Home Construction Surge – Continuing Forward

Story first appeared on USA Today

Many homebuilders were forced to drastically scale back construction on new homes during the aftermath of the housing bust, to reduce the risk of being left with multiple newly build but as of yet unsold properties.

But an improving housing market has homebuilders feeling more confident about sales, and that's likely to kick the pace of new construction into a higher gear this year.

The Commerce Department said Thursday that builders broke ground on houses and apartments last month at a seasonally adjusted annual rate of 954,000. That's 12.1% higher than November's annual rate. And it is nearly double the recession low reached in April 2009.

Construction increased last month for both single-family homes and apartments. And the pace in which builders requested permits to start more homes ticked up to a 4½ year high.

For the year, builders started work on 780,000 homes. That's still roughly half of the annual number of starts consistent with healthier markets. But it is an increase of 28.1% from 2011. And it is the most since 2008 — shortly after the housing market began to collapse in late 2006 and 2007.

Steady hiring, record-low mortgage rates and a tight supply of new and previously occupied homes available for sale have helped boost sales and prices in most markets. That has persuaded builders to start more homes, which adds to economic growth and hiring.

David Williams, a homebuilding analyst with Williams Financial Group, says builders are very closely tied to what's happening in the housing market and they're going to build homes to meet demand, but not go overboard.

"I don't think, at this point, that they're going to overbuild," Williams said, noting that homebuilders are still holding back on building too many spec homes, or properties built before they're sold.

Having some spec homes can help sales, especially when a buyer isn't willing to wait several months for their home to be built. Builders tend to put up more of those homes heading into the spring home-selling season that traditionally begins next month.

Larry Webb, CEO of homebuilder The New Home Co., in Aliso Viejo, Calif., says he is building homes at a faster pace than a year ago, but he sticks to a sell-first, build-second approach.

Overall, Webb is selling and building a minimum of four homes a month, at least double the pace of sales and construction two years ago.

Webb believes the stepped-up pace of home construction will continue this year. But he's holding on to the sell-first approach.

"Based on what we've gone through in the last recession and the way we do business, we think we should primarily build after we sell homes," he said. "We only build after we sell."

The company, which builds homes in California, has 10 open communities and plans to open another 14 this year.

"Normally there's a big drop off between Thanksgiving and Christmas," Webb said. "We saw very solid traffic and we're anticipating a very good first quarter."

Thursday's positive housing report, along with a steep decline in unemployment benefit applications, contributed to a strong day on Wall Street. The Standard & Poor's 500 closed at a five-year high.

"There is no denying that the housing market recovery is solidifying, and we expect construction activity to ramp up to the 1 million annualized threshold by the end of this year," said Michael Dolega, an economist with TD Economics, in a note to clients.

Dolega said the gains in home building helped boost construction hiring in December by 30,000 jobs — the most in 15 months. He predicts the construction industry could add half a million jobs in 2013.

In December, the pace of single-family home construction, which makes up two-thirds of the market, increased 8 percent. While that's well below healthy levels, single-family housing starts are now 75 percent higher than the recession low reached in March 2009.

Apartment construction, which is more volatile, surged 23 percent last month. It is now back to pre-recession levels.

Applications for building permits, a sign of future construction, inched up to a rate of 903,000 — the highest level since July 2008.

"The strong rise in single-family starts is a clear indication of builder confidence in the sales outlook," said Pierre Ellis, an economist at Decision Economics, in a note to clients.

Confidence among homebuilders held steady in January at the highest level in nearly seven years. But builders are feeling slightly less optimistic about their prospects for sales over the next six months, according to a survey released Wednesday.

In November, sales of previously occupied homes rose to their highest level in three years, while new-home sales reached a 2 1/2-year high.

Those factors have helped make homebuilders more confident and spurred new home construction. But homebuilders' are still warily watching the current standoff in Washington between President Obama and Congress over several approaching budget deadlines, including the need to boost the nation's $16.4 trillion borrowing limit.

Though new homes represent less than 20 percent of the housing sales market, they have an outsize impact on the economy.   For each home built, there is approximately $90,000 in tax revenue and an average creation of three jobs lasting for at least a year, data from the homebuilder’s association shows.

U.S. economy improving according to Fed

Story first appeared on USA Today

Activity is expanding in all 12 Federal Reserve districts, according to the Fed on Wednesday, showing that the nation's economy has proven to be surprisingly resilient for the past six weeks despite the budget standoff in Congress.

The Fed's Beige Book report said the New York and Philadelphia Federal Reserve bank districts have rebounded from the near-term effects of Super Storm Sandy, and the pace of growth picked up in the Boston, Richmond and Atlanta regions while slowing in St. Louis.

Still, uncertainty among businesses because of the so-called fiscal cliff of tax hikes and spending cuts — which was partially resolved early this month — dampened the retail outlook in some areas and prompted some employers to hold off hiring. And the economic slowdown in Europe hampered some manufacturing exports.

