8 Predictions for 08'
Yes, it's that time of year again. The famous quantum physicist and 1922 nobel prize winner Niels Bohr once said in true Yogi-esque fashion: "Prediction is very difficult, especially about the future." But, what the heck? Here goes my outlook for 2008.
#1 The U.S. will enter a recession - We may already be in it. Okay, nothing original here, plenty of other people are saying the same thing, but I will go on record as being in this camp.
#2 The dollar will remain weak, but will start to stabilize - This will be driven by weakening foreign economies. Foreign economies that, ex-China have already begun to slow their recent rate increasing campaigns will start cutting rates due to broadening global economic weakness sometime in 2008. The big driver of short-term currency movements tends to be interest rate and economic growth rate differentials. As the market starts to anticipate that these will begin to harmonize, it will make holding dollar assets more attractive...not that the world has really been shunning them. Additonally, if it continues, all the bargain hunting by sovereign funds in U.S. assets will put a floor under the value of the dollar as these investors convert their dinars, Euros, drahkmas etc. into dollars to buy our companies and real estate.
#3 Strong Manufacturing/Exports - The last recession was a dot-com driven corporate recession. Corporations were so worried about investing in software, the internet, telecom pipes and fancy Aerron chairs (to keep employees from jumping to dot-coms), that bloated capital spending was later decimated by the downturn. In fact, a 2004 Congressional Budget Office report on exports (chart below), noted that the cap ex slowdown was one of the reasons for losses of manufacturing employment shown in the following chart on the right.
The other reasons, of course, were high benefit and wage costs in the U.S., as well as many frictional costs like restrictions on pollution, worker safety, child labor, etc. Due to the fact that many emerging economies ignore these issues, manufacturing has been in a downtrend for years. However, many of these countries also preserved lower wages and costs by keeping their currencies unnaturally low, even as they industrialized rapidly, by not allowing their currencies to float freely and rise with their relatively higher economic growth, inflation and interest rates. In the recent upturn they took more share than they should have, and the normal rebound in exports failed to materialize as you can see in the chart to the left.
The coming recession will be an asset-driven affair, which will hurt the consumer who owns the asset, and financial companies that take ownership in the asset through their debt positions. It may side swipe corporate spending, just as the dot com debacle side-swiped the consumer. However, business capital expenditures in the U.S. and, more importantly abroad, are not ground zero of the recession this time. For this reason, as well as the weaker dollar, I believe that exports will be a relatively better performer than other parts of the economy and that manufacturers in the U.S. will benefit. So here are some relevant and interesting factoids.
Top 5 States by Exports (2006 Exports and Major Export Products)
North Carolina $211.2 Billion (Tobacco, Cigarettes, Aircraft Parts, Blood Components)
Texas $150.9 Billion (Oil, Semiconductors, Drilling Equipment, Aircraft Components)
California $127.7 Billion (Semis/ Semi Equipment, Aircraft Parts, Data Storage, Almonds)
New York $57.4 Billion (Diamonds, paintings, jewelry, aircraft parts, gold)
Washington $53 Billion (Aircraft, Aircraft Parts, Soybeans, Corn, Refined Oil products)
As you will notice, aircraft and aircraft parts are a significant factor for each of these large exporting states. Fortunately, the last few years has seen an explosion in orders for new aircraft from newly rich and oil rich emerging markets and even some fleet maintenance orders by recovering U.S. carriers. These backlogs will be delivered over several years and will drive continued strength even with some inevitable cancellations. Note that New York's exports tend more towards luxury items - much of the demand for these are also emerging market driven today and may stay strong, but have no backlogs, so I see risk here. It's fairly self evident, but I don't think a lift in New York exports can come close to cushioning the blow of a shrinking Wall Street economy.
