Sunday, November 1, 2009

Purely anecdotal—but impressive nonetheless

Recessions are painful, but they also are harbingers of better things to come. A recession happens when an economy is suddenly forced to change the way it operates—for example, to shift resources from overbuilt or overextended sectors to sectors that had been neglected. Recessions force changes in relative prices, so that unproductive resources can become productive again, and they force people to figure out new and more creative ways to do things to do in order to survive. Hardship is painful, but it can be beneficial.




Here's what the co-owner of a large design/construction firm in the Pomona Valley specializing in home remodeling told me the other day (he's also the one who told me a month ago that he had just re-hired two architects that he laid off last year), in response to my sending him the above chart which suggests that the third quarter uptick in residential construction activity has probably ended the deepest recession ever to hit the industry:

No wonder I've felt a bit nauseous and dizzy the last 18 months. But as we discussed, I've been asking around and everyone I talk to says that they have had a huge uptick in work flowing in - from my roofer today to other remodeling companies all over the country. My friend in Columbus MO said he had the best sales month ever this last month. I'm sure hoping this is a solid leading indicator!


Friday night my wife and I went to a late dinner at a nice local restaurant. I was surprised to see that the menu now has a special "Light Meals" option available from 5 pm to 6 pm, and from 9 pm to 10:30 pm. For $20 you get a choice of appetizer and a choice from 10 main courses, served in smaller-than-normal portion sizes. At 9:30 pm the restaurant was almost full, something we haven't seen for a long time, and the waiter was simply delighted. This solves several problems for us: not wanting to eat large portions at night, not wanting to share main courses, not wanting to spend extravagantly for a last-minute decision to go out for a bite to eat, and not wanting to go to a restaurant after 9 pm because they are emptying out. It also brings more business to the restaurant, allowing it to remain busy for more hours every day.

I imagine there are all sorts of anecdotes such as these happening around the country, in many lines of business. All this activity—change, if you will—is going on behind the scenes, and it is making the economy more productive. And it is all happening without any help from government stimulus programs. Indeed, I continue to believe that the economic recovery will proceed in spite of government stimulus programs.

12 comments:

Bill said...

I guess we'll have to see how these good stories balance out against ones that I've heard, e.g- a large multi-family developer is closing its regional office in February because there are no new projects as is a big commercial contractor. I hope the uptick in residential can offset the upcoming declines in commercial construction.

Colin said...

Well, as far as the housing sector is concerned, I imagine that any turnaround actually may be due in large part to government stimulus efforts. Particularly the tax credit and low interest FHA loans. However, I don't see that as a good thing, with the government simply attempting to re-inflate the bubble rather than let the free market reallocate resources to more productive uses.

Scott Grannis said...

I don't believe the government stimulus programs are big enough to distort the housing market. I think that enough time has passed for the market to address things adequately on its own. Residential construction activity has fallen to an unprecedented degree, as have housing prices. Interest rates are historically very low, and again I don't think the government is the sole cause of low interest rates; rates are low because the market is extremely pessimistic about the prospects for the future. Meanwhile, I see a genuine upturn in sales activity, and anecdotal evidence here in So. Calif. tells me that demand has really picked up. Latest example: a neighbor at the beach recently sold his place after being on the market for only a few weeks, and for close to his asking price.

Scott Grannis said...

One more thing: I wouldn't be at all surprised if the upturn in residential construction (where activity has been in a truly unprecedented slump for a very long time) offsets at least part of the weakness in commercial construction.

Gene Prescott said...

Scott, I know the important thing about the chart is the slight uptick. This would be a good chart, however, to test the conveyance in more correct information at a glance if the left side started at 0% rather than 2%. That would put to housing change in correct visual relationship with the change over time.

brodero said...

Over the last 50 years the economy
has contracted 17% of time and expanded 83% of the time...after
a deep 18 month recession....I like the odds....

Public Library said...

Restaurant Index Shows Contraction, Less Capital Spending

http://www.calculatedriskblog.com/2009/10/restaurant-index-shows-contraction-less.html

Public Library said...

A large chunk of GDP came from the cash-for-clunkers and housing tax credit. How you can say this, along with $1T in MBS purchases, are not impacting the market, still befuddles me.

The market is not worried about the past, it is worried about the government no longer supporting everything.

The S&P broke key support from the March lows...

Scott Grannis said...

Gene: you've got your wish. I changed the chart per your suggestion.

Scott Grannis said...

Public: I would never expect all sectors to turn up at the same time. Restaurants might the last to turn up, since I would first expect to see net job gains, and that is still many months in the future.

Brian said...

FYI - there is no "Columbus," Missouri. Maybe he meant "Columbia." LOL, because this adds to my theory that everyone from that town needs help.

Gene Prescott said...

:-) regarding the chart.