Barcelona’s Extraordinary Innovation District

Today conversations about Barcelona are more apt to evoke discussion of the Academy-Award winning movie “Vicky Christina Barcelona,” starring the stunning Penelope Cruz, than talk about the other striking attributes of the second-largest city of Spain.

 

Travelers who are familiar with this city know about the unique and distinctive architecture of Antoni Gaudi as well as the influence of great artists like Pablo Picasso and Salvador Dali. Visitors to Barcelona remember the astounding still to be finished Gaudi cathedral — Sagrada Familia, the unique Gaudi created mansion Casa Batillo on Passage de Gracia, and the long walk down Las Ramblas which eventually meets the Mediterranean Sea.

 

Barcelona is more than a tourist haven. Today it is Spain’s chief commercial and industrial hub in addition to being its largest port. The key manufacturing industries include textiles, airplanes, machinery and electrical equipment. The city is well known in Europe for its design and style. It is also an important banking and financial center. Barcelona has several major universities in addition to many other educational and research institutions.

 

The city government is busy preparing itself for leadership among world metro areas in the 21st century via the rapid development of an innovation district known as 22@Barcelona in a former industrial district by the sea. The project is large and ambitious and focuses on massive infrastructure development including housing, social amenities, smart urban transportation, fiber-optics connectivity, 21st century pneumatic waste collection and state of the art heating and cooling systems. Although a large amount of funding originates from the government, iconic Spanish businesses including La Caixa (a major bank),Telefonica, Abertis, Agbar, and Gas Natural are also major investors in this project.

 

The innovation district focuses on the development of five strategic industries that include media, IT, hi-tech medicine, clean-tech, and design. Since its inception in 2000, the innovation district has attracted nearly 1,000 companies with 32,000 jobs in these five industry areas. The success of one of the most ambitious urban development projects in Europe is based on the fact that it combines working and living with education, culture, leisure and entertainment.

The European City Monitor in 2006 rated Barcelona as one of the most attractive cities in Europe for quality of life for employees as well as a choice for companies wishing to relocate. Barcelona is an increasingly popular destination for highly educated professionals and creative people. The innovation district wants to capitalize on this trend. There are few projects of this kind and of this magnitude in the world today except for One North in Singapore and Hafen City in Hamburg. Josep Pique, the CEO of 22@Barcelona, proudly suggests that, “it is today the model for similar developments in Buenos Aries and Cape Town.”

 

In a recent conversation, Jerry Engel, the Executive Director of the Lester Center for Entrepreneurship and Innovation at UC Berkeley ,shared his insights on the project—“22@ is an audacious innovation about innovation! Rebuilding an entire live-work community around the concept of sustainable innovation as a way of living. They have rebuilt this old early 19^th century industrial community from the infrastructure below the street to the Universities, Research Parks, Hotels, Office Buildings and Apartment houses. Quite an accomplishment by a far sighted municipal government”.

 

The current recession in Spain does not appear to dim the enthusiasm for this exciting project in Barcelona. They seem to be looking beyond the end of the downturn to another economic renaissance driven by continuous innovation and what better place do it than a large, sophisticated, mini city inside one of the most dynamic metropolitan regions of Europe.

I continue to be impressed by the enthusiasm in Spain about building large scale infrastructure projects, whether it is 22@Barcelona or the high-speed AVE train system that is beginning to crisscross a large part of the country. Today sleek and luxurious high-speed trains travelling at speeds of more than 180 mph (unthinkable in the U.S. in the near future) connect downtown Barcelona with downtown Madrid. Travel time is a little longer than 90 minutes. You do not have to go through time-consuming security checks at airports and long and tedious taxi rides into the city.

 

What is most impressive to me is that the country’s goal is to eventually develop the most extensive high speed rail network in Europe.

 

It is my firm conviction that investment in smart infrastructure and continuous innovation in business as well as in government will be crucial to a country’s prosperity in the 21st century. The story of Spain is encouraging. There is an important lesson for us in Spain’s leadership in the building of large scale innovative infrastructures even in difficult economic times.

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Tapan Munroe,PhD, is an economist.The contents of the blog reflect his opinions.  

 

Innovation is the Life Blood of Our Economy

The good news is that the uncertainty about a recession has been dispelled. We are officially in a recession which started in December 2007.The bad news is that it is likely to be the severest recession since the great depression of the 1930’s by the time it is over. Hopefully this will be sometime in the second half of 2009.