5 Fastest Growing Exporters ($ of exports and 2006 y-y growth + biggest exports)
Delaware $3.9 Billion, grew 54% (Pharma, Refined Oils, Auto Parts)
Washington See above - exports grew 40% in 2006
Nevada $5.4 Billion, grew 40% (Gold, Casino Gaming Machines, Copper, Semis)
Alabama $13.9 Billion, grew 29% (Auto Parts, Coal, Polycarbonates, Optics, Cotton)
Kansas $8.7 Billion, grew 28% (Aircraft, Cattle, Auto Parts)
You will notice commodity exposure in the list of fastest growing exporting states, including coal, copper, cotton, cattle, gold, refined oils and soybeans.
#4 Commodity & Agricultural Prices Slow But Stay Firm - I believe that as long as the Chinese economy hangs in there, oil prices will stay firm and Russia, along with India and South America, will keep the commodity boom alive. Although I wouldn't be surprised to see a jaw-dropping correction in commodity prices in the first half as markets adjust to the recession outlook. I think as these countries pile in to buy on weakness you will get a neck snapping rebound. My pick of favorite states to benefit from the continued agricultural and commodity up cycle and export boom are below.
Montana $887 Million, grew 25% (Machine Parts, Copper, Silicon, Industrial Gases)
Louisiana $23.5 Billion, grew 22% (Corn, Soybeans, Refined Oils, Wheat)
Nebraska $3.6 Billion (Soybeans, Harvesters, Cattle Skins, Corn)
Idaho $3.7 Billion, grew 14% (Semis, fertilizers, chemicals, lead ore, potatoes)
Iowa $8.4 Billion grew 15% (Tractors, Corn, Swine, Soybeans, Aluminum)
Note that these states didn't have any major real estate boom conditions. Affordability will likely correct with the entire country, but they won't have the caustic over-supply of the coastal states and Nevada/Arizona. Why is this important?
#5 State Fiscal Crunches - Okay. This isn't really a prediction, it's already fate accompli. As you can see from the chart below, the real estate debacle is crimping state revenue during a period when spending was ratcheting up with the ebullient economic conditions. In fact, state spending grew 9.3% in 2007, but is now projected to grow only 4.7% in 2008. My real prediction is it will have to go negative in 2009. Already, New York, Arizona, California, Florida, Georgia, Kentucky, Indiana, Michigan, Maine, Maryland, Massachusetts, Nevada, Rhode Island, South Carolina, Virginia and Washington are talking about lower revenues, budget cuts or all out crises. Now here is the real problem: state spending is $1.8 trillion annually and reportedly about 13% of the economy and state spending is going from a big booster of growth to potentially contracting. In my opinion, New York City is apt to have budget issues caused by the combined effect of a weak real estate market and weak Wall Street.
#6 Foreign Visitation Will Continue To Flourish. - New York has been a huge beneficiary of the 27.3% growth in foreign visitation since the rebound from 9/11/01. The weaker dollar has continued to boost foreign visitation to the city and the state. In 2006, foreign visitation grew 6.7% to 7.3 million, according to NYC Visit. This is why hotel rates are sky high and 30,000 new hotel rooms are planned to be built in New York City in the next 3 years. According to U.S. Department of Commerce data, New York ranks as the #1 port of entry for foreign visitors to the U.S., at 2.7 million through September 2007. Newark, New Jersey has moved up from port of entry number seven to number four in September. I don't think the 1.1 million visitors who arrived in Newark through September were headed to the Joisy shore. So I add the 6.4% of foreign visitors that came into Newark to the 15.4% for New York and the Big Apple's share of foreign visitation jumps to 21.8%. Travel & tourism now accounts for 26% of all U.S. services "exports" and 7% of all U.S. goods and services exports.
#7 Availability of Business Loans Will Be Strong - This is the only area that has not gotten too out of control, away from the LBO guys. With interest rates coming down and banks being encouraged to lend, there will be money for good business ideas, particularly tied to exports, commodities, the farm belt and energy, if my other predictions are on the mark.
Finally, Bonus prediction #8 - If you keep reading Urban Digs you will have whiter looking teeth, fresher breath and be a hit at parties in 2008.
Have a Happy and Safe New Year! From the Blogosphere & Internet:
State Fiscal Issues
Real Estate Downturn & State Budgets
More State Budget Issues
Gutierrez Applauds Record Summer For International Visitation & Spending