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First Annual
GEDP Economic
Outlook Conference

by David Stanowski
17 July 2008


The conference consisted of three parts:

1. "Economic Value of the Gulf Coast" briefly covered the current problems in the financial markets, and the impact of high oil prices. The conclusion was that due to the dominance of the energy, medical, and tourism industries, which are doing relatively well; Southeast Texas will not suffer the same economic impact from these problems as other regions which are not as blessed.

It was also mentioned that a hit from a major hurricane could devastate the area economy, however, since the odds are against such an occurrence, why worry about it.

2. "Galveston Economic Profile" sought to answer the question "How is Galveston doing since 2000?" This report found improvement in nearly every metric examined.

3. "Galveston Real Estate Profile" attempted to develop a standard set of demographic and housing measurements that will allow better monitoring and assessment. This report featured a detailed analysis of Galveston real estate trends by Zip Code.

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At the end of the conference, someone in the audience stated that "Galveston's glass is half full", so he implored representatives from the press to report it that way. His comment received an enthusiastic round of applause.

When using the "glass is half full/half empty analogy", it should be remembered that there is no actual difference between the designations "half full" and "half empty". The only difference is in the attitude toward the measurement. However, real differences do exist between the measurements: empty, half-empty/half-full, and full.

If this comment from the audience summarized the consensus opinion, then there was no dispute that the use of this analogy, to describe the Galveston economy, meant that our glass is only half full. Therefore, the only difference of opinion would be how to "spin" the way that you want to look at the level, but "spin" should have little or no relevance when doing an economic analysis and forecast.

If this analogy is to be used, the more appropriate question should be posed in three parts:

1. How full is the glass.
2. Is the level going up or down.
3. How fast is the level going up or down.

This perspective was not offered at the conference.
   
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It should not be surprising that the most people at such a gathering would want to be told that the local economy is doing well, but is positive spin rather than cold hard reality helpful to decision makers? Isn't it better to know every problem facing the Galveston economy so that there is at least a chance that strategies and plans can be formulated for improvement?

Those who are aware of the track record of nationally-known economists, over the past 40 or 50 years, know that most have NEVER predicted a recession! Since several recessions did indeed occur, during this period, their perpetually-optimistic attitudes were of little or no value to their clients. Pretending that conditions are good and improving has lead to the downfall of many a business.

The following graph compares how economists predicted future GDP levels (black line) to what actually happened (red line) between 1971 and 2007. Note how they NEVER predict the big dips that go below the zero line denoting negative growth!

Economists
  
Once you become aware of this built-in bias in the economic profession, it isn't surprising that when economic consultants are hired to analyze a local economy, they will usually deliver good news. Many must believe that if they don't, they won't be hired again.

This is no reflection on the GEDP, but it does say something about many "consultants".


If a more objective process is used to analyze the national and local economies, it becomes clear that there are several critical issues that this Conference did not address.
In "The Adventure of Silver Blaze", Sherlock Holmes found the most important clue was that the dog didn't bark. In this case, the key to understanding what is really going on with the Galveston economy may be what was not said, or the topics that were avoided.


1. National and International Markets:
The entire world is currently enmeshed in the worst financial crisis since 1929, and most real estate and stock markets around the world are in bear markets.

Bear Markets

Bond spreads are reflecting this fact by challenging their 17 March panic high. They are a measure of the risk that traders perceive in holding lower-quality bonds. The larger the spread, the more risk in the system.

Bond Spread

The recent report by Bridgewater Associates estimated that the net worth of US-based assets is down about 13% since January 2007, a total loss of almost $8 trillion. With the current degree of leverage in the system, this is exerting enormous downward pressure.

Household Net Worth
The change in Household Net Worth has turned down hard!

Bridgewater also issued an apocalyptic warning to clients that bank losses from the worldwide credit crisis may reach $1.6 trillion, four times official estimates, which is a grave risk to the financial system. If the banks can't extend credit, the economy will decline.

Bank Credit

This is why bank lending is dropping and why the FDIC is expecting 200-300 more U.S. bank failures in the next two years.

