Trade Deficit in U.S. Increases by Most Since 1999

Nov. 13 (Bloomberg) -- The trade deficit in the U.S. widened in September by the most in a decade, reflecting rising demand for imported oil and automobiles as the economy rebounded from the worst recession since the 1930s.

The gap grew a larger-than-anticipated 18 percent to $36.5 billion, the highest level since January, from a revised $30.8 billion in August, the Commerce Department said today in Washington. Imports surged by the most in 16 years, swamping a gain in exports.

Demand for foreign products may remain elevated in coming months as consumer and business spending improve and companies aim to prevent inventories from collapsing even more. Exports may also rise as expanding economies in Asia and Europe and a weak dollar drive demand for American goods, giving manufacturers such as Dow Chemical Co. a lift.

“Sometimes what looks bad on the surface is actually quite good and I think that’s the case this time around,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Exports are growing strongly and imports are turning up because domestic spending has turned the corner.”

The dollar dropped after the report. One euro cost $1.4875 at 8:50 a.m. in New York, up 0.2 percent from late yesterday. The yen climbed to 89.68, up 0.8 percent. Stock-index futures pointed to a gain at the open.

Exceeds Forecasts

The trade gap was projected to widen to $31.8 billion, from an initially reported $30.7 billion in August, according to the median forecast in a Bloomberg News survey of 77 economists. Deficit projections ranged from $28.6 billion to $34.1 billion.

A collapse in world trade earlier this year brought the gap down to $26.4 billion in May, its lowest level since November 1999, as imports plunged even faster than exports. As commerce begins to pick back up, global leaders agree more needs to be done to strengthen the expansion.

U.S. Treasury Secretary Timothy Geithner and other finance ministers at the Asia-Pacific Economic Cooperation forum in Singapore this week reiterated a pledge to maintain stimulus efforts “until a durable recovery in private demand is secured.”

Asia is “leading the world” back to recovery, Geithner told reporters at a joint press briefing with his APEC counterparts. President Barack Obama began a swing through Asia today as world leaders work toward a rebalancing that will make global growth more reliant on spending by Asian consumers and businesses and less dependent on their American counterparts.

Imports Jump

Imports climbed 5.8 percent, the most since March 1993, to $168.4 billion. The figures reflected a $4.1 billion increase in imported oil as the cost of a barrel of crude climbed to the highest level since October 2008 and volumes also rose.

Purchases of foreign-made autos and parts surged by $1.7 billion to $16.4 billion, due mainly to a $1.3 billion increase in imports from Canada and Mexico as North American vehicle production picked up. Imports from South Korea also climbed.

The federal “cash for clunkers” auto trade-in program, which expired in late August, generated momentum in car sales and boosted demand for parts and supplies. Automotive inventory restocking is also boosting demand for foreign-made autos and parts.

U.S. sales for South Korea-based Hyundai Motor Co. increased in September for the third month in a row, while Toyota Motor Corp. is boosting production of models such as Corollas and Camry sedans to rebuild its U.S. inventory.

Replenishing Stockpiles

“Our inventories are continuing to recover with a very good pipeline as we move into the fourth quarter,” Robert Carter, Toyota’s North America sales chief, said on a conference call last month.

Exports rose 2.9 percent to $132 billion, the most this year, propelled by sales of civilian aircraft, industrial machines and petroleum products. The dollar this month was down 12 percent from a five-year high reached in March against a trade-weighted basket of currencies from it’s biggest trading partners.

China’s economy grew 8.9 percent in the third quarter from the same period in 2008, the best performance in a year. Exports to the Asian nation were the highest since October, even as imports from China also climbed.

“The economic outlook for the rest of 2009 appears to be stabilizing, with strong growth in Asia Pacific, especially China, and other emerging geographies,” Andrew Liveris, Dow Chemical’s chief executive officer, said in an Oct. 22 statement.

