In trying to understand various indicators, I believe the US economy has morphed into a . . . → Read More: Construction Outlook 2011]]> It’s the time of the year to reflect on business and economy; the recent past and what lies ahead.  With the challenges of 2008, 2009 and 2010 in the history books, one wonders what 2011 is going to be like.

In trying to understand various indicators, I believe the US economy has morphed into a bull and bear dual-economy.  The bull is the overall US economy and the bear is the construction economy.

US ECONOMY

The overall US economy is growing.  The much-talked double dip recession has not happened.  After a robust third & fourth quarter of 2010, the economy is poised to continue growth into 2011.  I expect GDP will grow 2.4% in 2011.  Many companies were able to enhance their profits in 2010 through cost-cutting measures.  After curbing investment in equipment, hiring, M & A and expansion, many large companies are sitting on significant cash reserves.

The companies constituting the S&P 500 derive approximately 30% of their profits from outside USA according to Barron’s Magazine.  Global business allowed large US companies to create more demand for products and services from other countries.  This provided solid support and momentum for the US economy.  This will propel the stock market through a 10% gain in 2011 with a possible mid-year correction, in my opinion.

However, unemployment hovers above 9% and under-employment is around 17%.  What gives?  The reluctance of companies to invest and hire is one reason.  Smaller companies are generally not hiring, which normally is a job creation engine.  The U.S. created approximate 950,000 new jobs in 2010.  By comparison, Flextronics, a computer-technology company headquartered in Singapore, alone added 350,000 new workers in 2010.  These jobs were all outside USA.  You get the picture…

CONSTRUCTION ECONOMY

Two major construction industry segments are single-family homes and commercial structures.  Both are mired in a deep prolonged slump.  There is a huge inventory (and shadow inventory) of unsold houses and condominiums.  Many owners and builders have defaulted or are underwater.  This type of distress has extended to other commercial structures such as office building and hotels.  Rather than lending, many banks are focused on getting back to good health.

With high unemployment and a trend towards smaller spaces, the need for new office space/structures is almost non existent.  In 2003, roughly 5,700 new condominium units, mostly in high rise structures, were sold in Chicago area.  Last year only 600 condominiums were sold in the Chicago area – many at a deep discount.  This picture is no different in Atlanta, Miami, Las Vegas, Miami and other larger cities.

With a construction depression, it is no wonder that unemployment in construction in December stood at 20.8% (ENR Magazine, January 2011).  In March 2009, it was around 27%.  If discouraged workers who are not looking for work are also included, this figure would be higher.  With time, some construction workers will transfer to other industries.

A number of states are battling huge budget deficits.  Now Texas is facing a budget deficit.  Several states have turned down Federal funds for partially-funded infrastructure projects.  Accordingly, the cancellation of other city/state projects will help the construction industry and its employment problem.

It will take an “extended” period of time for the unsold inventory to be absorbed and builders and lenders working together to build new structures.  I believe a notable recovery in single-family homes and commercial structures will occur in mid-2013 and mid-2014, respectively.

POST-TENSIONING and AMSYSCO

Now I will address unbonded post tensioning – the industry that my company AMSYSCO operates in.  Accordingly to the word on the street, our industry metrics declined 70% from 2008 to 2010.  (Alarming.)  In our industry, it is not great recession…it is depression.

Adding to the challenging environment is escalating raw material prices, which are defying laws of economics – supply and demand.  However, commodities have gone global in pricing behavior (which explains some price increases).  This effect is damaging to company margins.

How did AMSYSCO do in 2010?  We were very fortunate to chalk out a small profit in 2010.  This was possible due to our key customers, suppliers and our great employees.  I cannot thank them enough.  As opposed to the temptation of cutting back, we have enhanced both product quality and service through additional investment.  Additionally, we have expanded our internet presence and entered new markets.

- Rattan Khosa, President

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Corus is one of the largest of the 90 banks to close. this year.  The Chicago-based bank made loans to commercial real estate projects nationally.  The downturn of the real . . . → Read More: Real Estate – Closure of Corus Bank Chicago]]>

Corus Bank, National Association, Chicago, Illinois, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

Corus is one of the largest of the 90 banks to close. this year.  The Chicago-based bank made loans to commercial real estate projects nationally.  The downturn of the real estate market is the major reason for the bank failure.

For more information, please read the FDIC Press Release.

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The panel discussion was moderated by Ray Saurez, author and senior correspondent of PBS ‘The NewsHour,’ and the acclaimed panel included Professors Gary Becker, . . . → Read More: Chicago Booth 57th Annual Management Conference 2009]]> Yesterday, Rattan Khosa and I attended the Chicago Booth School of Business’s management conference titled “The Future of Markets.”  The conference included a panel discussion, breakout sessions and a special forum.

The panel discussion was moderated by Ray Saurez, author and senior correspondent of PBS ‘The NewsHour,’ and the acclaimed panel included Professors Gary Becker, Marianne Bertrand, Steve Kaplan, Anil Kashyap, Kevin Murphy and Raghuram Rajan.  Their discussions about the current economic condition were not only informative but also spirited.  The panel focused on the importance of human capital as a key driver of economic growth and strength.  Other topics included opinions of government bailouts and the unintended consequences of government regulation.  I took away that while markets are not perfect, they should be allowed to self-correct mistakes but that temporary government intervention may be necessary to overcome market failures.  Additionally, we need to solve the K-12 education and family structure issues now in order to decrease U.S. poverty in the future.

After the panel discussion, I attended a session headed by Prof. Joseph Pagliari that was titled ‘Commercial Real Estate:  Where have we been and Where are we heading?“  Prof. Pagliari lectured about core vs. non-core real estate, the effects of leverage (taking on debt), and institutional joint ventures.  Without getting too technical, the effects of leverage were extremely positive when real estate values were increasing, and had the opposite effect in the past 18 months.  The bottom-line is that the commercial real estate has not bottomed-out yet and that the bottom may last 1-2 years, a sentiment that I agree with.

Finally, Dean Snyder and Prof. Eugene Fama, the “father of modern finance,” chatted about the efficient market theory.  The discussion revolved around the stock market and whether it was better to be a passive investor (buy and hold index funds) or an active investor.  Conceptually, it is probably better for the average unskilled investor to be a diversified passive investor.

- Neel Khosa, AMSYSCO Inc.

Copyright © 2009 by AMSYSCO, Inc. All rights reserved.

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