Shaping the Economy vs. Waiting for It

Rich Walker
September 1, 2008
COLUMN : Industry Watch | Strategies & Practices

Last March I suggested in this column that the handwringing over the housing slump and the general recession that many were sure it would bring were overwrought. Let's see, some six months later, where all that stands.
In essence, the jury is still out. True, the housing crunch and its economic downturn have reached epic proportions and remain the highlight of campaigns for Presidential hopefuls. With Fannie Mae and Freddie Mac threatening to act more like Bonnie and Clyde in the mortgage financing market; oil price spikes that cascade to higher costs for raw materials, manufacturing, distribution and even food; continued downward pressure on new home prices; and the constant barrage of negative news on TV it's easy to find reason for being pessimistic.
However, despite the temptation to leap aboard this train of travails, the likelihood seems to be emerging that a) the most extreme economic woes are compartmentalized both geographically and by segment, and b) the worst may be over.

Regarding compartmentalization, we can look at two culprits. One is the cyclical downturn in housing aggravated by the sub-prime engendered credit upheavals. (Even here, some perspective is in order; as Treasury Secretary Henry M. Paulson, Jr. has recently noted, "93 percent of American homeowners pay their mortgages on time; only 2 percent are in foreclosure.") The second bad actor is spiking oil prices.

Many of the indicators are a consequence of one or both of these problem areas. Take, for example, unemployment. In early July, the Bureau of Labor Statistics noted that, "The unemployment rate increased from 4.9 percent in January to 5.5 percent in June." Ominous, yes - but the BLS also pointed out that the construction and manufacturing industries claimed the lion's share of that increase. The construction slump thus influences other indicators that, if not parsed carefully, might tempt a pundit to claim generic doom and gloom. The simultaneous slump in the automotive sector, itself linked to oil prices, is a major compartmentalized contributor to manufacturing unemployment, with Michigan and areas of Ohio looking at a nearly 9 percent unemployment rate.

Areas of strength
Within the distressed housing market, geographical compartmentalization can be seen under the surface turmoil. The rapidly growing resort and retirement centers along the Carolina coast continue to have the most intense housing development, followed closely by the hurricane rebuilding region on the Gulf Coast and the manufacturing and business centers in the North Carolina Piedmont area and Texas. The Census Bureau reports 11 areas experiencing a virtual boom, with more than 10,000 single-family permits issued over the last 12 months: Houston (leading the pack with nearly 35,000 permits issued), Dallas/Ft. Worth, Atlanta, Phoenix, Chicago, Washington, Charlotte, New York City, Austin, Riverside and Raleigh. This goes on unsung, as overbuilt southwest Florida and Las Vegas/Phoenix-likely to be the last markets to recover-continue to monopolize the negative reporting.

Some point out that the record inventory of existing homes, available at bargain prices, needs to be whittled down before new home sales will see significant rebound beyond the regional exceptions. But there are signs of change here as well. Even the Detroit area, quite possibly the most depressed housing market around as the automotive companies are still struggling, is showing signs of a turnaround. Crain's Detroit Business reported in July that Detroit area home sales increased by 13.1 percent in June of this year, compared with June 2007--the sixth straight month of year-over-year growth.

In addition to booms in geographical nodes, many industrial sectors (IT, health care, defense, and power plants) are still enjoying robust growth, and burgeoning exports remain the silver lining behind a weaker dollar. The Bureau of Economic Analysis confirms: "The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures for services, exports and federal government spending, only partly offset by [decreased investment in housing and durable goods]."

The effects of oil price spikes are obvious but perhaps overstated. "Surging prices for energy and food have driven headline inflation numbers into the stratosphere," observes David Seiders, chief economist for the National Association of Home Builders. "Even so, key measures of 'core' consumer price inflation (excluding food and direct energy prices) have been remarkably well contained...diffusing fears of protracted 'stagflation' in the U.S. economy."

Is the worst over?
George Friedman, writing for Strategic Forecasting Inc. (a.k.a. Stratfor, a respected government and corporate intelligence service) in its third quarter forecast seems to capture it well: "While talk of recession in the United States remains par for the course, the U.S. Federal Reserve is both becoming optimistic and leaning toward interest rate increases to contain inflation...The United States is well past the worst that the slowdown of the latter half of 2007 presented...The truth so far is much more positive than the doom-and-gloom talk that dominated American media the first half of the year."

Even with the first quarter GDP growing at a surprising one percent, unexpectedly accelerating from a 0.6 percent growth rate for fourth quarter 2007, the NAHB faithful appear to be kicking the can of recovery in the overall housing sector down the road into early 2009, rather than the second half of this year. But recover it will.

I maintain that, if our economy wasn't strong at the core, the housing slowdown and fuel price spikes would have already sent us plunging into recession - but that hasn't happened, at least so far. So, if the tried-and-true stock market philosophy of "buy-low, sell high" is a reliable maxim, then it still pays to invest in a better future when things look darkest.

We are very likely at that point now. So, I will reiterate my message of March: there is no better time to get our own houses in order and better poised to profit from the growing global economy. Furthermore, we need to take steps now to ensure that the latter doesn't grow at our expense.

In an insightful article in the July 2008 Quality Digest, William Denney puts in some telling barbs: "While we whine about our bosses, our organizations and our government; while we do the minimum that our jobs require; while we flip-flop through the malls and watch Oprah, [the Indians, Chinese and the rest of Asia] are planning, learning and executing. We have in fact met the enemy and he is us. Self-righteousness is our bte noir, and whining and mediocrity cripple us." Once we recover from this sobering slap, we are well-advised to pay attention to Denney's 10-point recommendation:

1. Change fast and often
2. Innovate or die
3. Lead with passion
4. Plan and execute
5. Understand customers
6. Measure and analyze
    (i.e., manage knowledge)
7. Focus on the workplace
8. Manage and improve processes
9. Strive to be effective, not
    just efficient
10. Localize the global; find
    your place

Fortunately, we see evidence of this kind of thinking beginning to take root in our own back yard, where some AAMA members are stepping up to the plate by landing great opportunities and making their companies more self-reliant.
AAMA is also examining ways to display the high quality of members' products to those who specify and purchase them, such as by developing a system to qualify door components for field substitution that preserves the finished product's compliance with codes. In addition, AAMA certification to AAMA/WDMA/CSA 101/I.S.2/A440 can help to differentiate participating manufacturers' products from those that do not test to this industry-accepted standard. For coastal regions, AAMA Southeast Region has been diligently developing a process to better enable meaningful rating of the ability of windows and doors to weather hurricane conditions.

As is often the case, the truth about the immediate economic future is probably somewhere in the middle- neither rosy nor doom-and-gloom. Take this slower time to really examine your business practices to make your operations leaner and products revolutionary to ensure that your future is, in fact, rosy.

 

Rich Walker is president and CEO of the American Architectural Manufacturers Association, 847/303-5664, rwalker@aamanet.org.