 Unlike the depression era the Federal Government has not been complacent about the meltdown of the economy and the financial sector. It has been very proactive. Hundreds of billions of dollars of tax payers money has been allocated to bail out the icons of our banking and insurance industries that are too big to fail but the strategy has yet to payoff .The credit markets are yet to unfreeze. At this time it is difficult to figure out what the money is being used for by the banks.

 In addition Congress is in the process of approving a $15 billion loan package for the three struggling U.S. auto giants-Ford, GM, and Chrysler in order to stave off their imminent bankruptcy. The prime rationale for the federal assistance is that they are too big to fail .Bankruptcy will result in severe job losses in the economy at time when we are in a deep recession and that is unacceptable to policy makers.

Well known economist Joseph Schumpeter some time ago said that recessions are like “a good cold shower for the economic system”. My hope is that even large old companies such as Ford, GM, and Chrysler can wake up with the cold shower hitting them with the realities of the 21^st century and become efficient and smart and build advanced fuel efficient cars that can compete with automobile leaders such as Toyota, Honda, and BMW. 

In times of economic downturns businesses lay off workers and cut costs wherever possible even in innovation projects that could pay handsome dividends in terms new products down the road. In other words innovation is often seen as a frill and can be dispensed with in tough economic times. That can ultimately spell disaster for a business in a highly competitive global economy.

This phenomenon is also nationally true. Bailouts, however, are temporary solutions only. They will not sustain productivity and prosperity into the future.

 In order to revitalize our economy we need to fall back on America’s strength—the idea and innovation economy. America has been a leader in innovation for quite some time.

The list of American successes is long and impressive and ranges from the light bulb to the transistor, the personal computer, the Internet, the genome. Four out of the eight winners of the Economist magazine’s recent annual innovation award (October 2008) are Americans. They include Jimmy Wales for the Wikipedia, the free on-line encyclopedia; Steve Chen and Chad Hurley, for You Tube, an easy way to share video via the Internet; Arthur Rosenfeld for the promotion of energy efficiency; and Bill and Melinda Gates for developing a businesslike approach to philanthropy. Their foundation provides an enabling platform for other non-profits for improving lives around the world. (Economist, December 6, 2008).

I would like to suggest that clean tech be one of our top national economic priorities. Silicon Valley as well as other US prime innovation regions are active in developing and investing in various forms of clean tech ranging from solar thermal, solar photovoltaic, biomass, tidal power, and energy efficiency.

 Clean energy is currently one the fastest growing sectors of our economy and it has the capacity of growing hundreds of thousands of jobs in the next several years. In addition it would contribute to our critical economic and national security needs of energy independence as well as reducing air pollution and mitigating the threat of climate change.

As job creation is one of the urgent priorities one of the obvious areas for government to invest in immediately would be to retrofit all of our existing public buildings .The payoff in addition to creating thousands of jobs is electricity conservation and reduction of pollution. Existing buildings use about 70% of our electricity and contribute to nearly 40% of our air pollution .The proposed Obama public works plan supports this initiative.

Enormous innovation opportunities also exist in health care, education, and infrastructure development with emphasis on transportation. Let us emulate the Silicon Valley ecology of innovation around the country so that we can become world leaders in creating new technologies that enhance our commerce as well as our quality of life.

We need to move beyond gas guzzling SUV’s, McMansions, and risk oblivious financial gymnastics in order to sustain our economy.

December 14, 2008

 

 

Economics of Hope –2009

This is the season of joy and hope.

A look at my investment portfolio certainly does not fill me with joy at this time. My joy also does not come from the things I own, it comes from spending time with family and friends and sharing the holidays with them.

My hope is an end to the gut wrenching recession we are experiencing and moving on to an America that is once again a highly competitive and productive economy.

Before I discuss what lies ahead for the economy in 2009 and beyond I will recount a bit of recent economic history as a lot has happened in the last year.

The U.S. recession started in December 2007 and much of the world is also mired in a recession including the 14 European Union countries. Even the robust economies of China and India are experiencing significant slowdown. By the end of 2008 the US will have lost 2 million jobs with unemployment level at around 7%.

