One of the local traditions you should know about is Shrub Kempner’s annual State of the Economy speech to Galveston Rotarians. The full text is below. We’ll have an excerpt in the print edition soon.
Harris L. “Shrub” Kempner Jr. is president and portfolio manager of
Kempner Capital Management Inc. Many people are interested in his economic forecasts. But, to me, the most interesting part of this year’s speech was the part about Galveston having plenty of jobs.
I think he’s absolutely right. Whatever the problem with Galveston’s economy, it’s not jobs. What do you think?
Kempner's State of the Economy 2012By Shrub Kempner
As usual, I will try to remind you of what I got right and wrong last year.
Shrub Kempner
- I said the U.S. economy would continue growing with no recession — correct, but I also thought it would grow at 3 1/2 to 4% — the actual growth rate was more like 2 1/4 %. The economy hit a set of walls in the first half of 2011. There were severe storms, floods, a 6 month oil price shock due to the Libyan revolution, and a disruption of the global supply chain from Japan following the Tsunami. Those issues are now history, but the combination was too much for the economy to grow at the stronger rate I had anticipated.
- I projected unemployment to be below 9% in the last quarter of 2011, and I'm delighted to say I was right about that. The unemployment rate was 8.6% in November.
- I thought inflation would be somewhere between 2 and 3% this year and I was correct about that as well.
So, not too bad — but the miss on the fundamental growth rate overrides everything, so let's try again.
U.S. ECONOMYI think we will be growing between 2-3% this year. Many of my peers are predicting less growth than that — at least for the 1st half of the year, but I think fundamental strength will be enough to get there.
UncertaintiesLet's talk about the uncertainties first:
- The headline concern is Europe. Taken as a whole, Europe has now entered recession, which will affect us all negatively. Further, there are risks to some European sovereign debts. However, I think that the worst has already been avoided. The worst would be a banking system failure because of all this, in which major European banks would be unable to retain their liquidity and pay their bills — something that almost happened here in 2008. Similar preventive measures, i.e. TARP-like actions, have now taken place in Europe because the European Central Bank has "ring-fenced" their banks by permitting over 500 of them to borrow for 3 years on almost any collateral they have. This as far as I'm concerned prevents the worst case from happening — a banking failure. The rest, I believe, will be nasty headlines, but not a fundamental devastation of the European or worldwide financial system.
- In this country, we are concerned about our fiscal policy or lack of it. What will happen to tax rates in 2012 and 2013? What will happen going forward as far as budget cuts are concerned? This is causing some economic indecision here. Unlike the Feds, the States are already well under way in their budget cutting, but this is reducing jobs nationally. Considerable uncertainties abound about federal politics as well — who will win in the races for President, Congress and Senate? Some of us think there are possible choices which will bring about the apocalypse. We'll see.
Fundamental StrengthsDespite major uncertainties, there are certain fundamental economic strengths which to me are getting ever more clear.
- It appears to me that we have turned the corner on job creation. The unemployment rate should be steadily descending on average throughout 2012 from the present 8.6 to below 8%. As perspective — net non-farm job creation was negative 5.06 million in calendar year 2009. It turned net positive by .94 million in 2010, and is estimated to be positive about 1.6 million when the final 2011 numbers are calculated. 2012 is expected to carry on the improving employment trend.
- The Inflation Rate, as measured by the CPI will be below 2% — partly due to the European recession and slow-downs in China, and partly due to substantial cost control by corporations. That's a very important and encouraging piece for consumer spending. In addition, my perception is that the headline numbers for saving rates are too low. I think consumers, have more money to spend than most analysts expect, and this 70% of the U.S. economy will show that all year long. Bottom Line — we've deprived ourselves out of fear for 3 years. Now cars, hard goods, and clothing will begin to be replaced in the U.S. — pretty much no matter what happens worldwide.
- Finally, I expect that the economy will be aided for the first time in 3 years by housing construction and its ancillary benefits. This began to take place at the end of 2011- largely in multi-family housing. For almost 10 years, from 1998, the pendulum had been leaning toward construction of new individual homes, and apartments were under-built. For the last 2 or 3 years construction was stagnant for both. However, the demand for shelter for new families is starting to push the pendulum in the other direction toward construction of multiple-family housing. Single-family housing, while not yet growing much, is also showing progress in pending home sales, etc. despite the continuing foreclosure problem. The housing area will be a net add of some importance to the overall GDP as the year progresses, for the first time since 2008.
