by Lang Motes, President

The last three years have been difficult for the US and the impact has been felt globally however none of these obstacles are too large for the American economy to overcome. The challenges we face in 2010 have not deviated much over the last two years; although, with every passing day we seem to get slightly clearer about where we stand. The unfortunate news is we still do not know exactly where we are going. The overarching theme is consistent – we must return to business profitability and investment capital from financial institutions must become a reality in order to gain traction and achieve true financial stability in the near term.

The new business model for 2010 is controlling costs, meeting consumer expectations and less is more or more directly stated, “Adapt, Mutate, Migrate or Die,” according to Ted Jones, PhD, Chief Economist at Stewart Title Guaranty Company. Many of these practical points have been prudent business practices for years but today, as Ted alludes, they are now issues of survival. We are at a pivotal point of reflection and direction change in America. Most companies are taking a much needed hard look at reality – who their company is, where their company is headed and how it is going to get there. The stakes are high and the economy has not been recovering quickly, so businesses are cutting unnecessary costs and addressing weaknesses. Business owners understand the cost to survive now more than ever and are continuing daily to make tough decisions, however, getting investment capital back into the global and US economy is a much tougher assignment. The federal government recognizes that employment and incentives are required to keep Americans paying their bills. This helps maintain the flow of money through local economies, but the two current solutions being implemented over the last several years have resulted in minimal real changes thus far.

The first solution the government introduced was a stimulus plan in an attempt to create new jobs. Regrettably it has not produced impressive results from a return on investment standpoint. This plan calls for spending approximately $787 billion to create or save 3.5 million jobs or $224,857 per job without interest and carry cost. So the question is, how many $225,000 jobs will be created through this program? These sound like really nice jobs, but where are they? The reality is that we do not exactly know where they are nor when they will be here but we do know the money is being allocated and spent.

The second solution the government introduced was the First Time Homebuyer Tax Credit that was not just for first time home buyers. In an effort to shock the flatlining heart of the struggling housing market, the government pulled out the shock paddles and rolled out a First Time Homebuyer Tax Credit. Through the end of 2009, this $8,000 credit on 3 million sales had generated 610,000 buyers, ultimately costing taxpayers $24 billion or $40,000 per home sale. Scores of buyers benefited from this credit but the truth is that many of these buyers would have purchased homes without the credit. More simply put – the credits needed to generate “new” buyers, not just issue credits to those already making a home purchase. Issuing tax credits to homebuyers who would have bought homes anyway does not necessarily grow the tax base or create new spending. Incentivizing someone to buy something they have already decided they are going to buy is a cost savings and in fact is a credit and not a stimulus, so both of these programs still leave many unanswered questions. The struggle for most Americans is they do not see where this $811 billion in tax dollars (being spent through credits and stimulus plans) are enticing, incentivizing or motivating consumers to spend more or encouraging businesses to expand and grow translating into real job creation and creating a more stable economy. Classical economists worry that government spending may decrease personal expenditures as households anticipate a future tax bill for the the stimulus while our current administration of Keynesian economists will likely plan more stimulus.

The reality is reflecting back reveals that the totality of the decisions US consumers and businesses made over the last decade were creative and aggressive and the damaging effects have not been short lived and will continue to be felt for some time. These decisions forced such drastic pull back that nearly every single source of business investment capital stopped flowing by mid 2008. The US has lost over five million jobs since the 2008 November election and unemployment still hovers around 10% making the current economic downturn more “down” and less “turn”. Everyone understands the real meaning of the term “jobless recovery” and many Americans have been wondering how long we will be both jobless and without a recovery. The beginning of 2010 is starting to look slightly better than 2009 ended and even if it is just a reprieve, US business owners and consumers are desperate for positive signs of a brighter day to come.

National reports are telling the story about Texas’s overall economic stability. Hovering just below the nation, Texas posted an 8.2% unemployment rate growing by about 40,000 jobs in February and another 29,000 jobs in March, according to the Texas Workforce Commission. February’s nonagricultural jobs were down offsetting January’s gains but March was up 8,500 jobs. Noteworthy industries growing include professional and business services gain of 9,000 jobs in February while manufacturing added 2,900 jobs in February and 2,100 jobs in March. The largest gain in March was in leisure and hospitality with 10,300 jobs. Also worth mentioning, February’s gain in professional and business services was the largest single monthly increase in nearly twenty-four months.

The Houston job picture is better than most US markets but has felt its fair share of losses. Houston lost approximately 93,000 jobs in 2009 a decline of 3.5%, according to the Texas Workforce Commission but has picked up in 2010. Houston posted an 8.5% unemployment rate in February and March, down from 8.8% in January, or a gain of approximately 8,600 jobs. Growth felt in Houston right now in the oil and gas, manufacturing, and medical sectors represents many of the Houston area economic drivers getting their wheels in motion – an encouraging sign for everyone in the region.

For the first time in nearly two years we are starting to see signs that the flow of money might start working its way back into the US economy. New financial regulations not fully in place yet will line themselves out soon and will provide new layers of protection and hopefully encourage new growth. Every lender has adjusted their underwriting criteria and has adjusted their lending practice standards to reflect stronger equity positions. The good news is that lenders and capital sources from local banks, to life companies, and private equity funds to commercial mortgage backed securities, all are getting back online and starting to putt deals together. The wheels that were once off are slowly starting to get back on track again and while this will take time, it is encouraging to start seeing positive signs.

Everyone knows the return of the economy will likely be led by a recovery in the housing market which is very slowing starting to move again. Robert Shiller of Yale University who on April 9, 2010 used an article in the New York Times to call for caution in evaluating the housing recovery, said in an interview on April 20,2010 that “the indicators have turned up”. Many serious issues still exist on the national level including: the federal budget deficit ($10 trillion before healthcare reform or cap and trade according to the Congressional Budget Office), oil prices, imported oil, the value of the US dollar, and approximately $3.5 trillion in commercial loans that need funding over the next ten years. More specific to Texas and Houston is the need for continued job growth, business creation, development and expansion, and keeping a healthy balance between the supply of vertical assets and the demand for these assets – all things Texas and Houston focused on before the downturn.

Since 2008 most Americans have struggled with where the economy is going and when things would improve. It will take many, many years to determine whether today’s continued hyper government spending will help or hurt us, but most are very concerned where it points us. Everyone understands that no one knows the exact date and time when the economy will make a strong positive turn, but new data supporting an improving US economy are starting to be reported. Both Texas and Houston fortunately remained relatively stable throughout the prior twenty-four months but we must remain vigilant and committed to core principles and objectives going forward. Effectively managing expenses, monitoring business risk, and making sound daily business decisions must become commonplace again. Refining who we are, where we are going, and how we are going to get there is simple yet critical. The financial markets are starting to take some steps in the right direction toward the introduction of liquidity back into the marketplace; nevertheless, we need to maintain our focus on profitability while financial sources continue healing. The truth is things will get better, perspective is everything, recovering is hard, and we must keep our eye on the prize.

Contact:
Lang Motes
President
281.207.3705
lmotes@icotexas.com