We may have staved off further worsening of the downturn in the last six months by pumping more than trillion dollars of taxpayer’s money into the economy in 2008 via the Federal Reserve System and the U.S. Treasury. In addition further reinforcements for the floundering economy have come from the Fed with a recent cut in the Fed Funds rate to near zero (~ 0.275%).This is almost free money for the bankers that borrow from the Fed.

Typically in past recessions easy money policy of the Fed alone would have been sufficient to start the economic recovery. This time it has not done so because of the double whammy of the housing bust and the meltdown of the financial markets. Credit is still very tight despite the infusion of billions of dollars by the government into the banking system. Confidence has been undermined and many banks are still shy about lending money to clients.

The December 2008 Anderson UCLA forecast suggests that the national recession will continue well into 2009 with total job losses of another 2 million and unemployment rising up to 8.5% by the end of 2009 and early 2010.The recovery will begin by the end of 2009 .Most experts agree with this viewpoint.

What kind on a national economic recovery are we going to have?  Things are not going to go back to the booming housing bubble years of 2005 and 2006 when sky rocketing home prices encouraged consumers to use their houses as ATM machines to finance their reckless spending. With the housing bust consumer confidence plummeted and it continues to fall today.

Consumers account for nearly 70% of our economy and they will not participate in the next revival. This is a serious problem. They will be too busy taking care of their household debt accrued over several years of weak income and in addition they will work on building up their depleted savings again.

In last several years US exports have been a major factor in the nation’s economic growth because of an anemic dollar as well as robust economic growth abroad. The global recession will restrict this avenue of growth for the US with declining foreign demand for our exports at least next two years.

So where will the economic recovery come from? It will have to be from the massive fiscal stimulus being proposed by President elect Obama’s team. The plan involves hundreds of billions of dollars in spending on improving and adding to the nation’s infrastructure in areas such as highways, mass transit, weatherization of government buildings for energy efficiency, installation of information technology in medical facilities among others.

Nobel Prize winning economist Paul Krugman of Princeton University recently suggested that the U.S. economy will have to depend on massive infusion of public money into infrastructure for many years to come before the economy will pick up enough steam and sustain respectable economic growth. His concern is that once the economy picks up momentum there will be enormous political pressure on the new administration to cut spending and raise taxes prematurely to reduce the deficit before the economy gets on a sound footing. (Paul Krugman, New York Times, and December 22, 2008).I agree. That will be a big mistake.FDR did that in 1937 and the economy went into a recession.

There is little doubt in my mind that a New Economy is about to unfold where government becomes a major player in investing in much needed public capital goods just as the nation did in the aftermath of WW II when we built the Interstate Highway system. That made a huge difference in our economic well being and made the nation more competitive. It is about time we started rebuilding America’s competitive base by investing in our future and not just living in the past.

Passive Houses can Rejuvinate the Building Industry and the Economy

The cheapest, cleanest, and most abundant energy resource is energy efficiency. It is a very simple concept—using less energy to get the same amount of heat for our homes, same amount of light for our offices, and same amount of power for our cars. It is really about getting the same or more with less.

There are two general categories of energy efficiency measures:

·         First, using more efficient machines and designs such as the compact fluorescent bulb that usually resemble high end onion rings;

·         Second, improving the efficiency of existing machines and structures, such as insulating our homes.

As buildings use nearly two thirds of our power they ought to be the prime target for implementing energy efficiency measures. In recent weeks more attention is being paid to the Passive House rather than on the crumbling housing market. (Elizabeth Rosenthal, New York Times, December 27.2008) The Passive House involves a design and construction standard that reduces the heating requirements to such an extent that conventional heating systems are no longer required in the building. The term passive comes from the fact that the home maintains a steady temperature and does not depend on fossil fuel generated heating.

There are no drafts, no cold floors, no waiting for the heat to come on in the Passive House. In fact there are no furnaces in such a house. They are well insulated and air tight and are heated by the free heat generated from appliances such as refrigerators, ovens, lighting, and computers operating in the house. Of course body heat and external solar heating of the house are also captured in such a system. It is important to note that these structures do have windows that can be opened and most of them face south than north. The Passive House is an excellent idea—why not uses the heat that one can obtain free?

