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August 2006 |
Volume 1, Number 1 |
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Economic Snapshots
Quick Facts – KC Metro Area
Meetings and
Presentations
Snapshot – Manufacturing Sector
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This Newsletter is being provided to you free of charge by Paul Licausi, President of LS Commercial Real Estate.SLOWING ECONOMY BUT STILL MOVING FORWARDMore of the same news this month as last, slowing of the overall economy but nothing to worry about yet. Higher interest rates and energy costs are starting to show their effects on the economy. This should not come as a surprise to anyone, the basic everyday cost for every consumer has increased, higher payments on credit card debt, increased interest on mortgage balances resulting in higher monthly mortgage payments, higher gasoline prices and on and on and on. You know the story; the media has pounded it into our heads day after day…yes, we get it, the cost of living has gone up. My question is, has that really affected you in your personal spending decisions or that of your business expenditures. The response, I am sure, is yes. I have talked to a lot of people recently and on a personal level they have either tightened the belt a notch or two since the first of the year, or at least are giving it some thought. However, the interesting thing I have noticed is that most of the clients I talk to (on a business level) are not pulling in the reins but still looking for ways to expand their operations. Business is still good and they are not seeing any immediate signs of a slow down so far. This is great news, all of know that overall economic conditions are slowing somewhat but the vast majority of my clients that I have talked to over the past 60 days regarding economic conditions and the effect on their business are still moving forward and business is still good. Now back to some fundamentals in the economy, I do see continued pressure on the economy from high energy costs and interest rates. This will continue to affect the consumer by reducing disposal income. We will most likely see softening in the retail sector first with manufacturing and distribution to follow. Given my position here, I do feel we will not see any significant effects of softening in the retail sector until later this year or perhaps into early 2007. My take here, will be put to the test over the next 45 days which will be the “back to school” shopping season and that will really show us if the consumer is cutting back, given the results over the next month and a half this should give us an indicator if we can expect softening sooner rather than later. I am still leaning towards a slow down not occurring until sometime next year. I do not anticipate any change in the story for the coming month respective to the economy. We should expect more of the same, slow but steady growth. The wild card here will be the Federal Reserve; their actions regarding interest rates will have a significant effect on economic conditions over the coming quarter. Fed Watch Hot off the press…the Fed at their August meeting kept rates as they are. This was great news!!! I was very concerned with the comments I was hearing leading up to the meeting. In reviewing information from the economist that I trust, a seesaw continued during the last month regarding consensus on what the Fed would do with interest rates at the August meeting. Early in July the consensus was that the Fed was going to raise rates again at the August meeting by .25%. However, as the month went along and more economic data was released; the housing market continued to cool, jobs report was less than expected and unemployment inched higher the mood was swinging the other way. By the end of the month, the consensus was that the Fed would not raise rates at the August meeting and was likely to leave rates at their current level through the end of this year. Great news for us business people that the Fed held the rates in check. The purpose of the Fed raising rates is to slow the economy and keep inflation under control. Based on the economic results for 2nd quarter and some preliminary forecasting for 3rd quarter, it appears that they have successfully tempered inflation and slowed the economy way down from the levels we saw during 1st quarter of this year. Now, the key here is to maintain this level and not push the economy down any more than it is right now. In the past the Fed continued to raise rates after the point we are at right now and they successfully pushed us into a recession. By stopping now, they can ride this course out for the remainder of the year and we should be just fine. The economy will continue to move along at slower pace but still expand and we can all continue to experience a good business environment. What is my thought for rates during the last half of this year, I was 80% convinced that the Fed would hit us with another rate hike by the end of the year pushing the Fed rate to 5.5%. At this point I am now at a 40% chance that the Fed will raise rates again during the last half of this year. I believe they have positioned the economy the way they want it and we should see some stability in rates for the next 6 months. Is there a possibility the Fed will decrease rates, I give it about a 35% chance that the Fed will start decreasing rates during 1st quarter of 2007, just a thought right now, but as I look at economic data coming out over the next few months that percentage may go up. Industry Alert Corner Industry in the spot light this month, Pasta Manufacturers. Who does not like Pasta? Apparently, a growing number of people. It is interesting to see how an industry is either positively or negatively affected by public perception. The push over the last several years has been to change the diet of the average American from a high fat diet to a low fat diet. To do this you have to cut out a lot of the grains