National Exports Initiative

Prepared remarks from the Secretary of Commerce Gary Locke.

In last week’s State of the Union address, President Obama announced a series of new proposals that will help put Americans back to work and our nation on a path to sustainable economic growth.

A key element in helping to meet that goal is a new National Export Initiative, which aims to double American exports over the next five years and support two million jobs here at home.

There have, of course, been previous endeavors by the government to elevate the importance of exports.

But what sets this effort apart is that this is the first time the United States will have a government-wide export-promotion strategy with focused attention from the president and his Cabinet.

This initiative will correct an economic blind spot that has allowed other countries to chip away at America’s international competitiveness.

Because for all of America's economic strengths, we stand out among developed nations as one of the few whose government does not have a focused, comprehensive and agile export strategy.

At a time when traditional drivers of U.S. economic growth like consumer and business spending are strained, we simply must elevate exports as a key part of our economic recovery efforts.

What the Obama administrations new “export focus” means for industrial real estate:

By the numbers:

Exports account for 11 percent of GDP,

Exports support 10 million jobs in America

Every 1 billion in exports supports 6,250 manufacturing and transportation jobs.

What the Obama Administration is proposing:

Gary Locke, the United States Commerce Secretary outlines a new Export Initiative which seeks to double American exports in the next five years.

What this means:

This would create 2 million jobs here in the U.S.

These 2 million additional workers would require upwards of 500 million SF of industrial space, much of which would be located within the Los Angeles Basin.

The Commerce Department would be advocating more forcibly for exporters, helping firms contract with companies overseas and directly connecting with new consumers.

Why markets and government policy matter

In a move that continually puts North Korea on my list of places never to visit, Kim Jong Il revalued the nation's currency, destroying wealth and inflicting uncertainty and pain on a long suffering people.

From the LA Times.

After the 1990s, when food distribution collapsed and as many as 2 million people died as a result, North Koreans began buying food privately from vendors who sold homegrown produce on the streets and at covered bazaars. By last year, the regime had rolled back many of the liberal reforms, tightening the hours of the markets and the types of Chinese goods available.The new dictates appear designed not only to put the entrepreneurs out of business but to confiscate any accumulated wealth.
...
"People panicked. They had all their savings in cash because nobody trusts the banks. Many committed suicide," said Song Jung-su, a former railroad security official who defected from North Korea in 2006 but is still in touch with relatives.
...
In the days before the old won lost its value and foreign currency was banned, people shopped frantically, snapping up whatever they could find: electronics, rice cookers, shoes, cosmetics, clothing and, most of all, food.
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The currency reform has had peculiar side effects. North Korea's treasury didn't print enough small-denomination notes, so shops have had to give out candy and gum as change.
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"It's always been that way. If you went to the main market and nobody was there, you knew the police had come through, so you went and found another market," said defector Kim. "They can close the markets, but they can't stop market activity."

GDP, ISM & WTF is really going on

Well, if you have been asleep all last Friday, or willfully and maliciously avoiding economic news, you probably missed the 4Q GDP numbers that came out last week.

Big mistake but your repentance is here.

4Q GDP blew through projections with a 5.7% annualized increase over the 3rd quarter numbers. In Q3, it was a 2.2% increase over Q2. So it seems that things are getting better at an increasing rate.

While you laziness may be forgiven in that these numbers are likely subject to further revisions and your precious time cannot be wasted on the incomplete speculation of some government bureaucracy, you are wrong.

Most of the increase in GDP (3.4%) came from inventory adjustments with the remainder (2.3%) coming from an increase in consumption, or what we like to call an actual increase in GDP. The 2.3% increase is over and above the change seen from Q2 to Q3, so things were already getting better, but what is with this 3.4% kicker, this bonus that hardly anybody saw coming?

Is this other 3.4% number mere voodoo magic, an accounting abstraction and nothing more?

Well, yes and no. Let me explain how it works.

In Q4, businesses sold $8.5 billion in goods over what was produced, meaning that they drew down inventories. How does this calculate into GDP? GDP = C + I + G + X. The inventory adjustment count as negative investment (-I), -8.5 billion or - 34 billion at an annual rate.

In Q3, inventory drawdowns were $34 billion, meaning that in Q3 we sold 34 billion more than we made, -139 on an annual rate.

This also counts as -I.

Here is where the magic happens.

Last quarter, inventory drawdowns were -139 I, this quarter they were - 34 I.

So the difference between -139 and -34 is +105 billion a change that is reported as positive.

We thought we were losing 139 billion dollars but we only really lost 34 billion, which is counted as positive GDP growth.

Econobrowser does a much better job of explaining it:

If consumers, businesses, foreigners, and the government had all purchased exactly the same quantity of real goods and services in 2009:Q4 as they had in 2009:Q3, more of those sales would have come out of inventory drawdown in Q3 than in Q4, so even without any gain in final sales we would have had to produce more stuff in Q4 than Q3, specifically, 3.4% more stuff at an annual rate. In fact real final sales to consumers, businesses, foreigners, and the government were not stagnant, but grew at a 2.3% annual rate during the fourth quarter, and the two effects combined give us the 5.7% reported GDP growth.

So we sold more stuff in Q4 over Q3, but this stuff came from the inventory adjustment that occurred in Q3. We didn’t see that huge inventory adjustment this quarter, meaning 2 things.
1. we are producing more to make up for the increase in stuff sold.
2. We are not producing more and this was a 1 time occurrence and GDP is likely to be less in the upcoming quarter.

I am inclined to believe #1, since the the ISM came out today as I am sure you are aware of, with inventories contracting at a slower pace in January, with production and new orders remaining on the rise.