What about ventilation in such an airtight capsule? Previous attempts at building solar heated homes failed because of stagnant air and resulting mold. No problem. The new design has a smart mechanical ventilation system that brings in fresh air while eliminating the same amount of stale air from the house. What is really impressive is that the stale air carrying the free heat transfers the heat to the incoming fresh air prior to its leaving the building. Such a system enhances the air quality of the house greatly. An added feature of the design is that the house has zero emissions. (Pat Murphy, www.energybulletin.net)

The concept of the Passive House originated from the city of Darmstadt near Frankfurt in Germany.( Passivhaus Institut )The first Passive House was built  by Wolfgang Feist, a physicist from Darmstadt in 1991.Such homes are becoming increasingly popular in Germany and Scandinavia. Today they require 85% less energy than a house built to existing German building standards. (Hans De Keulneur, Intelligent Energy for Europe SAVE program) What is impressive is that the additional construction cost in Germany is only 5 to 7% more than the standard house costs.

The Passive House industry is growing fast in Germany. Schools in Frankfurt are built with the latest Passive House technology. The European Parliament is now proposing that all new buildings meet these standards by 2011.Now even the U.S army in Germany is considering building their barracks with this technology. Currently there are nearly 15,000 Passive Houses in existence around the world. Vast majority of them are in Germany.

The movement is slowly gaining momentum in the U. S. Recently the Passive House Institute US held its third annual conference in Duluth, Minnesota. By contrast, the European Institute recently held its 12^th conference in Germany. So far we are mostly talking about the concept rather than embracing it as they have done in Germany.

 Nabih Tahan, a California architect, who worked in Austria for more than a decade, recently retrofitted his older home in Berkeley to Passive House standards. It is now a demonstration Green Home in the Bay Area. (www.nabihtahanarchitect.com).  Hopefully the Passive House movement will  gain a foothold in the Bay Area and spill over to the other regions of the U.S.

Undoubtedly the Passive House concept extending to all buildings could play a crucial role in cutting our national energy consumption. This would not only enhance our building practices but lead our nation to energy independence as well providing us with a major strategy for meeting the challenges of climate change and environmental pollution. Energy efficient buildings are a big deal.

 

 

 

Is Silicon Valley insulated from the Economic and Financial Debacle

The region is intimately connected to the U.S. and global economies. It would be unrealistic to expect that Silicon Valley will come through unscathed in the current economic ordeal. It is not a matter of if, but how much? Let us count some of the pluses that favor Silicon Valley at this time. The lifeblood of the Valley economy is venture capital. This is the ingredient that finances and nurtures startup companies and these new companies are the drivers of the region’s economic vitality and growth. The lists of Valley startups include today’s global tech icons such as Google, eBay, Yahoo, Intel, Hewlett Packard, and Cisco Systems and others. I have good news about venture money. In the third quarter of 2008, according to the Cleantech Group, the cleantech sector garnered $2.6 billion globally and Silicon Valley did well by obtaining $419million out of that.( The Cleantech industry includes an array of renewables that include solar, wind, biomass, and energy efficiency technologies.) For all of 2008, cleantech businesses in the Valley obtained more than $1 billion. The top five VC investors include Google.org; Kleiners, Perkins, Caulfield and Byers; and Khosla ventures. The biggest Valley VC deal in the third quarter involved the $200 million invested in the solar photo voltaic company Solopower. The Silicon Valley’s renewable power industry leaders were much relieved when the renewable-energy tax credit was extended as an add-on to the $700 billion bailout plan. The tax credit extension is critical to the success of this vital industry. The credits were to expire at the end of 2008. Without it many of the large projects nationwide could not have been built. That would have been a major blow to the industry, which has the promise of reshaping and revitalizing not only the Valley’s economy, but also the national economy. The investment tax credit was extended for an additional 8 years for solar power plants and for one year for wind power projects. The tax credit for solar power is 30 percent of the cost of plants. For wind farm owners, there is a 2 cents credit for every kilowatt hour of electricity generated. From a jobs perspective the Silicon Valley has fared relatively well. Between January and August of 2008, the region added 7,400 new jobs. Between July and August of this year, the region has added a net of 300 jobs, according ot the state. This is significant when we consider that the nation, the state, and other parts of the Bay Area have continued to lose jobs steadily since the beginning of the year. Minuses for the Valley are surely beginning to emerge.  Capital intensive semiconductor companies will also be impacted adversely because of the sever credit crunch. According to the New York Times, AMD recently ran into trouble trying to raise hundreds of millions of dollars for its planned spinoff of its chip fabrication operations in order to concentrate on chip design because of frozen credit markets. On Oct. 6, the Internet auction giant, eBay, reduced its workforce by 10 percent when it terminated a thousand workers. They are also planning to reduce several hundred temporary positions in order to cut costs and streamline operations. The reason for the layoff was due to slow growth in its core auctions business. Undoubtedly the two economic giants of the Valley, eBay and Google, are concerned about the impact of the recession on their businesses as they rely on consumer spending and clicks on their ads respectively for majority of their revenues. Belt tightening ,some layoffs, and a hiring freeze in many Valley companies will continue in the months ahead as the economy remains mired in a recession. Barring a prolonged recession in the U.S. economy, I see only a slowdown in the Valley, not a full blown recession,             Sorry, no items are currently available.

