Focus on Investment Conditions: Value Risk Management Key in This Economic Landscape

By Riggs, Ken, Jr. | Real Estate Issues, Spring 2004 | Go to article overview

Focus on Investment Conditions: Value Risk Management Key in This Economic Landscape


Riggs, Ken, Jr., Real Estate Issues


TO HEAR THE ELECTION-YEAR RHETORIC, ONE WOULD THINK the U.S. is mired in double-digit unemployment and that all our jobs are on the verge of being shipped offshore to workers in China or India for less than half of what U.S. workers are being paid. While we know that picture is inaccurate, it is true that the U.S. has lost over 2 million jobs since the recession began in 2001. However, we've cut that number in half during the last few months, and expect this trend to continue.

[ILLUSTRATION OMITTED]

And to quote Paul Harvey, "the rest of the story" shows that at 5.6 percent, America's long-term unemployment rate remains the lowest among all the Western countries. In fact, our near-95 percent employment rate, along with continued strong GDP growth, rising manufacturing activity and business investment, a recovering stock market, record home sales, and other positive indicators show that the economic recovery is well-underway. In addition, an accommodative Federal Reserve has kept the federal funds rate low and the President has signed a series of tax cuts and refunds designed to stimulate consumer and business spending. Now that we've seen the successes of these stimuli, along with the fortitude of U.S. business, are joblessness and a slow economy only bad memories? Or is the job situation and economic risk, especially as they relate to real estate returns and values, still tenuous?

WHAT'S DIFFERENT IN THIS ECONOMIC CYCLE?

Some lingering joblessness and economic risk is to be expected after any recessionary period. However, there are a number of key factors affecting jobs in this economic recovery that did not impact previous recessionary cycles. The most critical factor among these is exceptionally strong productivity. As noted last fall in our forecast report, Expectations & Market Realities in Real Estate: 2004, produced by Real Estate Research Corporation (RERC), Torto Wheaton Research, and Principal Real Estate Investors, we saw a significant likelihood that strong productivity would continue throughout 2004, resulting in low to moderate job growth. With productivity averaging 4.5 to 5 percent annually, and with each percentage point of productivity growth estimated to eliminate up to 1.3 million jobs, as outlined by the Bureau of Labor Statistics (BLS) and Forrester Research, Inc., some have commented that we were being too productive for our own good. We believe productivity increases will continue at this rate, as technology is further applied to business processes, additional jobs are outsourced, and corporate mergers continue.

Secondly, it is likely that there have been more jobs being created in this economy than were being reflected by the U.S. Census Bureau payroll/establishment survey. U.S. Treasury Secretary John Snow pointed out that a recent BLS household survey showed a gain of 2.4 million jobs since January 2002, although the BLS payroll/establishment survey showed a cumulative decline of 341,000 jobs over the same period. The household survey factors in critical employment characteristics not included in the establishment survey, such as self-employment, individuals on unpaid leave, and the development of new small businesses. Small business guru David Birch says that "the gazelles" (small businesses) create significantly more jobs than large businesses, noting that for the period 1994 to 1998, the largest firms lost 2 million jobs while during the same time, small companies created 10 million jobs. Birch believes small business drives the nation's economic growth even more today.

In addition, having been burned by recent corporate and accounting scandals and falling stock prices, companies are more cautious and focused on the bottom line. Besides further streamlining processes and avoiding geopolitical and economic risk, they are seeking to minimize their biggest expense--labor--along with the associated overhead costs of healthcare benefits and pension contributions. …

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