Friday, 14 June 2013 11:02

What It Takes for the Economy to Improve

By John D. Fox, CFA | Families Today

Q: Is our economy ever going to improve?

A: It already is, albeit slowly, due to favorable economic drivers. 

The economy certainly isn’t steaming ahead as we would all like, but there are promising improvements. In fact, there are three U.S. economic growth catalysts that are making a positive impact. I would like to share them with you, as well as how they correlate, and hope they are an encouragement.

The three catalysts are: low-cost energy; manufacturing homecoming; and housing improvement.

Low-Cost Energy: About the year 2000, overall, U.S. dry gas (natural gas) production was beginning to decline. However, around 2005 the production of shale gas began to increase considerably and projections are strong for the long term (Source: EIA, Annual Energy Outlook 2012). This natural gas is used for heating homes, generating electricity, and powering manufacturing facilities. Currently, our costs are considerably less than our international counterparts and with an abundant supply in America we are at a distinct advantage.

Manufacturing Homecoming: Challenges abroad such as higher energy costs, transportation issues, rising wages, and the slower delivery of products are changing business models. Foreign corporations from various industries such as Sasol (chemical) and Airbus (airline) are investing in U.S.A. manufacturing facilities.

Also, American companies are moving overseas plants back home. Examples include: Peerless Industries;

Outdoor Greatroom; Otis Elevator Company; Buck Knives; Karen Kane; GE; Caterpillar; and Coleman. 

As these new facilities ramp up, so do jobs.

Housing Improvement: Since 2010, we have seen an upward trend in existing home sales and new home construction permits have doubled. The numbers are not earth shattering, but they are positive and consistently growing. Additionally, home prices are increasing. When this happens it creates a snowball effect in our economy, including:

  • Municipalities receive more revenue from assessed housing values and turnover taxes.
  • Individual net worth increases and, thus, consumer confidence rises.
  • Bank balance sheets improve and, as a result, they tend to lend more.
  • Home builders construct and hire more.
  • People are more compelled to buy houses. When they do, they spend money at home improvement stores.

It’s interesting to see how low-cost energy, manufacturing, and housing can make a difference; and, when the three are combined, it produces an effect on our economy that is very powerful. Eventually, this kick start should gain momentum and our economy will hopefully return to historical growth rates.

John D. Fox, CFA is the Director of Research at Fenimore Asset Management, an independent investment advisory firm located in Cobleskill since 1974. Fenimore’s affiliates are the Fenimore Private Client Group & FAM Funds – offering separately managed accounts and mutual funds. In-depth research. Insightful investing.

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