from our diet, of which Pasta is one of the leaders in this food category. The Pasta manufacturers have been a stable bunch, however, over the last 15 years this industry has gone through a continuous consolidation. There used to be a multitude of small manufacturers and some very large manufacturers. Now it is uncommon to see any small guys in the game, and the big guys have been merging or buying each other, which has reduced the number of big boys as well. The assault on the American diet has taken its toll on this industry, sales have been trending downward and the manufacturers have been fighting to hold on to the sliver of sales they have left. Innovation has been in play within this group, new low carb pasta products have been coming on the market at a feverish pace. Although these moves have given this industry some positive results, not enough to stop the bleeding. Want an example, look close to home at American Italian Pasta based in Excelsior Springs, Missouri. This company was the darling of the industry, a home grown company that had a great success story. Expansion occurred all over the U.S. and they even opened plants overseas and were pumping out the product and collecting revenues, it was working great. Based on changes in the market, they have gone the other direction, closing plants and reducing staff and hiring a workout specialty firm and are now hanging on by their fingernails. Of what benefit is this information to you, well like all interesting things in business, I look for this industry to do a total turnaround. I am counting on good old American tendencies; we like to eat food that tastes good. This sounds simple I know, but pasta has always been a fan favorite and I look for this product to make a big comeback. If you think I am off base on this, just think about the news over the last 6 to 8 months that has been centering on premise that eating too much protein is not good that we need to get back to a more balanced diet of carbs and protein. This will open the door for the pasta guys to march right back in again. The importance of my comments here are simply a heads up, do some research for your self, get in early do not wait around for your competition to dig in with the players that are left in this industry. I plan on getting my foot in the door with these folks and if you can provide a service to this industry, you should do the same. My thought is that over the next 24-36 months this industry will see some real gains and that will be just the start, this industry should trend upward for years to come. Get in the game early with these folks I am sure it will pay some dividends. Manufacturing SectorThe manufacturing sector reported a 38th month of continued growth. The sector increased slightly in July compared to June. The July index reading of 54.7 was slightly higher than the June reading which of 53.8. Although the index was slightly higher in July the report showed more of a flat period in July with the sector doing slightly better than in June. However, the report did contain some positive news in some key indicators which given the general slow down in the overall economy is a very good sign. Given the information in the report this month I am still on board with the thinking that the sector should see further expansion during 3rd quarter of this year. Here is a direct statement right out of the report that I thought really summed up the status of the sector at this time; The report was issued today by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "Manufacturing growth accelerated in July driven by an upswing in production following June's increase in new orders. Employment expanded after a one-month decline, while inventories grew after two months of contraction. The overall message is that manufacturing is proving to be quite resilient in the face of higher interest rates and weakening consumer spending. Strong demand continues to put upward price pressure on primary metals including copper and nickel." Certainly good news with a positive outlook. The data in the report this month really supported the statement by the Chairman, most of the key indicators in the report were up, but more importantly it appears that there is some momentum here that I think can sustain the sector through the second half of this year. Why am I so upbeat here, I was not that positive regarding the overall economy for the balance of this year, I have made several comments regarding the uncertainty of the Federal Reserve. Here is why, the manufacturing sector continues to expand, all be it at a slower pace than say last year, but nonetheless continues to expand despite the pressures on this sector. Higher prices in raw materials, energy, transportation and wage pressure are all key components that can and should drag a sector down. However, the sector has maintained momentum over the first half of this year and given the data in the report this month the outlook is good. The sector has maintained a delicate balance between inventory and production; this has allowed them to stay lean financially. Inventory levels continue to be at the low end of historical trends, it is still unusual to see inventory levels reported above 30-40 days. They are ramping up and down production each month in order to maintain the status quo regarding inventory levels. The key thing to watch here is as consumer spending decreases, when we will see an affect on this sector. My feeling here is that we will eventually see the results of decreased consumer spending but not as sever as the last cycle which was in 2000-2002 where this sector spiraled downward. I have watched this sector and wondered when we would see inventory levels return to what I felt was a traditional level of 60-90 days. That has not happened and I am not sure if inventory levels will return to a 60-90 day level again. This may be a shift in thought process for the sector where they will balance production and inventory and