This leads me to believe that we are producing more to replace the low inventory levels that we have seen since the recession started.

Hopefully, manufacturers inventories will rise and then customers inventories will rise, but it appears that lean times remain upon us. Eventually the increased production will lead to increased inventories, and these two components are the only ones still remaining underwater on the ISM.

LA TIMES!

I meant to share this earlier, just bombarded with work in the past week. I believe the economy here in LA is improving, simply because I am busier this year over last at this same time.

A sample size of 1 isn't very valid, but most of the other researchers I talk to are saying the same thing.

Anyway, last weekend the LA times released their Commercial Real Estate Quarterly.

This is usually a pretty frustrating piece for me to read; our numbers have been done for a week but they chose to use the numbers of our competitors. Sometimes they will use older numbers.

But this quarter, I got a passing mention with my killer title.

Real estate brokerage Colliers International tellingly headlined a recent report: "2009: End of a year gone bad."

You can read the rest of the article, but that is the only time Colliers is mentioned. Which is fine by me, they probably have not mentioned us in the CRE quarterly since I have been here, but now I am making inroads.

Allen Group Files Chapter 11

On of my least favorite chapters. Here is the article.

They moved from San Diego to Dallas to take care of their 6,000 acre distribution hub. Think the Inland Empire on sterioids. The project was built as an inland port and is a great concept for rail, they have 2 different rail lines going through the park, the only one of its kind in the country.

The comments at the bottom of the article are pretty humorous

You need someone like Hillwood to step in and finish this project. Perot Jr definitely has the resources to finish this deal - and he'd basically own NW Fort Worth and SE Dallas! LOL

Trucking Companies Face Modest Recovery

From Business Week:

Unlike air freight carriers, and intermodal companies that use metal containers that can be transferred from railroads to ships in place of trucks, trucking companies are entirely dependent on the domestic economy, which isn't expected to recover as quickly as the global economy.

Improvement in trucking revenues between the first and second halves of 2009 wasn't sustainable, says Larkin, since much of it was due to fiscal stimulus programs like "cash for clunkers" and the $8,000 tax credit for first-time homebuyers. Market optimism toward the sector will likely wane as the reality of still-harsh economic conditions sinks in, he says.

"The modest recovery, combined with current lean inventory levels, makes it less likely that we will experience the sharp increase in freight volume that we have experienced in previous recoveries," Larkin wrote in a Jan. 5 research note. Without a major reduction in capacity, the return to a constrained supply-and-demand balance that would drive stronger pricing could take longer than many investors are now discounting in freight transportation and logistics stocks, the note said.

How much capacity does the trucking industry need to shed? Little has been taken out in the past 12 months, as banks and leasing companies are reluctant to put trucking firms into receivership or bankruptcy because they don't want to own a lot of devalued truck assets they can't sell, says Larkin. With freight volumes down 22% from their peak in 2005 and rebounding slowly, he doesn't project a tighter supply/demand balance until at least mid-2010 and maybe not until 2011.

Over the longer term, the "new normal" level of demand is likely to be higher than the current level but still depressed relative to the demand boom in 2004 and 2005, according to the Keybanc note. Rising fuel prices, tougher safety, security, and environmental regulations, and inadequate funding for infrastructure or development of an integrated nationwide freight transportation plan will likely increase transport and logistics costs over the next decade, the note said.

New ISM numbers

December 2009 Report: Click Here.

The PMI is up 2.3% to stand at 55.9, the highest level since 2006. This suggests that the economy is growing, and has been for the last 8 months.

Good news: New orders +5.2, Supplier deliveries +1.1, Production +0.9, Employment +1.2, Inventories +2.1, Prices +6.5,

Bad News: Consumer Inventories -2, Prices +6.5

Growth in the PMI reports that 55.9 of responses were favorable. To my knowledge, this report does not count non-responses, that is, companies that went out of business. This suggests that the companies that are still in business are doing much better than in previous months.

New orders are the most important stats for manufacturers, since that will lead to increased production down the road. This huge spike will be hard to follow in upcoming releases and there are a couple of reasons for it.

1. Restocking, we have talked about this before and maybe finally it is happening.

2. Consumer spending increases, increase in domestic consumption.

3. Export led boom. American goods are being shipped overseas.

For our interests here in the Inland Empire, one stat that does not get talked about is delivery times. Basically, 16% of respondents reported slower delivery times, and 6% reported faster delivery times. Slower is better for 2 reasons:

1. There is greater demand for products and it takes longer for these products to be secured and shipped.

2. This demand for product shipment will lead to favorable conditions for the nations carriers.

Now for the bad news: Customer's Inventories are still low. This may mean that inventories are still shrinking at the highest consumer demand months in the year. Silver lining: low inventories will be restocked in the future, but it kills the restocking argument in our increased new orders case. This suggests that the entire supply chain is lean and risk adverse, retailers do not want to stock what manufacturers are making. This is bad news for the Inland Empire, since we are basically the storage unit for Southern California and the Western United States. If consumers were buying goods, then retailers would not want to be caught with their pants down so they would be forced to restock, then this number would be going up. This kills the #2 argument in our new orders case. American consumers are not purchasing tons of goods.

Which leads us to the third and final piece: Prices. Prices increased a scary +6.5. This is good, right? Increased demand leads to increased prices ... except when inflation is caused by some other source. What sources may you ask?

1. Monetary expansion (inflation being a monetary phenomenon)

2. Supply shock (drop in aggregate supply due to unforeseen circumstances)

If raw materials are purchased on a world market with low transaction costs, and the demand for American dollars declines, (a weak American dollar) goods would seem more expensive for Americans, but cheaper for foreigners. This supports the third case for increased orders, increased exports.