December 2012

A PUBLICATION OF CHILTON CAPITAL MANAGEMENT

W W W.CHILTONCAPITAL.COM

Tis Better to Give

Samuel Rines

improvement. More jobs create more consumers and more consumers create more jobs for retailers, a positive feedback cycle. Constructing a Different Picture While the employment picture appears increasingly jolly, constructionespecially residential construction employmenthas lagged behind the broader recovery. Overall, construction peaked in 2006 with 7.73 million people employed in the industry. Today 5.54 million people are employed in construction, a 28 percent decline. Residential construction employment is even worse. At the height of the housing boom, in 2006, just over 1 million people were employed building homes. This figure has stabilized only recently at around 560,000, a 45 percent decline. Meanwhile, nonfarm payrolls have recovered most, though not all, of their losses from the recession with the private job market down only three percent from its 2008 peak of 115.6 million people employed. In the spirit of the season, consider this a good thing. The consumer is alive and consuming 3 percent more than the pre-crisis peakwith employment still recovering. Construction employment as a whole has stabilized, and a continuation of the housing recovery would begin to replenish some of the lost construction jobs. The sheer size of the residential market suggests that a housing recovery could boost employment and economic growth dramatically. At the beginning of 2008, residential fixed investment was $813 billion, but by the third quarter 2012 that figure was down to $388 billion, a 52% decline. As frightful as that decline might sound, the cost to the economy is even greater than simply the loss in housing investment. The investment multiplier

ive more gifts this Christmas. After all, the health of the US economy and its prospects for growth rely heavily on where, and how much, the US consumer chooses to shop. The term consumer spending is ubiquitous, but sometimes the familiarity leads to a misunderstanding of its importanceand at more than 70 percent of GDP, it is critically important to the economy. As consumers recovered from the last recession, so did spending. From the bottom in 2007, spending has increased by more than $600 billion and retail sales have improved by nearly 14 percent since 2009. Not simply part of the economic machine, consumers are the juice of the economy. Without a strong and growing consumer, the US economy will struggle to continue moving forward. One of the more critical issues for the economic recovery is how to keep the US consumer going. There are hopeful signsunemployment continues its slow decline, the housing market has life, and consumer confidence has hit a five year high. The slightly less bullish counterpoints are that fewer people are participating in the labor market, and that housing and consumer confidence remain well below long-term levels. But there is a possibility the consumerand therefore much of the economyhas only begun to recover. A continued housing rebound could create more jobs in a construction sector that has yet to see much

for housing is somewhere around 1.4xmeaning that for every additional dollar pulled from fixed residential investment, the economy loses $1.40. This also means that the economy can still gain quite a bit from a housing recovery, as housing starts begin to creep upward, employment slowly gains traction, and the investment multiplier kicks in. Construction is not the only part of the economy that would benefit from a continued recovery, but it is one of the last truly depressed segments of the economy and has a long runway of potential growth. Housing is essential to a recovery. It bolsters the economy by bringing additional income, and the purchases that naturally come with it. Nonsupervisory construction roles pay 42 percent more than the average of all industries, adding more spending power to the economy than the typical job. Even with the recovery that has already taken place in housing, many of these jobs have yet to return. A continued recovery will require housing starts and price stabilization to carry over into employment figureswhere a significant amount of economic growth potential still lies. The Unwittingly Confident Consumer Housing and employment provide economic benefits beyond simply creating jobs with paychecks to be spent. They make us feel better about today and tomorrow. If the economy feels like it is stabilizing and employment is secure, we feel better about buying cars, homes, and other big ticket items. Confidence in the economy creates a positive loop. Consumers feel more aff luent when the stock market performs well and their homes increase in value. This wealth effect is correlated with higher spendingwhen there is a high level of confidence about what the future holds, it is easier to make financial decisions. The consumer confidence reading is 82.7, a 5 year high. While not spectacular (for much of the mid-2000s confidence was above 90), it is significantly above the 2008 low of 55.3. There are legitimate questions about the high level of confidence consumers are showing in the face of obstacles like the fiscal cliff, the albatross of Europe, and a recovering yet still weak jobs market. But there are also reasons to believe the number could go much higher. The fiscal cliff is an immediate issue, and consumer confidence appears to be unfazed. A resolution to the fiscal cliff should provide even more clarity, pushing confidence higher. And, barring any meaningful missteps, Europe should remain in consumers peripheral vision. Moreover, a recovering labor market not only makes those searching for a job feel better, it also makes those with jobs feel more secure as higher demand leads to fewer available workers with desired skills. This leads to higher
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wages, and higher wages lead to higher discretionary spending (all of which could also lead to inf lation, incidentallybah humbug). Christmas and the Economy The US economy is predominately driven by consumption, and people tend to spend when they are confident and secure. The economy relies heavily on the confident consumer during the holidays with a significant portion of retailers revenues generated during the Christmas rush. The shopping destinations of consumers are shifting from brick-and-mortar to an increasing comfort level with online shopping. Black Friday has begun to bleed backward into Grey Thursday as consumers look for bargains, and Cyber Monday continues to grow. But even as the shopping habits and traditions of the US change, the economic factors that inf luence spending habits are largely the same. Whether they realize it or not, consumers benefit directly from higher home prices, increased home construction, and a more secure labor market. The more spent at Christmas, the better off the economy will be in the future. The more homes purchased today, the more jobs created, and the higher home prices go. An increase in the price of homes fosters a wealth effect to those who own a homewho spend more. And consumer confidence can still go a long way. Home prices have stabilized, but have yet to move higher in a meaningful manner. Employment remains low, and residential investment remains weak. There could still be a few pleasant surprises left in this recovery. In the meantime, doing the best thing for the economy is simple: shop more. Remember, this is the season of giving.
Sources: Bloomberg, University of Michigan Consumer Confidence, How Housing Booms Unwind: Income Effects, Wealth Effects, and Feedbacks Through Financial Markets by Case and Quigley, The Associated General Contractors of America, Bureau of Labor Statistics, Bureau of Economic Analysis, and the Federal Reserve Economic Database.

SAMUEL RINES is an a nalyst and Economist at chilton capital m anagEmEnt in houston, tExas. dirEct quEstions or commEnts to: srinEs @chiltoncapital .com ZACH BECk is thE E ditor of chilton currEnts and an opErations spEcialist at chilton capital m anagEmEnt in houston, tExas. for furthEr information on chilton capital m anagEmEnt stratEgiEs and sErvicEs, plEasE contact christophEr l. K napp, cKnapp@chiltoncapital .com for rEprints contact srinEs@chiltoncapital .com www.chiltoncapital .com/currEnts