February 11, 2015

Something Else Is Going On

A report from NPR. “The big drop in oil prices and a stronger dollar both help the economy and hurt it. Add to that the recent slowdown in global growth. There’s good reason to be concerned, says Jeffrey Snider, head of global investment research at Alhambra Partners. Falling oil prices are a clear sign of a dangerously weak global economy, he says. And, he says, recent data suggest U.S. consumers are saving most of their windfall from lower energy prices, not spending it to fuel growth. ‘That’s an indication of very cautious behavior. Whenever you see oil prices collapse, especially by something like 60 percent, something else is going on, and so therefore, any benefit that might come to consumers in the form of lower energy prices is being overwhelmed by whatever it is that’s causing oil to fall in the first place,’ Snider says.”

“‘You have economies from Europe, Japan, China that are either in or very close to recession or some form of growth that is significantly degraded,’ Snider says.”

The Gulf Times. “Slowing GDP growth in China is leading to weaker demand for commodities, contributing to lower global commodity prices, QNB has said in a report. The slowdown in growth in China is a consequence of past over-investment that has led to a build-up of excess capacity in the economy. Over-investment has contributed to a decline in housing prices and a build-up of financial vulnerabilities in the shadow banking system, which are also dragging down growth.”

“With private consumption and investment both slowing, the growth slowdown is expected to continue, despite government stimulus measures. Based on the historical relationship between real GDP growth in China and global commodities, slower growth and weaker demand from China is likely to lead to lower global commodity prices by around 11% in 2015 and 5% in 2016, broadly in line with the latest IMF commodity price forecasts. ‘This could add to the global disinflationary pressures that are contributing to what we have called the ‘great deflation’ in 2015.’ QNB said.”

The Morning Bulletin in Australia. “There are 22 residential properties on the market for over $1 million in the Rockhampton and Capricorn Coast areas. But will they sell? According to Australia’s property information service RP Data, high value house sales have been few and far between in the past six months with only 10 sales over $600,000 across the region. A recent market overview by Herron Todd White supported these findings and said generally, Rockhampton finished off 2014 with a low level of sales activity and softening prices across the region.”

“‘The year ahead starts with a large amount of uncertainty for most of our resource and mining industries,’ the report said. ‘Numerous industries are reporting salary cuts, job losses and general restructuring and downsizing. Gracemere is still feeling the effects of an oversupply of new housing construction in the past two to three years, creating a significant rise in vacancy rates and a drop in house prices. The recent approval of the Pines housing development, one of the biggest land releases on the Capricorn Coast to date, poses a massive risk of delivering another Gracemere scenario with supply likely to outweigh demand.’”

The Midland Reporter Telegram in Texas. “Karr Ingham, the Amarillo economist who prepares the Midland-Odessa Regional Economic Indicators for the Midland Development Corp. and Security Bank, said that even if oil prices begin to recover immediately, the stage is still set for a deep contraction in the area’s oil and gas industry and this will find its way into the general economy.”

“Jim Smitherman, CEO of Security Bank, said the bank has been seeing decreased demand for loans as oil prices have fallen. As oil prices have plunged, so have collateralized asset values — especially related to energy credits — which pose some risk to banks’ balance sheets, Smitherman said. ‘There is softening of this prospect on credits which hedged oil prices; however, some stress can be expected on financial firms heavily involved in energy. Regarding service company credits, asset values of underlying equipment have seen some price declines as has been seen in recent auctions; this, too, will put pressure on bank asset quality,’ he said.”

“‘There is no doubt many financial institutions, especially those new to the energy cycle, will tighten underwriting standards, further exacerbating the issues,’ he said. As real estate values undergo an expected correction near-term, ‘this will strain banks’ asset quality, especially for banks concentrated in development and construction lending,’ Smitherman said.”

The Telegraph on North Dakota. “It became one of the most-photographed signs in America, proclaiming a brash welcome to the North Dakota crossroads town that became a symbol of a new American oil rush: ‘Welcome to Williston. Boomtown USA.’ As always with booms, those who got in early, got rich – rents spiked to Manhattan levels, land values quadrupled, unskilled labourers earned more than $100,000 (£66,000) a year and some ‘mom and pop’ restaurants took $20,000 a week; for a while it seemed like the party would never end.”

“At the office of Remax Bakken Realty, there is a sanguine view about the long-term viability of the building spree which has seen hundreds of new flats and houses being thrown up around Williston. ‘I predict we’ll see more of a re-grouping than a bust,” says Angela Jennings, a senior associate at the firm, ‘there will be some slowdown, some builders will have to adjust their investment time-horizons, but we’re not seeing panic. No one’s pulling out, the phones are still ringing.’”

The Star Phoenix in Canada. “Total housing starts in Saskatoon were 155 in January, down 59 per cent from 376 in January 2014, with most of the decline occurring in multiple units, which were down 69 per cent to 96 from 308 in January 2014, continuing the slowdown in the housing sector that began about this time last year, according to the Canada Mortgage and Housing Corp. ‘Following a strong performance for housing starts last year, builders will be keen to ensure that demand from new home buyers in 2015 is first channelled toward their complete and unsold inventory,’ said Goodson Mwale, CMHC’s senior market analyst for Saskatchewan.”

“Home builders in Regina are responding to economic uncertainty, compounded by a large inventory of unsold new housing units, Mwale said. ‘When you have all this economic news coming out regarding energy prices and the lower Canadian dollar, there is economic uncertainty in the marketplace,’ Mwale said. ‘When there is uncertainty, businesses will play a wait-and-see game. … That affects their hiring plans; they may want to freeze hiring and see where the chips fall. When there is economic uncertainty, people will want to approach (home buying) cautiously. … Job security is another thing. You need a job to carry a mortgage.’ Mwale noted that inmigration and job growth have slowed down in the last year, which in turn reduces demand for housing.”

“Another major factor is the inventory of unsold new housing units, which is currently at a 30-year high. ‘We ended the year at 476 (unsold new housing units). At the end of January, we were sitting at 443.’ Saskatoon is expected to see housing starts moderate to 3,085 in 2015 and 3,015 in 2016 after 3,531 starts last year. In Saskatchewan, housing starts are expected to decline from 8,257 in 2014 to 7,300 in 2015 and 7,200 in 2016.”

Bits Bucket for February 11, 2015

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