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Figures Show Island's Economy
Weakening Rapidly

by David Stanowski
23 January 2008

This article originally appeared in the Galveston County Daily News on 23 January 2008. The text version of the article appears below. 

Figures Show Island's Economy Weakening Rapidly

It's ironic that the controversy over whether the international-residential-real-estate bubble would bypass Galveston has now spread to a discussion about whether the looming national recession will spare the island economy. The evidence on both counts seems to show that Galveston does not have the financial muscle to allow it to avoid problems affecting national and international financial markets.

Unfortunately, I find myself in the camp shared by many independent analysts, as well as Morgan Stanley, Merrill Lynch and Goldman Sachs, who foresee not only a bursting national housing bubble, but also a recession starting about now. Therefore, a more relevant question is "If the U.S. economy enters a recession in 2008, will Galveston begin a new leg down in its ongoing decline?"

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The stock market is a discounting mechanism that reflects the collective outlook for business over the next six to nine months. Using the Wilshire 5000 Index as a benchmark, as of the close on Jan. 11 this index made its high on Oct. 11 and it is now down 13 percent.

The outlook for Galveston¹s major economic sectors:

Tourism: The Dow Jones Travel & Tourism Index peaked on Oct. 1 and it is now down 28 percent, which means that this sector is in sync with, but weaker than, the broad market.

Restaurants: National restaurant chains have been reporting lower sales for some weeks, as demonstrated by Landry¹s Restaurants, which has a strong presence in Galveston; it peaked on April 17, 2006 and is down 58 percent.

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Retail: The Dow Jones Retail Index peaked on June 4, and it is now down 23 percent, so this sector topped before and it is weaker than the broad market. Data through the second quarter of 2007 show that retail sales in Galveston peaked in the fourth quarter of 2005. With retail sales per capita running 28 percent below the average for the State of Texas, as it stands now, this is hardly a sector that can rescue the local economy from a recession.

Home building:  The S&P Homebuilding Index peaked on July 15 2005 and is now down 80 percent, so the homebuilders topped long before and are much weaker than the broad market. Centex, developer of Pointe West, peaked on July 1, 2005 and is down 78 percent.

Financial services: The Dow Jones Financial Services Index peaked on Feb.
5 and is now down 34 percent, which means that the financials topped long before, and are much weaker than the broad market.

The port: There is no index made up of just ocean-going-shipping-company stocks, but the Dow Jones Transportation Index has been leading the broad market lower since it peaked on July 16 and it is now down 26 percent.

Oil and Gas Service Industry: The Dow Jones Oil Equipment, Services & Distribution Index peaked on Oct. 15 and has rallied off its November low, so it is only down 9 percent. This is the only sector, in Galveston, that is outperforming the general market, but it is hard to say if it is a big factor in the local economy.

Government: With six out of the top 10 local employers providing government services, this is the dominant sector in the Galveston economy. This may seem like a sector that is safe from trouble during a national recession, but this is not the case. Local governments, in other housing-bubble areas, like Arizona, California and Florida, are already experiencing financial crises, due to dwindling sales, income and property tax collections.

Conclusion: After considering what the stock market is projecting for the major sectors, of the local economy, there seems to be little reason to believe that Galveston will weather a national recession better than most areas of the country because all of the private-sector components, with the exception of oil equipment and services, are showing below average strength.

Is the situation hopeless? No, not if action is taken to make improvements.

Also see Galveston: Recession 2008?

For more information on the Galveston Economy: CLICK HERE


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