Econ Category #3: Production & Business Activity

 

“With some people, if you give them an inch, they will convert it to centimeters”  

– Thomas Sowell

 

Howdy, gang!  Well, it looks like it’s that time of the week again!  Time sure has a nasty habit of sneaking up on people.  When I was a kid it seemed like time was unbearably slow, but now as an adult (well…an “adult kid”) it kind of feels like time won’t stop buzzing by!  Funny thing about time, however, is that we all have the same amount of it from hour to hour.  What truly separates people is how they chose to spend it.

With the first two economic categories in the rearview, it’s on to the third one that I initially listed on my blog, Know Good Things.  The first category (Income, Spendind &  Output – read it HERE) had some heavy hitters like Gross Domestic Product.  It would be hard for me to argue against the opinion that GDP is the biggest and most demanding singular economic report that we have access to because, well… it pretty much is the biggest and most demanding!  The second category (Employment & Wages – Read HERE & HERE) dealt with some reports that tend to get a lot of headlines and a lot of emotion.  Anything that sheds light on the unemployment in America is always going to be hyper-politicized, which also means that it’s going to provoke some raw emotion.  There always seems to be an initial “knee-jerk” reaction in the markets immediately following the employment situation report.  I also tried to explain the differences between the reported unemployment rates and the REAL unemployment rates (found by looking up the U6 data).

That brings us to the third economic category, which is production and business activity.  Some of you may be thinking, “but, Kleiny…didn’t you mention production quite a while explaining the first econ category?” and if you are one of those people then you’re definitely on to something!  There is a definite difference, however, between the type of production mentioned in a report like the Gross Domestic Product and the type of production found in this category.  When it comes to something as large and encompassing as GDP it’s impossible to look at anything other than the overall number (percentage growth or decline).  This category focuses on the production results of particular segments of our economy rather than mixing them all together.

To be precise, this category tends to focus on some very key aspects of the overall economy and because of that focus, it carves out an opportunity for something extremely valuable.  The types of reports that will fall under this category will deal with industrial production (like factory orders, for example) and construction.  To be more specific, we’ll end up placing a lot of emphasis on the construction of new homes…and there’s a reason for this!

 

The construction of NEW houses is a rather layered economic measurement.  On the one hand, we have a new home.  A new home that didn’t exist before.  A new home that adds overall economic value to the neighborhood and community.  This new home is looked at as an overall asset from several different viewpoints.  If you think beyond the “four walls and a roof” aspect of a new home and consider the larger economic impact then you’ll begin to see why housing is such a huge and vital aspect of our domestic economy.

Banks are dramatically improved (economically) when new homes are built because of the loans they issue to the builders.  Once everything is complete, the prospective homeowners enter into the picture and they end up securing their own loans from these same banks.  Manufacturers of the tools required to actually build these homes are able to stay in business and provide jobs.  Landscapers are then hired (by the builders or the homeowners) to provide their service, which wouldn’t exist if the home hadn’t been built.  These landscaping companies are also enabled to expand and hire more personnel to fully staff their (hopefully) growing business.  Don’t forget about the abundance of plumbing and electrical work that goes into building a new home, too!  These types of jobs are regarded as “trades” and require years of education and apprenticeship… all of which are necessary in order to provide the type of expertise that needs to exist for a job as important as these.  After all, how valuable is a new home if the sewer pipes are defective?  These trades filter into the increased revenues of the utility companies, which provides them with the necessary capital to make improvements.

Don’t forget about the appliances that go with the new home, either!  Oh, the appliances!  From new washing machines and dryers to furnaces and air conditioning units all the way down to toaster overs!  There are so many appliances that home owners can choose from and accommodate their new house with, which means that companies like Maytag need to keep developing and marketing new products to entice new (and existing) customers!  If they don’t then Whirlpool certainly will, right?

I’m sure I’m forgetting a few things that could easily be thrown into this discussion, but my point isn’t to try and label every single economic aspect that is benefited by the construction of a new home.  My point is to make it obvious that there is a heck of a lot of economic value that is created when a new home is built.  The construction of a new home is just one of many, many good economic benefits that are a result.  The fact that there is so much value here is why this particular aspect of our economy is so important.  In fact, many economists have argued that the construction of new homes is a forerunner to the overall health/growth of an economy!  That’s right!  Housing construction is regarded as a LEADING ECONOMIC INDICIATOR!  Since we really don’t have access to too many reports like this, we tend to take notice and place some real focus on this aspect of our economy.

The actual reports that I’m putting under the umbrella of this econ category include the following:

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As for the type and classification (for reference to the “types” and “classifications”, please read the previous posts of KGT HERE) of economic reports that fall into this second category (employment and wages), allow me to list the following:

• Industrial Production (monthly)

• New Construction (monthly)

• New Private Housing and Vacancy (monthly)

Ex: Housing Starts

• Business Sales and Inventories (monthly)

•Manufacturers’ Shipments, Inventories, and Orders (quarterly)

All of these reports are considered to be leading indicators and procyclic.  However, we should be careful how we interpret this data because while they may be leading indicators of the future of our overall economy, there is no firm timetable.  By this, I mean that just because the “housing starts” report shows a decrease this month compared to last month does NOT mean that the economy is ready to take a nose dive!  I would need to see a trend develop and be able to corroborate it with a few of these other reports, which should also be giving me the same trend.  If you’re able (willing) to do some research then take a look at the trends of these reports previous to the big crash of 2008 – 2009 and see how long they were negatively trending before the bottom fell out of the markets.  I think you’ll be surprised to learn that there was a big chunk of time involved there!

Those who had an understanding of these things prior to the “Great Recession” were not at all surprised when things finally began to sell off and start roaring in a bearish direction.  They were expecting it.  They may not have known exactly when it was going to happen, but they were all prepared for it.  This is why it makes sense to spend a little bit of time educating yourself on such matters as macroeconomics.  Like a new home (especially once that new home is finally paid off)…it’s an asset.

Until next time, my friends!

 

Be good.  Do good.  Know good.

Kleiny (@KnowGoodThings)

Columbus, Indiana