Market falls by a shocking $1.2 trillion

Shockwaves are reverberating around worldwide capital markets. Response of Wall Street to the failure of Congress to pass the $700 billion bailout measure designed to prevent the collapse of the credit markets was staggering.

The US stock market lost nearly $1.2 trillion in value on Monday, September 29, 2008. The one day loss in value of stocks was considerably higher than the $700 billion requested in the bailout measure.

The decline in the Dow Jones average of 778 points was the most ever in a single day surpassing the previous record of a drop of 721 points in the aftermath of 9/11 terror attack on America.

World financial markets were rattled as they tried to shore up the banking system by pumping billions of dollars of new money to keep credit flowing in their economies. The US Fed offered nearly $620 billion to other Central banks to help them out in this severe credit crisis.

Credit is the life blood of our economies and as lending dries up so does the economy.As banks have become increasingly fearful of lending to each other and tightened their lending criteria money  has become scarce. Hence the concern of the US Federal Reserve Bank. The Bank wanted to make sure that other economies had enough credit to keep their economies functioning. It is a full fledged global financial crisis now.

The financial implosion is not just  decimating Wall Street it is also taking a  toll on Main Street. After all Wall Street and Main Street are joined at the hip. As credit becomes scarce families are unable to finance their autos, fund student loans, finance home loans, and purchase furnititure and appliances. There is also the meltdown of our IRA’s and retirement accounts. Many of my friends are scared to even look at their shrinking portfolio statements. The American Dream is begining to erode.The pain on Main Street  is obvious and widespread.

Businesses are  facing difficulties in meeting their payrolls, building up inventories,expanding their shops and plants, and investing in new technology. If the crisis continues further  businesses will close down and lay off their employees at rates faster than what they have been doing in recent months if credit availability worsens. Small businesses are begining to pay a heavy toll due to the worsening economic and financial connditions in the U.S.

Implications of the financial crisis are obvious.The weak economy may slide into a full fledged recession in a matter of weeks if immediate action is not taken to instill some confidence in the market.

It is critical that the bailout measure which has now grown to a document of several hundred pages instead of the initial three pages with modifications be approved as soon as possible. Hopefully it will be approved by the end of this week by the House and the Senate.

There is little doubt that the passage of this measure alone will not solve our economic and financial ills.There is a long list of problems that need to be addressed.We need to revitalize and renew the economy if America is to live up to its potential as one of the economic leaders of the world in the 21st century.

Passage of the bailout measure is akin to applying a bandaid to a severe injury. They are necssary to stop the bleeding temporarily. We need a cure and not a short term fix.

In my next column for the Media News group to be published on September 7, 2008, I will talk about what we need to do revitalize our economy.

Who will bail out Uncle Sam?

We are in the midst of the most serious financial crisis since the Great Depression of the early 1930s. It all began with the housing bubble and subprime loans. Wall Street got into this mess by betting recklessly on real estate via the purchase of subprime loans. Lack of due diligence, euphoria, and a casino mentality were the problems behind the debacle.

What was unthinkable has happened. In March 2008 there was the rescue of the fabled Wall Street investment bank Bear Stearns by JP Morgan Chase with billions in help from the Fed. Many experts thought that this was the last of our Wall Street problems.

But that was just the beginning. In a matter of weeks we witnessed the takeover by the U.S government of mortgage giants Fannie Mae and Freddie Mac. Both were at the brink of disaster. This shocker was followed by the bankruptcy of 158 years old Lehman Brothers, followed by the quick sale of Merrill Lynch  to Bank of America.