keep the inventory levels in the 40-day range. This might be a key factor that could prolong the expansion within this sector. Looking into the report, most key indicators increased. Production, Employment, Supplier Deliveries and Inventories were all up which signaled a jump in production during the month. Manufacturers increased employment levels and added to inventories. This was not a surprise, new orders were up last month, the increase in these key indicators, were in response to that increase. One key comment in the report; was a concern by the manufacturers are customer inventories continued to remain to low. This is directed more so towards the distribution sector. There were only a few key indicators that were down; New Orders, Back Log Orders, Customer Inventories and Imports. Although I do have some concern regarding new orders and back log orders, I think this is more a minor setback as the reporting numbers were just slightly decreased and I anticipate that we should see some better numbers out next month. What to expect next month, growth in the same range as this month and steady as she goes. We may see some residual effects from the conflict in the Middle East and other political problems throughout the world but I do not feel they will have any real impact on this sector. ENERGY SECTOR SPOTLIGHT I received some great feedback last month regarding my comments in this section. Some different viewpoints that really gave me a broader picture of the overall energy sector and why we are facing higher energy prices. I really appreciate and encourage comments; it is great to get a different viewpoint. My contention has been that commodity prices have been the key contributor to why our energy prices have been at all time highs. One of the comments I received covered the energy policy for the U.S. which has made exploration, refining and other related activities very difficult to do. This has had an adverse affect on the ability for companies in the U.S. to produce product. I understand this point and was not aware of the impact this could have on the market. It is apparent that we are not reducing energy consumption; rather it is trending upward with no end in site. What is the answer here, be prepared for higher energy bills all around. Will we see gasoline prices below $2.00 per gallon, not any time soon in my opinion. There is a push for alternative fuels; the problem is that these fuels are more costly to produce than gasoline because they have no ability at this time for mass production. There is an investment in biofuel plants, but do not count on any real access to these products for several years. As for energy prices, I see no light at the end of this tunnel yet so be prepared to pay close to or over $3.00 per gallon for gasoline for the foreseeable future. |
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KC INDUSTRIAL REAL ESTATE UPDATE
Second quarter results are in and the activity was up significantly comparative to this time over the last two years. Heading into early summer has always been a slower time of year for the industrial real estate sector. However, this year the activity continued to be towards the high end of the scale coming out of 1st quarter and continued right through 2nd quarter. I do not expect the sector to slow much during 3rd quarter. Why the change in trend, companies operating in the industrial market are making moves in reaction to opportunities in their business. I have seen more manufacturers out in the market responding to increased orders, distribution and transportation companies are expanding and there is great activity coming out of the service sector. The interesting thing I have noticed is that I have not seen any companies making a move to downsize, it is all expansion. Some of this is driven by looking for a more efficient facility to better address their operations. But a lot of the movement is just companies outgrowing current facilities and needing more space to accommodate the growth in their business. What effect has this increased activity had, nothing significant thusfar. Inventory levels have remained towards the lower end of the scale; however, both existing and new space is still coming on the market, so as more existing space is leased there is new or existing space coming on the market to replenish the inventory. Now the issue here is balance, there has been more space that is being leased and coming off the market then there is new and existing space coming on the market available for either sell or lease. This trend should continue through the end of 3rd quarter and then we will most likely see some leveling off as we approach the end of the year. What is happening with lease rates, there is some upward movement in rates but not significant. It is interesting that in the KC market lease rates remain fairly stable, any movement either up or down is typically less then 10% in any given cycle so I really do not anticipate any change in this trend, but you should expect some upward movement in rents but nothing that is going to be significant. Not much of any change in pricing for buildings being offered for sale. The inventory level has increased slightly but this has not affect pricing in any way. You can still expect to pay towards the higher end of the scale and with higher interest rates this will increase the overall cost to own a building right now. I do not expect any change in sale prices but should see an increase in inventory levels over the next 12 months. COMPANIES MOVING IN THE MARKET
If you are interested in buying, selling a building or need to lease space call me and I will provide detailed market information to you and assist you in completing the transaction. Also, if you are interested in selling your building now is a good time and I can assist you in establishing market value for your building and selling your building for you. Thank you for your time and I hope this information has been helpful. |
