While 2016 turned out to be a banner year in most aspects of real estate — residential and commercial building, primarily — it’s doubtful this pace can be maintained during the current year.
With both private housing and multi-story apartment buildings reaching record levels in development, rentals and sales since the 2011 end of the Great Recession, it’s questionable as to whether these red-hot levels can be maintained. Interestingly, there have been no problems raising relevant investment funds or securing double digit rentals, especially in the major cities. This torrid pace is unlikely to be maintained.
Especially good financing investment news has come from abroad, with Chinese interest in U.S. real estate expenditures high up in expanding that nation’s investment in purchases of both U.S. residential and commercial construction.
While property values have doubled in surging markets in Northern California and most large and medium-sized major cities in the East and Midwest, the multi-year construction boom surging since 2012 has brought badly needed new structures into play. This should calm the record price increases of the last five years.
Even though the fate of shopping centers may be threatened by the “Amazon innovation” and increased mail-order schemes, many shopping centers underpinned by grocery stores will continue to do well. While many storefronts have remained empty, depressed by both property values and rents, an expected increase in middle-income spending this year will likely have seen a “bottoming out” last year.
Even selected increases in such highly populated and seasonally friendly geographical areas as southern Florida and California are expecting an increase in capacity for later in 2017.
With the dynamic growth of the American population expected to grow to 350 million in the next decade, the need for daily grocery purchases and the pleasantries of coffee shops will continue to maintain most of the foot traffic of previous years. These will acquit themselves well in the face of increasing on-line rival activity.
While the ongoing drive of high technology will lessen the need for conventional industrial construction, the prior abandonment of mass production factories will necessitate upgrading and the relevant type of structures to accommodate building programs geared to advanced technology.
All in all, this will turn out to be a breather year for construction building and maintenance, but still strong in light of the previous multi-year downturns earlier in the decade encompassing the Great Recession and its immediate aftermath.
Why U.S. fossil fuels continue production boom
The unanticipated shock of the price crash enveloping coal, natural gas, and oil since mid-2014 had been expected to bring a practical halt to an incredible energy boom. This surge had brought West Texas Intermediate (WTI) oil production from a low of less than four million barrels per day at the turn of the current millennium to more than 10 million BPD by 2014. This put the U.S. with Russia and Saudi Arabia as the sole trio able to produce consistently at such a high level.
But with the fossil fuel demand depression that encompassed both the U.S. and the rest of the developed world by mid-2014, it was expected that a combination of excessive investment funds, drilling rigs, etc. and a torrent of bankruptcies would quickly reverse production.
On the contrary. While more than 100 U.S. oil and gas companies have declared bankruptcy in the last year alone, with more than $100 billion of debt and equity at risk, this has had only a minor effect on inventory reduction.
Even when accounting for recent drawdowns, oil producers and importers added 18 million oil barrels to U.S. stockpiles last year. This has brought the total to near 500 million barrels, close to an all-time record.
There was also enough coal on hand in early autumn to fuel every coal-fired power plant in the country for more than 80 days, according to the most recent data from the U.S. Energy Information Administration.
While OPEC, in general, and the questionable ability of Russia and Saudi Arabia to control their intensive production capabilities, it’s doubtful that international oil price levels, both in the U.S. and the energy world at large, can expect a price return to anywhere near the $100 per barrel range. This had seemed an inevitable long-term target when 2014 began, but now looks even remotely unreachable as the year 2017 develops momentum.
Pipe-Valve-Fittings Roundtable expands reach
The multi-billion-dollar PHCP industry’s PVF Roundtable, focusing on the fast-growing expanding energy industry, is accelerating its expansion at a torrid pace.
Founded in 1986 to focus on the broad group of explorers and developers of oil utilization potential as well as excavating, pipeline development, exporters, importers, mechanical contractors, distributors, and refineries, the Roundtable was founded to provide a common ground for the thousands of participants in the development of fossil fuels (coal, oil, and natural gas) and renewables (solar, wind, and geodesic).
This has been provided for by the Roundtable organization, which has embraced many hundreds of participants. The attendees participate in four annual networking sessions to share their common interest in the rapid energy development of which the U.S. is rapidly becoming the world’s most significant.