It was hard to believe that in a matter of a few days two of the largest investment banks in the world became history. Then came another shocker – the bail out of the world’s largest insurance company, the $1 trillion American International Group (AIG) via an $85 billion loan from Uncle Sam.

More surprises were in store. The administration decided to solve the imploding credit crisis in one swoop. The mother of all bail outs, a $700 billion plan, was presented to the U.S. Congress on Monday, September 22, ’08 by the U.S Treasury Secretary, Henry Paulsen. It involved the creation of a fund that would buy out toxic loans from banks. The idea is to soften the credit crisis and restore confidence in the financial system.

The underlying concern in framing this proposal was that the meltdown of Wall Street poses great risks for Main Street. Credit is the life blood of our high spending market economy. Disappearance of credit would mean that consumers and businesses will not be able finance their spending and investments. That would result in a further worsening of the weak US economy, continued disappearance of jobs, and further delay in the recovery of the housing sector.

Congress has expressed concern about writing an enormous blank check with tax payer money to Wall Street without fully examining the plan. Specific concerns in congress included independent oversight of the fund, help for homeowners facing foreclosure, limits on executive compensation of firms seeking help from the plan, and the value of what the government will be buying. An additional issue is taxpayer ownership in the banks selling their bad debt to the government.

Most economists agree that the current situation is too risky to just leave it to the market and the Paulsen intervention is necessary to avoid huge problems down the road. The debate is about how to do it. There is much concern that the bill will serve private interests at public cost.

I expect that this bill will pass in a matter days. With national elections coming in a few weeks and the congress getting ready to adjourn for the fall elections the sense of urgency is acute.

My questions at this point are:

· Who will be bailed out next? The auto companies?

· Are there more shocking surprises like the ones we have experienced in the last several weeks?

· Is $700 billion too little, or is it too much?

· Value of what the government will be buying?

· What will be the economic consequences of the bill?

· What is in the bill for Main Street

· Are we drifting into an era of state capitalism?

· When do we say enough is enough?

Oil Price Spike

The oil price picture gets dicer every day. It climbed to a record $138 a barrel on Friday in the New York Mercantile Exchange as the dollar fell sharply against the Euro and tensions in the Middle East mounted.

In the last year prices have doubled, and in 2008 oil prices so far have risen by over 40%,

My take on skyrocketing prices of oil has to do with rising energy demand of high growth Asian economies such as China and India where oil prices are heavily subsidized, a weak dollar, and rising tensions in the Middle East. I do not think it is another bubble.

Comments on the U.S. Economy

The U.S. Economy

Overview

The stock market has put on a spectacular show in the last few months. On October 23 the Dow Jones Industrial Average crossed 12,100, an all time record, indicating investor optimism resulting from impressive corporate earnings and a steady decline in oil prices in the last several weeks resulting in lower inflation.

It took the Dow nearly six years to recover from the stock market debacle of Spring 2000 triggered by the dot-com bust. Normally it takes a bull market about three years to return to a new high following a major correction.

Another piece of good news was a 0.5% drop in the September consumer price index (CPI), helped by a fall in oil prices. From a high of $78 a barrel in mid-July crude oil prices has fallen to nearly $58 a barrel by mid-October. The fall in the CPI resulted in average worker’s weekly pay increase in of 1% after adjusting for inflation. September was the first month in 2006 when the CPI did not rise.

The core inflation rate, which excludes volatile energy and food prices, rose by a modest 0.2% in September indicating that recent energy price increases have not spread throughout the economy.

But, there is concern about the fact that the core inflation in September ‘06 increased by 2.9% from a year ago. This is a rate higher than what the Fed likes. The Fed’s comfort zone is in the 1%-2% range for the core inflation rate. So the economy is still not out of the woods.

The Fed at its most recent meeting kept the Fed Funds rate unchanged at 5.25% indicating that the economy is performing sufficiently well and the inflation picture at this point does not warrant a rate increase at this time. The door is still left open for an interest rate increase if inflation kicks up again in the fall or the winter.

What could trigger higher inflation in the near term? Higher oil prices because of OPEC cut backs in crude oil production, and worsening of the Middle East situation, and higher labor costs as the economy continues to build up stream.