IndyMac
Second largest bank failure in U.S. history, 11 July 2008!

FDIC

IndyMac
Run on the bank; IndyMac, Mission Viejo, CA, 14 July 2008!

Bank Run
Run on the bank; American Union Bank, 1931!

Most analysts agree that the two agencies that guarantee almost half of all residential mortgages, Fannie Mae and Freddie Mac, are technically insolvent, which is reflected in their recent stock prices.

FNMAE

This is very bad news for the U.S. real estate market, and could be especially damaging to a city like Galveston that has placed so many of its resources into real estate development.

NAHB Index
The National Association of Homebuilders Index
falls to all-time lows, showing that homebuilders
are very pessimistic about their industry.


Schiller Housing Index
The Case-Schiller Home Price Index shows the
largest one year decline in prices since the 1930s.



2. Galveston Economic Profile:
As the population of the State of Texas grew 61%, between 1980 and 2005, Galveston had a population decline of 7%.  Source: The FHC

The number of jobs in Galveston peaked at 30,387 in 1995, and by the end of last year there were only 26,394 remaining; a decline 13%. During this same period the number of jobs in the State of Texas increased 22%. Source: BLS via Texas A&M
Note: Dr. Hodgin found more jobs on the Island than did the BLS, but he did not supply the count in 1995 using his alternate method. It could still show a decline.

In 2005, the Median Household Income in the State of Texas was $42,139, in Galveston it was $30,500; 28% below the State average. Source: Texas: Census Bureau  Source: Galveston: City-Data

Galveston’s retail sales per capita lag far behind those for the U.S., the State of Texas, and many local cites, too; even with up to 4 million tourists per year. In 2006, per capita retail sales were $9,535 versus $13,159 for the State of Texas. When adjusted for inflation, local per capita retail sales peaked in 1984. Source: The FHC

The number of tons of cargo shipped from the Port peaked in 1984. Source: The Wharves Board

In 2006, the Crime Index for the City of Galveston was 636, which is 97% higher than the national average of 323! Source: City-Data

GISD currently ranks number 800 out of the 1024 school districts in the State of Texas. Source: Schooldigger via Texas Education Agency.


These key metrics are hardly as reassuring as those presented at the conference.


What is the true status of the City of Galveston and its economy? Is it more accurately represented by what was presented at this conference, or by the data listed above? There is one very simple observation that makes a very compelling case that is difficult to refute:

The Texas economy was booming from 1980 to 2005. The State attracted so many new residents that the population grew 61%. Galveston is a beautiful city that has to be considered one of the most desirable places to live in the State, but the City still lost 7% of its population during this same period.

This can mean only one thing. The local economy was so weak, during this period, that it did not provide enough high-paying jobs to allow its middle class population to grow. Worse than that, the population declined! People who wanted to live in this City found themselves reluctantly fleeing across the Causeway to find better economic opportunities.

I don't know about others in attendance, but this "member of the press" fails to see how this is a "glass half full" story. No, the story from this conference is clearly the dog that did not bark; the story that was not told.

Until this City faces the reality that people were forced to "vote with their feet" and leave; we will never understand what caused this exodus, and how to reverse it.

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Final Thought for fans of the "glass is half full/half empty" analogy:

The Dow Jones Industrial Average is a proxy for the manufacturing industry in this country. Looking at the DJIA in Dollar terms can not be considered accurate due to the amount of degradation of the unit of measure, i.e. the U.S. Dollar. Dividing the DJIA by the price of gold should be a reasonable approximation of the real, i.e. inflation-adjusted value of U.S. manufacturing.

DJIA/Gold 
The level of the inflation-adjusted DJIA (i.e. DJIA/Gold) on 10 July 2008 is 34% below its value on 3 September 1929 (the peak before the 1929 crash)! Therefore, the current value of the real DJIA is now the same as it was 80 years ago! What does this say about the value of U.S. manufacturing if it has made no net gain in 80 years?

Is our national economic glass half empty or half full? 


For more information on the Galveston Economy:
 
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