Factory Pickup

Dow’s factories around the world ran at 78 percent of capacity in the third quarter, an increase of 3 percentage points, because of increased demand in developing markets, including China and Brazil, as well as relatively low North American ingredient costs that led to increased exports. The largest U.S. chemical maker yesterday said cost cuts and rising sales will boost earnings more than analysts estimate.

After eliminating the influence of prices, which are the numbers used to calculate gross domestic product, the trade deficit grew to $41.7 billion, the highest since January. The figures suggest the government may revise down their estimate for third-quarter economic growth.

The U.S. is growing again after posting its worst contraction in seven decades. The world’s largest economy expanded at a 3.5 percent annual rate in the third quarter, the best performance in two years. Economists surveyed last month forecast a 3 percent rate of growth this quarter

Real Estate Economists Parse October Jobs Report

The October employment report released by the U.S. Bureau of Labor Statistics last Friday reflects a familiar but troubling pattern for a commercial real estate industry desperately seeking green shoots.


While the pace of job losses continues to moderate, total non-farm payroll employment nationally has fallen by a whopping 7.3 million since December 2007. The end result is rising vacancies and falling rents across all major property types, and the industry’s woes are likely far from over.


The continuing deterioration in labor market conditions for young adults is particularly problematic for the apartment sector, according to Sam Chandan, president and chief economist of New York-based Real Estate Econometrics


“The unemployment rate for heads of households that are 24 or younger — a group that is almost exclusively renters — rose from 14.9% to 15.6% over the month,” according to Chandan, who also serves as an adjunct professor of real estate at the Wharton School of the University of Pennsylvania.


U.S. nonfarm payrolls fell in October by 190,000, including a net loss of 61,000 in construction, 40,000 in retail, and 37,000 in the leisure and hospitality sector.


Meanwhile, the unemployment rate nationally rose four-tenths of a percentage point to 10.2%, the highest rate since April 1983. What’s more, the number of unemployed persons increased by 558,000 in October to 15.7 million.


“The bad news for the economy and commercial real estate is that we are still losing jobs, and it will likely take another few months before we turn the corner,” says Hessam Nadji, managing director of research services for Marcus & Millichap Real Estate Investment Services based in Encino, Calif.


“Further, even after we turn the corner, the recovery will face a number of headwinds, and job growth will remain muted in 2010,” adds Nadji. The six- to nine-month lag between employment and occupancy trends points to rising vacancies until mid-2010.”


Encouraging signs


So what’s the silver lining in the rather gloomy October jobs report? “The fact that job losses fell below 200,000 for the month confirms the winding down of the worst employment crisis since the Great Depression,” according to Nadji. Another positive sign is the drop in first-time unemployment applications, which points to further moderation of job cuts in coming months.


“Coupled with other positive developments, such as inventory clearing and rising exports, we should be more confident that the recession has come to an end, at least technically,” says Nadji. U.S. gross domestic product in the third quarter grew 3.5% on an annualized basis, providing further evidence of recovery.


The veteran Marcus & Millichap researcher also points out that roughly half of the $787 billion federal stimulus package has yet to be spent. “The full trickle effect will not materialize until well into 2010. Ultimately, the prospects beyond 2010 are far more promising as there will be more pent-up demand for corporate spending,” emphasizes Nadji.


Employers added 34,000 temporary workers in October, which is another positive development because they are typically the first to be hired during a recovery. Lastly, revisions to the nonfarm payroll employment for August and September show that the net job losses for those two months totaled 373,000, not 464,000, a 91,000 change to the upside.


The revisions to the August and September jobs figures helped Wall Street investors look beyond the double-digit unemployment rate nationally. The Dow Jones Industrial Average rose by 17 points on Friday to close at 10,023.


October surprise


“It is not surprising to see the Bureau of Labor Statistics (BLS) adjustnumbers from previous periods,” says Victor Calanog, director of research for New York-based Reis. “At the cusp of downturns it gets even more confusing, as sometimes BLS revises numbers from positive [job gains] to negative [job losses].”