Housing & Real Estate

According to the U.S. Department of Commerce new home construction in September ’06 was up by 5.9% from August. This comes to an annual rate of 1.77 million new housing units for the year. This is good news for an industry that has been starved for some positive developments. However, housing starts are still 18% below what it was a year ago.

The concern is that permits for new construction (indicator of housing construction in the near future) declined by 6.3% in August. Given that there is a considerable inventory of unsold houses in the market currently homebuilders are likely to cut back on new construction in the months ahead.

- Los Angeles based KB Home recently said that new home orders on the West Coast declined by 58% in the June-August period compared to an year earlier.
- The housing industry that had set records for the sale of new and existing homes for five years (2000-2005) in a row has been steadily losing momentum this year.
- The residential home resale market continues to slow down. Home resales on a monthly basis have been declining steadily each month since March of 2006.Home resale was down in most of the U.S. except for the South, which posted a small gain of nearly 0.4%.

For the first time in ten years median home prices in the U.S. declined. The 2.5% price decline between August 2005 and August 2006 was the biggest drop in forty years. This has raised some concerns about the real estate slump and its impact on the economy.

Even in the San Francisco Bay Area, once considered unsinkable, median home price in the 9 county region declined by 0.8% between September 2005 and September 2006. A large inventory of houses and condominiums has transformed the Bay Area from a sellers’ to a buyers market for the first time in 4.5 years in the aftermath of the Dot-Com Bust.

Southern California home prices increased by 1.9% for the year ending September ’06. This is the smallest gain for the region in ten years.

The bright spot in the real estate sector is the rental market. It is hot. According to RealFacts, a Novato research firm, in mid-October ’06 the average asking rent for a Bay Area apartment was $1,415 compared to $1,378 a year ago and the occupancy rate was 96%. As the expectation of big gains from real estate speculation has vanished more and more people have opted for rentals.

The Stock Market

The recent breaking of the 12,000 mark by the Dow Jones Industrial Average of 30 industrial stocks in recent weeks has been the cause of much celebration among investors. That is understandable. However, from an analytical perspective we need to remember that the Dow is a very limited index. Only 30 stocks represent the U.S. economy with its enormous complexities.

To obtain a more complete understanding of what is really happening in the financial markets we need to take a look at two broader indices—The S&P 500 index of 500 blue-chip stocks and the NASDAQ composite index, which includes 3,000 stocks. The S&P at this point is actually down 13% from its high in March 2002, and the NASDAQ is down 55% from its peak nearly 6 years ago.

The stock market has continued to ignore the impact of the real estate slump on the economy. Many analysts believe that housing slowdown will not be enough to dampen the stock market. Why? The loss of jobs in the homebuilding industry will be offset by growth in non-residential construction (commercial and industrial) construction industry. In addition, we have not witnessed a hit on consumption spending despite fall in home prices in many areas of the country. Equity investors remain focused on earnings and are betting that they will emerge unscathed despite the housing slow down as the Fed engineers a soft landing— modest growth and modest inflation.

The view from the bond market is different. The 10 year Treasury Note yields have declined from 5.25% in June ’06 to 4.56% in the first week of ’06.With the current Fed Funds rate at 5.25% we have a negative yield curve. (Short-term rates are higher than long-term rates). To many analysts that suggests a real slowdown in the economy if not a recession down the road.

My take on the current situation is that the economy is slowing down and the inflation outlook is risky at best. It is unlikely that we will see a Dow 14,000 for quite a while. In the meantime enjoy the ride.

California Economy

California’s unemployment picture continues to improve. The state unemployment rate in September was 4.8%, slightly down from the 4.9% in August. In September 2005 California unemployment rate was 5.2%. The total number of people unemployed in the state was 858,000. Among the unemployed, 98,4000 left their jobs on their own accord, 260,400 were laid off, and the remaining were temporary jobholders.

September 20th Fed Meeting – Decision: No Change in Discount Rate

The Fed voted to keep the Fed Funds Rate unchanged at 5.25% at the September 20 meeting. This is the second time in six weeks the Fed has done that for a few months.

Two factors weighed heavily in the Fed decision—1) housing slowdown and its downward impact on the economy, and 2) lower inflationary risk as a result of sharp decline in oil and natural gas prices in recent weeks.

It is unlikely the Fed will change rates in their October meeting just before the mid-term elections. So borrowers will have a breathing spell.