In addition, at these meetings held in Houston, the world’s acknowledged energy center, the Roundtable’s podium has featured such celebrated industry spokespersons as John Hofmeister, former Shell CEO, who now heads up Citizens for Affordable Energy; the late university economic expert Michael Economides; and the head of the American Petroleum Institute, to name a few.
The Roundtable extends thousands of scholarships for institutions such as to Texas A&M, whose many recipients are headed for positions in the energy industry.
Lately, other universities have voiced their admiration for what the Roundtable is accomplishing by attending the recent organization’s board meeting, as well as accepting speaking engagements from Roundtable officials.
As someone blessed with the award of outstanding ex-director by founder Sid Westbrook, I have been active in the association, with industry-wide communication that has multiplied the quarterly meeting attendance by ten in the last 10 years.
What has recently been announced is the formation of a forthcoming development of a “Young Roundtable Executive Aspirants,” college graduates, and others who wish to embrace their lifetime career involvement into the exciting emerging development. With the added enthusiasm of these millennials and others, America’s mighty world class energy industry will secure a permanent leading position alongside such global energy titans as Saudi Arabia, Russia, and the Mideast OPEC group, in general.
Will the consumer sector continue to carry the US economy?
When looking warily at the U.S.’s economic potential for 2017, it’s readily apparent that the American consumer kept the gross domestic product on the positive ledger side in 2016, even if marginally so, at less than 2% per annum.
While the two-thirds factor of America’s world-leading GDP has carried the U.S. economy more effectively than any other of the world’s developed nations, such impressive buying power reflected a rapidly expanding population, despite static wages and a record number of people on some type of government financial support.
This has translated into automotive purchases, home repairs, and maintenance as well as higher-than-expected personal expenditures motivated by the retail sector’s ease of purchase. This was substantially elevated by the Amazon factor’s impressive lightning-fast delivery system.
But also impressive was the fact that the U.S. savings rate remained on the positive side as retail prices remained stable, led by continued low prices for a wide range of commodities.
Despite the recent election campaign’s derision of too much dependence on consumer imports, this factor played a large role in the maintenance of a prudent plus in savings while continuing to keep retail consumption as a pillar of economic strength.
With major government initiatives to be considered by the new presidential administration, such as major new approaches to tax policies, immigration, and export/import trade direction, the impact of a continuously changing consumer-related technology will play a large part in the supremacy of the American consumer maintaining the critical role of economic linchpin.
Are emerging market bonds a good bet?
With returns on cash, government bonds, and even negative interest on highly-rated commercial paper, increasing attention has been given to corporate bonds from emerging nations the world over.
As a result of the parsimonious returns on conservative long-term bonds of developed nations at the government treasury level, as well as private corporate investment initiatives, so far this year, bond funds in the emerging nations’ high risk sector have received inflows of almost $12.5 billion.
In 2016, this alternative has proven to be a good bet with double-digit yield returns as the year neared an end, according to Bloomberg’s emerging market corporate bond index. This is triple the return generated by American treasury bonds which, of course, are gilt-edged in their security and guaranteed interest payments.
Looking toward 2017, this shift may be slowing, if not ending, as the reduced global trade and international import/export activity, which had driven their success in expanding their internal economies, is slowing down precipitously.
The good news that has kept interest in emerging nations’ red-hot corporate bonds is that such commodities as fossil fuels, copper, iron ore, precious metals, and energy-oriented production generally experienced price improvements as the year wore on.
However, the emergence of a new wave of protectionism in securing domestic markets by the world’s leading nations is already signaling further downturns in multi-national trade. This would hit emerging nations especially hard, as much of their monetary liquidity has been created by their intensive commodity excavation.
Furthermore, and unfortunately, such forthcoming commercial economies in Southeast Asia, Latin America, and Africa have proven to be increasingly unreliable geopolitically. This is heightening their risk factor immeasurably.
With geopolitical instability sweeping over much of the Mideast and North Africa, corporate investment in these areas may prove to be increasingly risky as the year 2017 emerges.
Will the new administration develop a realistic economic rebound?