Consumer spending increased across the country, but holiday sales were somewhat disappointing in the New York, Cleveland, Atlanta, Chicago and San Francisco districts.

Government figures released this week show holiday sales rose 2.7% over last year, far less than the 5.5% pace of 2010 and 2011. Sales of clothing, shoes and furniture were brisk in Boston, while online sales were strong in San Francisco. But retail sales were flat in the Richmond area and the fiscal cliff dampened the outlook in Philadelphia, Kansas City and Dallas regions.

Auto sales, however, remain a bright spot, with sales steady or stronger in 10 districts.

Tourism, meanwhile, rebounded in the Mid-Atlantic and Northeast following the Super Storm.  And tourism in Boston, Atlanta and San Francisco was bolstered by surging business and international travel.

Manufacturing, however, was mixed, with six districts growing, three contracting and two reporting little or no change. Rising aerospace and chemical production fueled growth in the Boston, San Francisco and Dallas districts. And the resurgent auto and housing sectors helped support manufacturing in Chicago and Philadelphia.

But uncertainty about the fiscal cliff tempered growth in the Richmond area. And steel and auto production slowed in Cleveland.

Overall, however, manufacturers were optimistic about coming months in New York, Philadelphia, Atlanta, Minneapolis and Kansas City.

The housing market also continued its comeback, with activity increasing and prices rising in most districts. Low interest rates and affordable prices sparked home sales in Boston. Still, the hotter market is creating some bottlenecks, with Kansas City reporting higher lumber and drywall costs that limited construction.

Commercial space leasing was more tepid, however, with Boston real estate officials reporting a drop in activity due partly to the fiscal cliff and demand for commercial real estate loans softening.

The budget standoff also caused some employers to delay hiring, particularly in Boston, Richmond, Atlanta, Chicago, Kansas City and San Francisco. Companies in Chicago that do business with Europe also scaled back hiring plans.  Atlanta and Kansas City businesses have put off adding to their staff due to the new health reform law.

U.S. ECONOMY DAMAGED MORE THAN THOUGHT BY JAPAN QUAKE

The impact on the US economy from the earthquake and tsunami in Japan in March was grim, however, it appears the earlier damage estimates were too low. This hurts hopes that the US economy would rebound quickly.
A series of analysts have recently cut their second-quarter gross domestic product projections, based in large part on impact that the Japan disaster is having on the automotive industry.
Factory shutdowns and ensuing problems with getting parts have slowed vehicle production, a move likely to drive up prices, increase unemployment and slow consumer spending, according to recent projections from economists at Goldman Sachs and Deutsche Bank.
Japan is having an impact across the US economy, but is being felt most acutely on vulnerable Detroit automakers, whose business was just beginning to recover when the disaster hit March 11.
As expected, the hardest-hit sector of the economy appears to be motor vehicle production. Shortages in supply of the key components, notably auto microcontrollers, have led to production shutdowns at US facilities, particularly those owned by Japanese manufacturers.
Consequently, Goldman has cut its second-quarter GDP estimates to 3.0 percent, growth for sure, but below trend and off hopes that the consensus had as the year progressed.
An economic report Wednesday from the Commerce Department reflected how deep the damage was running.
Orders for durable goods, long-lasting items such as cars and appliances, tumbled 3.6 percent in April, much worse than the 2.2 percent consensus forecast and indicative of how much slowdown effects from Japan are hampering the recovery.
New orders for transportation equipment plunged 9.5 percent, while shipments for transportation equipment fell 3 percent.
Manufacturing numbers in general have been weak lately, reflected particularly in a series of reports from regional Federal Reserve branches that measure business activity.
Yet Tilton and Deutsche maintain that the effects from Japan could be short-lived.
Deutsche last week cut its quarterly GDP projections by half a point to 3.2 percent. But the firm focused on a recent report from the Institute for Supply Management projecting continued growth in the second half although at a slower pace.
The Deutsche economists also predicted that first-quarter growth will be revised upward, from 1.8 percent to 2.3 percent, in a report due Thursday. While further downward revisions to their Q2 2011 forecast are possible, they are hesitant to make any meaningful changes ahead of what they still believe could be a strong May employment report.
The enthusiasm, though, was not universal.
Gluskin Sheff economist warned Wednesday of deepening recession pressure in Japan that will cause a spillover on global production schedules the likes of which was felt in the durable goods report.
The main question seems to be how long the effects from Japan will be felt.
Economists at Nomura Securities in New York stated both orders and shipments of motor vehicles and parts fell sharply in April, a development that they believe reflects the contagion effects of the loss of key components that are made in Japan but needed for assembling cars in the U.S. This issue on domestic producers is likely to persist in May and probably June as well.
Goldman's warned that the smaller supply of autos will give manufacturers and dealers more purchasing power, driving up inflation fears among consumers already battered by high oil and fuel costs. They also cautioned that consumer spending would drop by a fairly small amount and projected another 70,000 jobless claims filed over the previous four weeks due to slowdowns in vehicle-producing states.
Higher vehicle inflation and any supply-chain related weakness in vehicle sales should be temporary effects as well, probably fading by late in the year.

