As so often happens when I’m out & about, I was asked countless times at the Institute of Building’s annual awards on Friday night: “What’s the market doing?”
My first reaction to this question is: “Why are they asking me?” And my followup is this: “Because they don’t have a clue.”
That’s not to say the people asking the question are clueless or stupid, but that clues to the immediate economic future are very hard to establish.
My preference is to look at the big global picture/s, and then come back to local property issues such as vacancy, land availability & costs, and the constraints such as labour supply & regulation.
Building industry’s dedicated exponents need to dominate
On the way to these economic pictures, the awards need a special mention. Many institutions award the project, but the Institute of Building does a double assessment of the individual’s contribution, starting with a preliminary judging round and followed by a second round of judging.
The winners, unassuming despite their performances, talked about others in their team and thanked their company.
That’s about bringing quality performance, from top to bottom, to an industry which has been rocked by widespread bad performance over 2 decades, as leaky buildings & many other examples of poor workmanship gained prominence.
Expertise & dedication need to dominate over the quick & shoddy.
Unfortunately – and I’d like to be proved wrong on this – I feel poor performance will continue to dog the industry and, through that, will reduce the country’s economic growth.
My view from the wider picture centres on the US treatment of its economy, which I see as essentially avoiding “bad” news, as in no belt-tightening:
- The US Federal Reserve continues to talk of extremely low inflation, around 2%. One US index, Chapwood, examines inflation around 50 metropolitan areas annually and put the range in 2018 at 6.9-13.4% – nothing remotely as low as the 2% figure
- In a speech on Friday, Fed chair Jerome Powell thought the central bank was doing OK – and ignored what I believe is the main lever enabling economies to function as if everything really is fine, the upward spiral of US public sector debt
- Reduction of that public debt hasn’t just stopped, it’s been forgotten; according to the US Treasury it went above $US22 trillion in February, then resumed mountaineering on 2 August with a $US300 billion jump and topped $US22.4 billion last Tuesday; the US Debt Clock website had that debt level at $US22.532 trillion on Saturday afternoon
- Any move to address the issue causes the US sharemarkets to cough, and the fix stops
- Nevertheless, President Donald Trump wants lower interest rates and the debt level to be ignored
- That upward debt spiral will in due course burst into catastrophe, spreading internationally, unless some smart person produces an alternative that enables net economic growth, instead of theoretical growth which is debt-funded to an extent that it’s actually backward growth.
This switch of economic track is not going to occur as a result of Fed action, judging by the speech Federal Reserve chair Jerome Powell gave at the Jackson Hole gathering of central bankers on challenges for monetary policy.
Below, I’ve set out the key handful of points Mr Powell made”
“I will divide the history since World War II into 3 eras organised around some well known ‘Greats.’ The first era comprises the postwar years through the Great Inflation. The second era brought the Great Moderation but ended in the Great Recession. The third era is still under way, and time will tell what ‘Greats’ may emerge.”
After the first era: “And the next expansion, as we are all painfully aware, ended with the collapse of a housing bubble and the global financial crisis. Thus, this second era provided good reason for optimism about the Fed’s ability to deliver stable inflation, but also raised a question about whether long expansions inevitably lead to destabilising financial excesses.”
Era III, 2010 & after: Monetary policy & the emerging new normal
“The third era began in 2010 as the recovery from the Great Recession was taking hold…. I will fast-forward past the early years of the expansion and pick up the story in December 2015.
“The second era’s question – whether long expansions inevitably breed financial excesses – is a challenging & timely one. Hyman Minsky long argued that, as an expansion continues and memories of the previous downturn fade, financial risk management deteriorates and risks are increasingly underappreciated. This observation has spurred much discussion. At the end of the day, we cannot prevent people from finding ways to take excessive financial risks. But we can work to make sure that they bear the costs of their decisions, and that the financial system as a whole continues to function effectively. Since the crisis, Congress, the Fed & other regulatory authorities here & around the world have taken substantial steps to achieve these goals. Banks & other key institutions have significantly more capital & more stable funding than before the crisis. We comprehensively review financial stability every quarter and release our assessments twice a year to highlight areas of concern and allow oversight of our efforts. We have not seen unsustainable borrowing, financial booms or other excesses of the sort that occurred at times during the Great Moderation, and I continue to judge overall financial stability risks to be moderate.”
Mr Powell touched briefly on the division of responsibility, and on the influence of the Trump trade utterances:
“Setting trade policy is the business of Congress & the Administration, not that of the Fed….
“The global growth outlook has been deteriorating since the middle of last year. Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing & capital spending in the US. Inflation fell below our objective at the start of the year. It appears to be moving back up closer to our symmetric 2% objective, but there are concerns about a more prolonged shortfall…”
“We face heightened risks of lengthy, difficult-to-escape periods in which our policy interest rate is pinned near zero.”
4 issues which Simon Barnes, the head of the institute’s awards judging panel & a co-founder of project consultancy Barnes Beagley Doherr Ltd, mentioned at Friday’s event as influencing the state of the development market were: lack of training, a massive shortage of skills, health & safety and council regulation.
Some building company owners told me they weren’t seeing the poaching of staff that’s occurred in previous end-of-boom tight labour markets.
The Government is addressing skills & training with an overhaul of tertiary trades education, which is also bound to cause upheaval.
23 August 2019, Jackson Hole, US Federal Reserve chair Jerome Powell: Challenges for monetary policy
US Treasury, Debt to the penny
US Debt Clock
NZ Institute of Building awards: Institute of Building awards made for beating adversity, developing technology
Attribution: NZIOB, US Federal Reserve, US Treasury, US Debt Clock, Chapwood index.