The real surprise, emphasizes Calanog, is that the unemployment rate breached 10% this year. "Most consensus estimates did place the unemployment rate in the low to mid-10s by next year, so we were headed in that direction. But 22 months into the recession, I think most people expected at least some kind of slowdown to the bloodletting."


One data point that Calanog is tracking closely is labor underutilization, known as the “U-6” because of its data classification by the Labor Department. The figure includes the officially unemployed who have looked for work in the last four weeks. It also includes discouraged workers who have looked in the past year, as well part-time workers who want to work full time.


This broad measure of unemployment, the U-6, increased from 17% in September to 17.5% in October. “Typically this number is indicative of the amount of labor that employers need to soak up before making actual new hires,” explains Calanog. “The higher this number goes, the longer the labor markets will take to stabilize and for job gains to truly be reflective of an economic recovery.”


Consumer power erodes


While job losses are moderating, unemployed persons are staying unemployed longer, according to Chandan of Real Estate Econometrics. “The mean duration of unemployment is now 26.9 weeks, up from 26.2 weeks in September. Put another way, the average unemployed person has been out of work for just over six months.”


Persons who remain employed generally have little power in wage negotiations, adds Chandan. Absent overall improvements in wages, he believes that the retail-spending outlook will be subdued through the holiday season.


The decline of 40,000 jobs in the retail sector during October may reflect retailers' soft expectations for the holiday shopping season, according to Chandan. Job losses were particularly large for stores selling discretionary items, including book and music stores. Department stores also took a hit.


“While measures of consumer sentiment and general economic activity have both improved, personal consumption trends remain weak,” concludes Chandan. “The savings rate rebounded last month following the end of the Car Allowance Rebate System program (cash for clunkers). Consumers remain cautious in making large and discretionary purchases.”

‘Phantom’ Vacancy Haunts Office Market as Job Losses Mount

Nov 11, 2009 3:17 PM
National Real Estate Investor


Amid rising unemployment and weakening demand for space, the U.S. office vacancy rate rose to 13% in the third quarter. But it could climb as high as 19% if companies consolidate their space to reflect smaller workforce levels.

Analysts fear that the nation’s job losses are not yet fully reflected in the office vacancy rates. If employers across the country cut their space needs to match layoffs when tenants’ leases come up for renewal, soaring vacancies could later wallop the office sector.

The nation’s unemployment rate reached a 26-year high of 10.2% in October, and more layoffs are expected in months ahead. Meanwhile, the gap between the current vacancy rate and the rate statisticians project based on the unemployment rate stands at six percentage points, according to Bethesda, Md.-based research firm CoStar Group.

“We call it phantom vacancy. Phantom vacancy can mute any recovery that we do see down the road,” says Jay Spivey, senior director of analytics at CoStar.

Currently, without a sharp adjustment in leasing requirements to get rid of the unused space, the firm expects the national vacancy rate to peak in the third quarter of 2010 at about 16%.

It could take two more years, until the third quarter of 2012, before landlords begin to see positive gains in rent. That is because all the excess supply in the market needs to be absorbed before vacancies tighten sufficiently to warrant higher rents.

The current employment picture does not bode well for the office market. The volume of negative net absorption has not reached the level expected for such a high number of job losses.

In the first quarter of 2009, the office sector recorded negative net absorption of close to 20 million sq. ft. nationally, compared with an expected negative net absorption of nearly 130 million sq. ft. In the third quarter, net absorption totaled approximately negative 13 million sq. ft. Given the mounting job losses, analysts were expecting net absorption of 25 million sq. ft.

The job losses piling up during this downturn are unlike those of the early 2000s when dot-com companies went bust. This time many big, established companies lost jobs, including major financial institutions.

