Recovery: Not for the Faint-Hearted By Charlie Hall

In my November 2009 column, I wrote that housing is a critical component of the economic recovery now in progress. So far, the housing side of the recovery can be described as three steps forward, two steps back. The latest housing-starts figures are no exception. Perhaps out of fear of the expiration of the home buyer tax credit, builders pulled back on both starts and permits in the last quarter of 2009. The hit was particularly severe in the volatile multifamily sector, but even the single-family housing market hit a speed bump. But there is a proverbial silver lining: While the pull-back is not good for fourth-quarter GDP expectations (or housing companies), it is good for the long term rebalancing that needs to occur between housing supply and demand.

On the demand front, the tax credit has been extended and expanded. The Federal Reserve's manipulation of the mortgage market is keeping financing costs down and improving affordability in many markets; thanks to the decline in prices, buyers are slowly coming out of the woodwork.

I still believe we will continue to see a slow, steady recovery in new and existing home sales, a gradual decline in the number of homes on the market, a tepid rebound in home construction and broad-based stabilization in home prices as we head into 2010. All of the statistical data on housing makes sense if you view it from that lens.

Recovery and Growers

I think it is safe to say that the housing bubble days are long gone and won't be coming back for several years. Needless to say, this is having a major impact on some of the major home improvement retailers, which also happen to be the big growers' major buyers in the green industry. As I wrote this column, Home Depot and Lowe's both announced much weaker revenues during the third quarter of 2009, with Home Depot down 8 percent and Lowe's down 29.5 percent from the same period a year ago. Compared to sales in the previous quarter, this represented a 22 percent decrease for Home Depot and 17 percent decrease for Lowe's. Both companies indicated in their respective news releases that they had made solid market share gains. ÉSay what?

Both home improvement giants are cutting costs and doing everything they can think of to salvage the situation, but they are fighting economic headwinds that continue at gale-force levels. They realize they have more capacity in certain regions than they need and their superstore sizes may not sustain the economic models they are used to working with. This may lead to some heavy-duty financial shrapnel in the commercial real estate market as underperforming stores go dark and leases are exited.

Home Depot and Lowe's are savvy retailers and merchants, and they'll look to other product lines to fill their stores and feed their investors. This will entail stepping out into product lines they are less familiar with. Watch for new hires from nontraditional product groups, along with investments, joint ventures and other forms of partnerships with nontraditional product groups. I also wouldn't be surprised to see the approved vendor lists shrinking for these megaretailers.

An End in Sight?

The good news overall is that the nation's gross domestic product grew in the third quarter by 3.5 percent, unofficially ending the recession. We are seeing signs of shrinking inventories and a willingness on manufacturers' parts to replenish low supplies in anticipation of a broader-based recovery. But we still have tremendous hurdles to face; in some ways, we have robbed Peter to pay Paul for the productivity gains we've realized thus far. Remember the old adage, "There's no such thing as a free lunch?" We'll have to pay, sooner or later, for all the government infrastructure spending we have put in place.

Inflation has not reared its ugly head yet — to the surprise of some — but at some point, we'll be talking about fiscal and monetary policy measures to curb inflationary pressures. In the very short run, though, we can expect to see more stimuli, but in little pieces, and an even greater focus on job creation. To that end, the Fed will likely hold interest rates at a level that will encourage as much business investment as possible.

Cautious hiring practices, however, continue to cast a shadow over the outlook for economic growth. These cautious hiring practices are a double-edged sword. They are generating exceptionally strong gains in productivity, which strengthens corporate profits and provides the financial wherewithal for business investment in new equipment, but they're also undermining consumer confidence and further reducing household incomes necessary to support spending.

Looking Ahead

To date, businesses have cut their work forces to the bone, and eventually they will have to begin hiring to increase output. Some evidence says that time may not be too far off. Wages will also stabilize for a while, albeit at slightly suppressed levels. In the end, we should expect to see job growth begin to return slowly in the late spring or summer 2010, and the tech industry will likely lead this recovery.

Last spring, bedding plants and perennials fared well, and expectations are the same for this upcoming spring — providing the weather holds, of course. We are much better off economically than we were last year at this time, and consumer confidence indices are nearly twice the levels we saw then.

But here's the real question: Is the newfound frugality on the part of postÐGreat Recession consumers a permanent behavioral shift, or will a new age of affluence emerge? Pundits differ on this question, and I have heard compelling arguments for both sides. But two great economic principles can be summarized as follows: Expenditures rise to meet income (Parkinson), and people afford what they want (Catlett).

Our job as an industry — growers, service providers and retailers alike — is to make sure we are providing what consumers want in such a way that we capture our fair share of their income. Stated slightly differently: Positioning our products and services as necessities in people's lives and not mere luxuries is the best recession- and weather-proofing we can do!

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Charlie Hall

Charlie Hall is Ellison Chair in International Floriculture in Texas A&M University’s department of horticulture. He can be reached at [email protected]

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