Are we there yet?
Anybody who has ever been on a long family car trip with kids has repeatedly heard this dreaded question. You feel the excitement and expectation the longing of just wanting to be there. It turns to frustration because you know that no matter what you do, the journey will simply take as long as it takes. Sound similar to any conversations you've had about when this current economic downturn will be over?
In challenging economic times like these, the world tends to fall into one of two camps those who obsessively watch how bad things have become and those who look for signs of hope that the end may be near. The sad reality is that conditions in the northern Nevada industrial market currently show no signs today of getting any better.
In fact, they seem to be getting worse. There is no speculative construction planned for 2009, the number of build-to-suit starts planned for 2009 is only one, and rents are falling as landlords have stopped trying to preserve returns underwritten in better economic times and have begun simply trying to cover costs. Despite attempts from landlords to avoid move-outs, industrial vacancy is continuing to rise. At the end of this year's first quarter we calculate it at 14.93 percent.
For those of you looking for any signs of hope, I'll cover three topics: Animal spirits, the "emotional metric", and perhaps the single best leading indicator for when the global recession will begin to reverse direction, the Baltic Dry Index.
Animal spirits
Animal spirits are, according to Wikipedia, "The colorful name that John Maynard Keynes, the famous British economist ... gave to one of the essential ingredients of economic prosperity: confidence.
According to Keynes, "Our decisions to do something positive ... can only be taken as the result of animal spirits a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities." (From "The General Theory of Employment Interest and Money.")
It is my personal belief that the confidence necessary for entrepreneurs to undertake their endeavors comes from within the Animal Spirit. America is fundamentally a nation of entrepreneurs, who will find within themselves the confidence to step forward and start this economy growing again.
The emotional metric
Consumer confidence is essentially a barometer of our Animal Spirit, but it is not perfect. The Conference Board Consumer Confidence Index declined in February, reached yet another all-time low at 25.0 (1985 equals 100), down from 37.4 in January. It was basically flat in March at 26.
The next release is scheduled for 7 a.m. this Tuesday. Let's hope it begins an upward march!
While the index reports how we are feeling, it doesn't reflect the moment when we find the confidence required to act. In order to give our clients sound advice on when the market may turn and when they should start buying the incredible deals that are out there, we need a better litmus test.
Baltic Dry Index
May I suggest that our first signs of hope will come from the seas? The Baltic Dry Index is a daily poll of trans-oceanic shipping rates for dry materials such as coal and iron ore. There are three reasons why it will be the first harbinger of new economic activity.
First, the raw materials on these ships provide the inputs to the production process. Businesses don't order them until they need to make something to fill orders.
Second, we are in a global recession which really picked up steam with oil priced at over $100-a-barrel. Fortunately, oil prices are already down significantly, which will take the brakes off international economic growth. That's good because global economic growth is a key factor in re-igniting growth here at home.
The Baltic Dry Index is a global economic health indicator unlike the narrow, national focus of our stock market or consumer confidence.
Finally, shipping is highly correlated to the availability of business credit. The subprime mess certainly started the recession and has infected the entire banking system. Unprecedented governmental response has occurred in the world's centers of power. Let's hope it thaws the credit markets soon.
While 80 percent off its 12 month high, recent readings of the Baltic Dry Index are up.
Could that be the Disneyland Hotel on the horizon?
Dan Oster is a vice president in the industrial properties group of NAI Alliance in Reno. Contact him at 336-4665 or DOster@naialliance.com
