Is 2011 the Year the World Starts Turning Again?

January 12, 2011 - 10:51

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 re-accelerate in 2011. Consumer spending is expected to regain 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. Again, as I have said before, this will be a slow recovery but hopefully a smarter recovery this time around.

Of course, this forecast is based on the expectation Congress and the president will come to an agreement to extend the tax cuts along their current lines for at least two years. Congress will also likely agree on a relatively austere budget for fiscal 2011, and the incoming Congress has promised to make additional cuts to discretionary outlays. State and local budgets will also remain under intense pressure, which is one reason the Fed has chosen to move forward with its second quantitative ease.

 

Homeownership Crossroads

High unemployment will likely constrain the recoveries in consumer spending and housing, but both will 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 and 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 ome 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, but 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. Longer-term questions about the viability of homeownership also appear to be exaggerated. A recent survey by the National Association of Realtors shows that a large proportion of the population continues to believe that housing is a good investment. Also, a large majority expects prices to increase over the next five to 10 years.

But consumers’ favorable views on homeownership will not likely be enough to keep the homeownership rate from falling over the next few years. The homeownership rate peaked in early 2006 and has fallen 2.2 percentage points to 66.9 percent in the third quarter. The homeownership rate will likely settle at around 66 percent toward the middle of the decade before improving demographics and stronger economic conditions send the rate back up near current levels later in the decade.

 

Lost Ground vs. Held Their Own

One very interesting outcome of the “Great Recession” is that it has divided the United States 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 NBER 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, mind share is more important than market share to the long-run profitability of our industry.

 

Ride Out the Storm

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; 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, driving the weakest firms out of the industry, and producing even greater industry consolidation in general.

The economy certainly took its toll on the greenhouse sector in 2010 (in spite of the recovery being underway), although its effects were not felt evenly among growers. For example, bedding plant growers had a fairly good spring (until bad weather hit in several key areas of the country and shut things down), but potted plant and foliage growers still had a tough year for the most part. Several well-known firms who offered very high-quality products and services are no longer in the industry.

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.

About The Author

Charlie Hall is Ellison Chair in International Floriculture in Texas A&M University’s department of horticulture. He can be reached at charliehall@tamu.edu.

Leave A Comment

  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <em> <strong> <cite> <code> <ul> <ol> <li> <dl> <dt> <dd>
  • Lines and paragraphs break automatically.

More information about formatting options

By submitting this form, you accept the Mollom privacy policy.
Email Subscriptions