I thought I would share a little of my recent analysis with you. It significantly boosted my confidence about the near to medium term global economic outlook. I was prompted to do a little digging after the most recent US employment figures ‘spooked’ the market a little on July 8, it’s been on a downward tear ever since. Basically, the US unemployment rose (admittedly by only 18,000 jobs) to 9.2%, this obviously indicates a struggling economy; Australia’s unemployment rate is below 5%.
Before making ridiculous conclusions about the dire future of the US economy, I decided to further investigate the underlying reasons for the current situation.
In my view, the primary driver for US unemployment is the sorry state of the US housing market. Consider this, for the last 52 years; the US has averaged 1.497 million housing starts per annum. Troughs included 1.16 million in 1975 at the nadir of the 1974/1975 recession, about 1.07 million per year over the 2 years of 1981 and 1982 and 1.01 million in 1991. These three recessions accompanied 3 of the 5 most severe bear-markets in the period (the 1987 crash & 2000/2001 tech-wreck had different drivers) 1959 – 2007.
So in the 50 years leading up to 2008, the least number of housing starts was 1,013,900 in 1991 to put that in context of the GFC, housing starts in 2008 were 905,500, in 2009 were 554,000, in 2010 were 586,900 (there were less houses built in 2008/2009/2010 combined than in 2005). 2011 again looks likely to again fall short of 600,000.
I have estimated that at its peak, the total excess housing generated in the lead-up to the GFC approximated 2.9 million houses (in late 2007). This equates to over 2 years worth of excess supply and in hindsight it is little wonder there was a significant crash. The level of dip in US housing starts is absolutely unprecedented. In order to rapidly return the housing market in equilibrium, it needed to be.
This brings me to my analysis, using an approximate natural level of US housing formations of 1.35 million (based on various figures I have seen, which nominate between 1.2m & 1.45m as the current ‘natural’ level) and my assumption that the market was last approximately in equilibrium in 2000, I estimate the ‘excess’ 2 years supply (in 2007) of housing will be ‘mopped up’ some time in the first half of 2012 (February or March is my calculation, but definitely sometime in early 2012 in my view). This is subject to the caveat that there is anecdotal evidence of children staying home longer and increased house-sharing, which may delay the tipping point. A note about the caveat though, is that if the trough occurs later, the acceleration out of it will occur much more rapidly as people return to their normal behaviours.
My positive conclusion – given that total starts are running at about 600,000 it naturally follows that employment in the housing/construction industry will need to grow substantially (i.e. in order to return output to its natural level of 1.35 million per annum). This leads me to believe that smart builders will start hiring the best unemployed construction workers available in the second half of 2011, in preparation for what will (over calendar 2012 & 2013) in my view be the biggest upturn in housing starts since 1983 (when starts grew by 60% after the two down years mentioned above) and possibly ever. From January 1983 to July 1984, the US unemployment rate fell from 10.4% to 7.1% (that’s right, down 3.3% in 18 months) according to this site. Put in context, in order to get back to the natural level, the housing industry will need to grow much more rapidly (it needs to more than double from 0.6m to 1.35m). I confess, I love to be contrary, but I expect US unemployment is very likely to fall by approximately the same quantum between about now and December 2013 as it did in 1983 & 1984. It should not be forgotten that in the 4 years from 1982-1985, the S&P500 more than doubled, now I do not make predictions, but barring some other factor (such as the European debt issues) having a bigger than expected global impact, in my view the next few years are likely to be better than average in the US. In my view Australia’s market will do better than the US, you do the math…
It needs to be remembered, whilst the ‘China Story’ is the most exciting thing happening to the Australian economy, the US is easily and will be for a good while yet, more important to the global economy as a whole. The US accounts for about ¼ of global GDP and the US economy is more than twice the size of China’s economy. In my view, things look a good deal better than the news I’m seeing out of economists and commentators. The most important thing for the US to do is to recognise the up-tick as early as possible, raise interest rates and eliminate the deficit spending – Tony Hansen 17/07/2011
S&PASX200TR The benchmark index is Down by 2.91% since July 1st. The benchmark is Down 6.81% all-time (since April 1st2011).
|April 1 2011||July 1 2011||Current Price||Current Period||Since Inception|
|EGP Fund No. 1||1.00000||1.08396||1.13280||4.51%||13.28%|