- Other international economies — the BRICS (Brazil, Russia, India, and China) , are considerably stronger than Europe and will be net positives in terms of the export market, although nowhere near as large as last year.
Combining all these strengths and uncertainties, I believe the US economy will grow at around, or slightly below, the average rate for the last 50 years of 3%.
TEXASThe session last year has built in major cutbacks in state spending. This will be a continuing drag on employment and the Texas picture. However, the remarkable resurgence of oil and natural gas drilling using new technology — fracking and horizontal drilling, has become and will continue to be a major job creating force in the State. It's not just all the jobs associated with the drilling process, but the fact that after 5 years of success, natural gas is so cheap in this country that people are moving chemical plants and other processing sectors back to take advantage of it. Construction on plant expansion and renovation is booming in the State. On balance Texas should be a growth area in 2012.
GALVESTONOne great thing — thanks to multiple efforts, UTMB's future and growth here is now as assured as is possible. Let's enjoy that for a second before the usual kvetching.
Enough back patting. Last year I complained about the recovery money not flowing, particularly for our rebuild of citizens' homes previously on the tax rolls. That has gotten a bit better, but is not yet satisfactory. Part of the reason it is not going as rapidly as it should in my opinion, is the summary firing in mid-year of a City Manager with experience in unwinding bureaucratic tangles with government agencies. Natural slow-downs in processing took place after he left. Remember, the Council had to go out of town to get a temporary manager, because they had inexperienced backup. Despite Tom Muehlenbeck's extreme competence, he could not keep the flow running as rapidly as it should because he had too much to learn. So we are still waiting for the full flowering of this particular pre-owned housing area dependent upon federal funds flow. We'll see what the new manager can do.
Let me make it clear, the housing I've been talking about to this point, is explicitly not the housing proposed by the Galveston Housing Authority and it's for-profit development partner. However, I am delighted that still other housing will be built by the GHA team in large enough quantities to add to the tax base and increase our population. This will meet the needs of our most disadvantaged, but remember that also 60% of it, is housing that can bring back work force population I think this is a good and necessary thing for Galveston.
Finally, I want to run head-on once again into the great Galveston myth: The myth that Galveston has few jobs, even fewer good ones, and without a lot of new ones we can't grow and survive. This is extraordinarily misguided and denies the facts. Denying the facts is a Galveston specialty, but this has become ridiculous.
FACT: Galveston has a huge number of jobs for a city of its size. These are full time jobs that are well paid in areas such as medical services, upper and middle and lower level education, port related activities, and entrepreneurial and financial services. In addition to these, there are the most obvious jobs in the tourist industry, which are more seasonal.
FACT: The Census, the Bureau of Labor statistics and a GEDP survey indicate that even after IKE, we have over 25,000 full-time equivalent jobs on the island every day, in a community of less than 50,000. That's a very positive full-time jobs-to-population ratio of over 52% and;
FACT: is higher than the 2008 jobs-to-population ratio of Manhattan Island of only 46.4%, as measured by the Census and Bureau of Labor statistics.
Do you think Manhattan's biggest problem a lack of jobs? It isn't their biggest problem and, by the facts, it certainly isn't ours. And yet, every time some people open their mouth about Galveston's problems, they start and stop by complaining about the lack of jobs. Getting more jobs is a good idea, but even more important to me, is the realization that an estimated 40-50% of those 25,000 full-time jobs are held by commuters. The economic development steps we must take going forward, is to attract more of the people who work here to choose to live here. This will shift the benefit to our island businesses of commuter salaries paid here, but spent where they live. Just don't let people pass off this nonsense that Galveston has insufficient jobs to grow, as an answer.
Galveston has jobs, lots of good jobs. Galveston needs most to build its population. That's why I emphasize housing. That's why I emphasize workforce housing with the GHA project as positives. And, that's why I'm developing less and less patience with those local politicians, policy makers, and reporters who don't seem to understand that the real opportunity for the city to become much more economically healthy is to find ways to grow our permanent population.
Harris L. "Shrub" Kempner Jr. is president and portfolio manager of Kempner Capital Management Inc.
