldn’t be a surprise since both sectors of the economy had swollen to unsustainable peaks in the bubble that preceded the crash. Regardless, the country wants growth, and it wants it now.

Economics is called the dismal science because it acknowledges that we live in a world of limited resources. This implies that we have to make tradeoffs – if we want to consume more of A, we must give up some of B – we simply can’t have it all. Monetary and fiscal policy regarding short-term economic growth is similar in nature. We may make policy choices that will spur growth in the short run, but this necessarily comes at a cost to future growth.

This is the tradeoff the current administration and the U.S. Federal Reserve accepted when they opted to extend quantitative easing and maintain the tax cuts put into place over the past eight years. Given that the economy is finally starting to pull out of the doldrums, these policies are sure to keep the recovery moving ahead at a solid pace for at least the next two years.

GDP.
While the recovery remained lackluster in the third and fourth quarters of 2010 with gross domestic product (GDP) growth coming in at around 2 percent, we should, however, start to see the economy begin to reaccelerate in 2011. Consumer spending is expected to continue its holiday-spending momentum, as long as the increases in employment that are expected actually come into fruition. Housing should start to respond to record-low rates and exports and equipment spending are expected to remain strong. On net, real GDP is forecast to rise to around 2.5 percent in the first quarter and move back into the 3 percent range in the second quarter. As I have said more than once at recent green industry meetings, this will be a slow recovery but hopefully a smarter recovery this time around.

HOUSING MARKET.
High unemployment will likely constrain the recoveries in consumer spending and housing, but look for both to improve in 2011. Retail pundits look for consumer spending to rise 2.1 percent next year, up from 1.7 percent in 2010. Home sales, as well as new home construction, also look set to improve, but questions surrounding the disposition of foreclosed properties could push off a full recovery until late 2011 and create some downside risks in some areas.

Stronger job growth will further lift household formations in 2011 and 2012 and also increase the number of qualified buyers. Affordability should not be a major issue, as home prices have already overshot historic norms relative to income in many key markets. Unfortunately, price declines probably have a little further to run before we reach an absolute bottom and many potential buyers will likely remain on the sidelines until prices stabilize.

The supply of homes either in foreclosure or at risk of foreclosure has many people wondering if housing starts will be able to rise at all in 2011.In my opinion, they will, albeit slightly. The current excess supply of homes on the market or likely to hit the market is around 2.5 million units and much of this excess supply is concentrated in a handful of markets. Builder inventories of completed homes are currently at historic lows and permits for new single-family homes are running slightly above single-family starts.

THE CONSUMERS.
One very interesting outcome of this Great Recession is that it has divided America into two groups that are roughly the same size but that experienced very different economic downturns. For a narrow majority of Americans (55 percent) who are referred to as those who lost ground, the recession brought a mix of hardships (usually in combination) such as a spell of unemployment, missed mortgage or rent payments, shrinking paychecks and shattered household budgets, according to a recent survey by the Pew Research Center. But for the other 45 percent of the country (those who are referred to as held their own), the recession was largely free of such difficulties.

All of these statistics serve to validate what we in the green industry have been surmising for a while – for some, not much has improved since June of 2009 (the month the National Bureau of Economic Research officially declared as the end of the recession); for others, life hasn’t changed that much from before the recession. Interestingly, their level of income has not been a perfect predictor of which group folks fell into either.

As we consider the plight of consumers in the future, to me it matters less about how much more they save or how their purchasing behavior changes. We already know that some of them will be more frugal and some will be more risk-averse, but they all will incur greater search and acquisitions costs; that is, they will spend more time evaluating big-ticket purchases and more carefully weighing product features and benefits before they purchase. To me, the real question is whether our industry will maintain its relevance in the mind of consumers. Thus, mindshare is more important than market share to the long-run profitability of our industry.

GREEN GROWTH.
Without a doubt, the entire green industry in 2009-2010 continued to exhibit patterns of a maturing industry with a slowing growth in demand generating more head-to-head competition for market share. That included a greater emphasis on reducing costs and enhancing service offerings; a reduction in industry profitability as reflected by tighter margins, and a number of mergers and acquisitions among former competitors.

The economy certainly took its toll on the landscape sector in 2010 (in spite of the recovery being underway), although its effects were not felt evenly. For example, several well-known firms who offered very high quality products and services are no longer in the industry. But in other regions, there were firms who made some serious money.

Those firms that have competed successfully in the midst of the economic downturn were those that: (1) shaved even more costs out of their value chain (maybe through implementing lean flow principles), (2) tweaked their existing value proposition in order to further differentiate themselves in the marketplace, and (3) had access to adequate levels of working capital to ride out the economic storm. I’d say this would continue to be a good strategy to carry on into 2011 as well.

Eventually the drivers of this growth spurt will have to be removed. Tax increases will need to be put into place to start closing the federal deficit. The excess liquidity of the monetary base will have to be mopped up. The good news is that for now, neither of these issues seems to be pressing. This implies the nation has at least a couple of years – and a presidential election – to move through. But eventually, monetary and fiscal discipline must be reasserted. When it does, watch out.
 

The author is the Ellison Chair in International Floriculture at Texas A&M University.

To hear more economic advice from Hall, visit ellisonchair.tamu.edu and click on “multimedia” in the right column.