Good Service Vital During Downturn

By The Wall Street Journal

People are dining out less, so the occasion is more dear when they do. Someone who may have gone to four or five places a month may be going twice. There is a lower tolerance for service shortfalls, so make sure you operate better than you might normally. That's how you hold your own in a competitive industry susceptible to recession.

Few companies escape recession, especially those selling something consumers can cut, such as dining out. Restaurant industry sales are down, but sales at Darden Restaurants' Olive Garden and Red Lobster have held firm. Darden CEO Clarence Otis, 53, spoke to USA TODAY corporate management reporter Del Jones about gaining market share as the pie shrinks. Following are excerpts, edited for clarity and space.

Q: How are you holding your own in a competitive industry susceptible to recession?

A: People are dining out less, so the occasion is more dear when they do. Someone who may have gone to four or five places a month may be going twice. There is a lower tolerance for service shortfalls, so make sure you operate better than you might normally.

Q: Every company should focus on service?

A: Yeah. A server Relevant Products/Services or a manager, regardless of what's happening at home, must walk into a unit and put on a smile. It's more important now when people are experiencing more anxiety than they might normally.

Q: Have consumers been changed forever? Will they stay frugal when things improve?

A: Habits and behaviors change pretty slowly, so there won't be a radical change in behavior. A lot is temporary. There will be structural changes. Credit cards will be harder to get, the limits on credit cards will be lower. It will take a bigger down payment to buy a house. Absent those structural, institutionally driven changes, I'm not so sure there would be a lot of change, but credit will affect how people behave.

Q: What companies do you pay close attention to outside the restaurant industry?

A: Many. I think about Wal-Mart's support platform Relevant Products/Services and supply chain. They are innovative and world class. Marriott has a number of brands that are positioned differently. They do a great job as a multibrand operator, and are focused on sharing much of the back end, such as their reservations technology, without it being obvious to the customer Relevant Products/Services and muddying the brands.

Q: If cost cutting is done so customers don't notice, does that mean pressuring suppliers or cutting employee benefits such as health insurance?

A: We tend not to go to benefits because they are valued by our people. Our suppliers are long-term partners. We cut things like travel. We are automating key steps. We've centralized purchasing to take advantage of scale and qualify for better terms from suppliers, because they can count on us for volume. Companies in more distressed situations cut to the core, but we've made sure that we've got financial flexibility Relevant Products/Services.

Q: At least it's easy to find good employees in times of high unemployment.

A: We're able to keep our good people, so turnover is lower. That's important, because these are people with basic training, and you can layer on advanced training and development.

Q: When competitors lose market share, they often turn to coupons and other forms of discounting. How do you avoid a race to the bottom?

A: Be prepared for cyclical downturns by offering a range from value to premium. When appropriate, emphasize the value offerings. The auto companies that have a range of models from entry-level to midtier have held up better. Those unprepared had to rely heavily on discounting.

Q: Do you lose business when you don't match a competitor's coupon for $2 off lunch?

A: It has no major impact. There is a lot of risk to putting your brand on heavy sales. It reinforces what it's worth, and it is challenging to get back normalized pricing after an extended period of time. You see it in consumer packaged goods that get supported by coupons. They lose their ability to command a premium.

Q: You must be operating each restaurant with one fewer employee?

A: No. That gets to the quality. When you reduce staffing, the customer experience gets eroded. You breach trust at a time when their restaurant visits are more dear than they've ever been.

Q: Surely Darden has made mistakes in this bad economy. What has failed or backfired?

A: We underestimated last summer the depth of the slowdown. Fuel prices were a big problem, and we didn't see that coming. We weren't as conservative as we needed to be.

Q: What is the smartest thing Darden has done?

A: Work as hard as we can to protect our people. A lot of companies saw the opportunity to take reductions. That breaks the bond with employees, and as things recover, you can pay.

Q: Did you get rid of weaker employees and replace them with good ones?

A: No. Our talent evaluation process is a good one. We didn't feel like we had many low performers, because we had been pretty disciplined.

Q: Based on your most recent data Relevant Products/Services, what is happening with the economy now?

A: It's stabilized, but at a low level.

Q: What should companies do differently once the economy turns and consumers spend more?

A: Companies that will win are working right now to better position themselves to serve their customers, strengthen their offer, improve the business model. They will be able to move faster. They need to be investing in people, in the skill set. Look at the financial services. It's been under stress, but there are firms that have taken steps to get better, and you're seeing them perform better even before the economy turns.