“If they’re laying off workers, it might be that in their office they might have every fifth desk sitting empty. That’s not necessarily given back to the market [so far] in terms of space,” says Spivey. One reason the space has not yet been consolidated is that many leases have not yet come up for renewal. Some tenants want to hang on to prime space in anticipation of growth.

However, if thousands of tenants give up unused space, that could drive up vacancy rates while depressing net operating income. And that additional space could lengthen market recovery time. “The excess space would have to be burned off before we start to see any real, positive absorption,” says Spivey.

Vacancies roil Phoenix market

Among the nation’s 20 largest markets, vacancy rates vary widely. The worst-performing office market in the third quarter was Phoenix, which recorded a vacancy rate of 21%.

Overbuilding has presented a problem for Phoenix, which is struggling with a large amount of office space coming on line at a time when the market is already suffering from negative net absorption. Those two trends have magnified the effects of the metro area’s vacancy rate.

Much like Phoenix, the Dallas and Atlanta markets, which recorded 17% vacancy rates, have also experienced a lot of suburban office construction. Because a great deal of land was available and building costs were cheaper than in many other markets, developers became aggressive, adding to the vacancy rate. In Atlanta, developers also undertook a lot of high-rise urban construction in the Buckhead submarket.

In the Detroit area, vacancy rates have risen along with the well-chronicled troubles of the auto industry. Some Michigan developers and property owners face severe competition from financially distressed properties.

“When you’re at a 20% to 25% vacancy rate, you have a supply and demand problem. That’s way too much supply, which is creating a tenant market and driving lease rates down to what they were 20 years ago,” says Scott Marcus, principal of RSM Development & Management, an owner, developer and manager of medical office properties based in Bloomfield Hills, Mich.

The surging vacancy rates have jeopardized owners’ ability to stay in business, he says. When competitors lose their properties to foreclosure, and the properties re-enter the market at far lower sale prices and lease rates, the results can be devastating.

“If those buildings go back to the lender, similar buildings [to his] are being sold for 30% of what we paid for ours.” In Southfield, Mich., for instance, a 200,000 sq. ft. building sold for $5 million. “We’re seeing class-A properties being sold for under $100 per sq. ft., one third of replacement cost.”

Buyers of distressed properties can afford to lease the buildings for a fraction of the going rate, making it even more difficult for market-rate owners such as RSM to compete.

Home Prices in 20 U.S. Cities Rise for Third Month

Oct. 27 (Bloomberg) -- Home prices in 20 U.S. cities rose in August for a third consecutive month, bolstering the case that an economic recovery is at hand.

The S&P/Case-Shiller home-price index climbed 1 percent from the prior month, seasonally adjusted, after a 1.2 percent increase in July, the group said today in New York. From a year earlier, the gauge fell 11.3 percent, less than forecast.

Rising home sales, due in part to government programs including the first-time buyer credit and efforts to lower borrowing costs, have helped stem the slump in property values that precipitated the worst recession since the 1930s. Sustained gains in household spending, the biggest part of the economy, may be harder to come by as joblessness mounts.

“We’re nearing the bottom in home prices,” said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. “Right now the government is helping to stabilize housing.”

Stocks in the U.S. rose for the first time in three days after the report. The Standard & Poor’s 500 Index was up 0.3 percent to 1,069.70 at 9:39 a.m. in New York.

The housing index was forecast to fall 11.9 percent from August 2008, after a 13.3 percent drop in the 12 months ended in July, according to the median forecast of 33 economists surveyed by Bloomberg News. Estimates ranged from declines of 11 percent to 13.3 percent. Year-over-year records began in 2001.

The gains over the last three months have been the strongest since the three months ended in December 2005.

Broad-Based Improvement

Nineteen of the 20 cities in the S&P/Case-Shiller index showed a smaller decline year-over-year than in July. Dallas showed the smallest drop since August 2008, at 1.2 percent, while Las Vegas showed a 30 percent decrease, the most of any city.