When looking at superior past performance as a guide to how a dynamic economic recovery can lead the U.S. out of its economic doldrums, what appears as a shining example are the two terms of the 1981-89 Reagan Administration.
A comparison of America’s economic status between predecessor Jimmy Carter’s turbulence (1977-81) with the incredible rebound of the 1980s can be summed up in the following accomplishments:
1) A sagging economy, weighed down by runaway inflation and surging interest rates, elicited a called-for national “downsizing” by a frustrated President Carter as the only solution.
2) When President Reagan, who recovered miraculously from an attempted assassination, less than three months after unexpectedly winning a runaway presidential victory, left office in 1989, inflation had dropped from annualized high double digits to less than 5%.
3) An unwieldy, unworkable tax structure totally out of sync with the reality of the nation’s income sector was replaced with one realistically reflecting the circumstances existing in the mid-1980s. This was accomplished through a joint effort and partnership between GOP President Reagan and powerful Democrat House Speaker Tip O’Neill.
4) The pathetic job increases facing the incoming president in 1981 were succeeded by one of the greatest employment expansions since the end of World War II, reestablishing the U.S. as the solid world leader dating back to the post-war years. This laid the groundwork of the Soviet Union’s collapse when it could not compete with what then Russian President Gorbachev tacitly admitted.
5) The U.S. stock market’s Dow Jones Industrial Average leaped from a doddering 600 average to nearly 3,000 as the Reagan Administration ended.
6) By virtue of historic analysis, the 1980s not only vaulted the U.S. into the undisputed lone global superpower, but reversed America’s economic downturn, beset by the strong emergence of Japan and Germany threatening to further diminish U.S. economic strength.
Despite the following interlude of an undramatic George H. W. Bush Administration, primarily involved with stopping the Iraq military expansion, the solidifying of the U.S. world position in the 1990s owed much of its economic strength to the salvation of the Reagan Administration.
A similar historic repeat of the circumstances facing the incoming president in January 1981 seem to be in the making in 2017. Whether comparable success, or failure, follows will depend on the direction of the incoming leadership.
Will Obamacare rejection undermine the Obama legacy?
It is becoming increasingly apparent that the major focus of President Barack Obama’s single-payer development healthcare program is proving far short of the healthcare benefits it was expected to provide to the American population. This was punctuated by former President Bill Clinton, who labeled it as “crazy” in a public oration.
Granted, President Obama stepped into the presidential hot seat during the low point of the “financial crisis” that spawned a three-year period, from mid-September 2008, until well into 2012. At that point, Fed Chairman Ben Bernanke and U.S. Treasury Secretary Hank Paulson developed a combination of remedial factors that arrested the worst downward financial plunge since the Great Depression of the 1930s.
It is becoming increasingly clear that the $10 trillion, doubling the U.S. Treasury debt during Obama’s eight-year reign, was misspent in its focus on the revolutionary healthcare program (Obamacare) and a failed attempt to instigate “cap and trade.” The latter would have punished the “excessive” generation of carbon dioxide by rewarding those that had reduced or eliminated CO2.
This was scotched by the “takeover” of the “House” by Republicans in mid-term elections while the debates leading to cap and trade’s passage were still mid-stage. Also proving to be misspent was the hundreds of billions of dollars directed toward solar panels and other renewable initiatives, disappointingly unsuccessful in substituting their use to replace fossil fuels (coal, oil, and natural gas).
Also lost in the president’s opportunities for economic betterment was the nation’s degenerating infrastructure of pipelines, dams, bridges, railroads, and highways that had not been massively improved upon since the mid-1950s, during the two-term presidency of Dwight D. Eisenhower. The end result of these shortcomings was immense pressure on the incoming administration, which must now face the nation’s increasingly laggard infrastructure. This must be accomplished while grappling with the ever more ponderous national U.S. Treasury debt and facing the increased cost of a record-high principle base at upward-creeping interest rates.
It is very likely that the new Administration’s next four years will provide insight as to whether a solution to this combination of problems will indicate a step in the right direction, domestically and foreign policy-wise, to reverse the stagnation now hovering over the economies of the U.S. as well as the world in general.
This article was originally titled “Tapering off in 2017” in the January 2017 print edition of Plumbing & Mechanical.