If you turn on your TV or pick up a newspaper these days, prepare to be depressed. You’ll read or hear about anemic economic growth, disappointing employment growth, and political candidates who are blaming each other for all of the bad news. Despite the plethora of negativity, I find reasons to be optimistic. I want to share with you two of those reasons.
First, I am optimistic that the residential housing market will finally add economic growth. To be sure, I am not talking about the housing market Rockin’ Like It’s 2005 but any growth from this economic sector will be better than the economic drag that this segment of the economy has exhibited for the past six years.
What makes me optimistic about housing? What we all learned in Economics 101 – Supply and Demand. I believe that increased demand will come from an increase in household formation. If you think about it, household formation has been negative for over six years but the population has certainly grown over that time. I believe that this has created a pent-up demand from households waiting for the housing market to stabilize. At the same time that pent-up demand for housing has been growing, supply of homes for sale has been shrinking. The National Association of Realtors states there were 2.49 million existing homes for sale in May, down from 2.93 million in May 2011 and 3.22 million in 2010. In 2007 there was a record 4.04 million existing homes available for sale. According to the National Association of Realtors, from 1990-2004 there was an average 2.01 million existing homes available for sale. Additionally, research from JP Morgan shows that seasonally-adjusted new home construction remains at the lowest level since the 1960s, when the population was significantly smaller.
The second source of optimism is that the US has made great strides toward energy independence just in the last few years. If sustainable (and I think it is), this movement toward US energy independence will be beneficial to global economic growth. Enhanced technologic breakthroughs in drilling equipment have made it easier and economical to access oil and natural gas reserves that were previously difficult and costly to procure. Drilling in the Marcellus and Utica shale deposits have led to a windfall of natural gas and, to a lesser extent, oil. Because of the increase in drilling in the shale deposits, North Dakota will soon surpass both Alaska and California to become the second largest domestic producer of oil. Oil deposits in the Canadian tar sands (I do realize that Canada is not part of the US but they have been an ally of the US since the aftermath of the War of 1812 and certainly a more friendly supplier of oil than some of the Middle Eastern OPEC countries or Venezuela) is said by some energy analysts to exceed oil reserves in Saudi Arabia. Last, once the technology for natural gas liquefaction is improved, the US’s vast reserves of natural gas can be transported as LNG and exported to other countries.
There are some environmental challenges to fracking technology and the extraction of oil from the Canadian tar sands but great strides have also been made in recently years to make the extraction of these technologies more environmentally-friendly.
While I am optimistic, I acknowledge that global economies and markets face headwinds in both the short-term and the long-term. Stayed tuned for my next blog entry which will talk about why these headwinds temper my optimism somewhat.