Compared with the prior month, 15 of the 20 areas covered showed an increase while four showed a decline. The biggest month-over-month gain was in San Francisco, which showed a 2.6 percent gain.

In the latest evidence of rising demand, existing home sales in September jumped to a 5.57 million annual rate, more than economists forecast and the highest in more than two years, according to data from the National Association of Realtors issued last week.

Housing and manufacturing are leading the stabilization in the economy, the Federal Reserve said in the Beige Book survey of conditions in its 12 district banks during September and early October.

Fed Regions

“Most districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses,” the Fed said.

One risk to the emerging stabilization is foreclosures, which worsen the property glut. Foreclosure rates will climb through late 2010, peaking only after the unemployment rate reaches 10.2 percent in the second quarter, Jay Brinkmann, chief economist at the Mortgage Bankers Association, said this month.

Unemployment, which is projected to exceed 10 percent by early 2010, according to the median estimate in a Bloomberg survey earlier this month, will also limit demand. Economists and industry groups are among those projecting home sales will also cool in the absence of the $8,000 credit for first-time buyers, due to expire Nov. 30. Lawmakers are debating extending the credit.

Home Builder Stocks

The Standard & Poor’s Supercomposite Homebuilding Index has climbed 22 percent since the beginning of July on the improving outlook for housing, compared with a 16 percent increase in the S&P 500 index. The builder index fell yesterday on concern that the tax-credit program may not be extended.

“The residential housing market appears to have stabilized, but it has done so at a very low level,” William Foote, chief executive officer of USG Corp., North America’s largest maker of gypsum wallboard, said Oct. 21 on a conference call. The Chicago-based company posted its eighth straight net loss last quarter as sales dropped 32 percent from a year ago.

Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

U.S. Stocks, Oil Gain on Housing Data, IBM Buyback Approval

Oct. 27 (Bloomberg) -- U.S. stocks rose for the first time in three days after International Business Machines Corp.’s board approved $5 billion in additional funds for buybacks and home prices climbed for a third consecutive month.

IBM jumped 1.4 percent and contributed the most to the advance in the Dow Jones Industrial Average. Exxon Mobil Corp. and Chevron Corp. climbed at least 2 percent as crude gained on increased optimism the economy is emerging from the worst recession since the 1930s. Lennar Corp. and Home Depot Inc. advanced after the S&P/Case-Shiller home-price index climbed 1 percent in August from the previous month.

“Earnings are good, we continue to see stabilization in housing prices,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “Ultimately, that should give support to the stock market.”

The Standard & Poor’s 500 Index added 0.4 percent to 1,071.01 at 10:49 a.m. in New York. The Dow Jones Industrial Average increased 65.83 points, or 0.7 percent, to 9,933.79.

Benchmark indexes briefly erased gains after the Conference Board’s gauge of consumer confidence unexpectedly decreased in October. The S&P 500 has rallied 58 percent from a 12-year low on March 9 amid growing confidence a U.S. economic recovery will drive profit growth.

IBM led technology shares in the S&P 500 up 0.3 percent after the group fell 1 percent earlier. IBM, the world’s largest computer-services provider, gained 1.4 percent to $121.84

Verizon added 2 percent to $29.20. The second-largest U.S. phone company was raised to “outperform” at Wells Fargo & Co., which said “wireline margins troughed in Q3 and should be a driver of upside going forward.”

Pullback Predicted

Jeremy Grantham, the chief investment strategist at Boston- based Grantham Mayo Van Otterloo & Co., said stocks will “drop painfully from current levels” in the coming year amid disappointing economic data and profits as margins shrink. The benchmark S&P 500 for U.S. equities fell 1.2 percent to 1,066.95 yesterday, higher than Grantham’s estimate for its so-called fair value at 860.

Grantham said his firm has recently reduced equity holdings from a “neutral” 65 percent weighting in its portfolio to 62 percent, leaving “room to pull back further” should markets continue to climb.