by David Stanowski
14 January 2008
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 effecting national and international financial markets.
There are many different ways to define a recession, but fundamentally, it is a low growth, or negative growth period in the economy. Although there is no overall measure of economic activity, for the City of Galveston, there are data that can provide some insight into whether the local economy is growing.
For example, it could be argued that Galveston entered a recession sometime in the 1980’s, simply because the local population has been declining since then. Between 1980 and 2005, the U.S. population increased 30% while the local population declined 7%! It certainly is possible for an economy to expand, while it is losing population, but if people are leaving a city, an economic decline will probably follow.
The loss of population did foreshadow future job losses, because the number of jobs in Galveston peaked at 30,387 in 1995, and by 2006 stood at 25,912; a decline of 15%! During this same period, the State of Texas added 1,936,038 jobs; an INCREASE of 21.55%. This means that the number of jobs, in Galveston, declined at twice the rate as the population!
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 on-going decline?”
The stock market is a discounting mechanism that reflects the collective outlook for business over the next 6-9 months. Using the Wilshire 5000 Index (WLSH or DWC) as a benchmark: as of the close on 11 January 2008, this index made its high on 11 October 2007, and it is now down 13%, on a high to low basis.
The outlook for Galveston’s
major economic sectors
The Dow Jones Travel & Tourism Index (DJUSTT) peaked on 1 October 2007, and it is now down 28%, which means that this sector is in sync with, but weaker than the broad market.
Marriott Hotels (MAR), the largest U.S. hotel chain, peaked on 17 April 2007, and it is down 39%.
National restaurant chains have been reporting lower sales for some weeks as consumers tighten their belts on leisure and entertainment spending, as demonstrated by these two companies:
Landry’s Restaurants (LNY), which has a strong presence in Galveston, peaked on 17 April 2006, and is down 58%.
Ruby Tuesday (RT) peaked on 30 March 2006, and is down 82%.
While there are some members of this industry group that are doing better than these examples, the fact remains that the Travel & Tourism Index is weaker than the benchmark, as are MAR, LNY, and RT, which hardly suggests that Galveston’s tourism industry is going to help prevent the local economy from participating in a national recession!
The Dow Jones Retail Index (DJUSRT) peaked on 04 June 2007, and it is now down 23%, so this sector topped before, and it is weaker than the broad market.
National retail data shows that consumers are running out of money, so they are focusing their purchases on food, gasoline, and other necessities, but some people believe that more affluent consumers can save the day. However, an examination of Tiffany’s (TIF) shows that it peaked on 11 October 2007, and is now down 40%.
The weakness in retail sales is also confirmed by the fact that vacancies at neighborhood and community shopping centers just hit an at 11-year high.
Data through 2Q 2007 show that retail sales in Galveston peaked in 4Q 2005. With retail sales per capita running 28% below the average for the State of Texas, and weaker than the national trends, shown above; as it stands now, this is hardly a sector that can rescue the local economy from a recession.
On the other hand, with Galveston retail sales running far below their potential, this is probably the one economic sector that has the most room for improvement, and with a renewed effort to turn it around, could actually expand during a national recession!
The S&P Homebuilding Index (SPHB) peaked on 15 July 2005, and is now down 80%, so the homebuilders topped long before, and are much weaker than the broad market!
Looking at two components of this index finds Beazer Homes (BZH) peaked on 06 January 2006, and it is down 94%.
Centex (CTX), developer of Pointe West, peaked on 01 July 2005, and is down 78%.
Obviously, the homebuilding stocks are not giving an indication that this sector will have the strength to support the Galveston economy.
This sector includes banks, insurance companies, stock brokers, Realtors, title companies, appraisers, etcetera. The Dow Jones Financial Services Index (DWCFSV) peaked on 05 February 2007, and is now down 34%, which means that the financials topped long before, and are much weaker than the broad market!
Looking at publicly-traded Realtor Zip Realty (ZIPR), it peaked on 01 December 2004, and is down 78%, which is not a good sign for this business in 2008.
There is no index made up of just ocean-going-shipping-company stocks, but the Dow Jones Transportation Index (TRAN) has been leading the broad market lower since it peaked on 16 July 2007, and it is now down 26%.
The Baltic Dry Index is a number issued daily by the Baltic Exchange, a London-based organization whose members arrange for ocean transport of industrial bulk commodities from producers to end users. Every day they survey brokers around the world to find out how much it costs to book cargoes of raw materials on a variety of shipping routes. The answers are then reformulated as the Baltic Dry Index. It tracks the actual cost of shipping raw materials, by sea, based on real cargo bookings, for the world's 24 key shipping routes, and is therefore considered a pretty good indicator of global trade volumes.
On 10 January, the BDI had its biggest one-day plunge since 1989, plummeting 384 points (4.6%) to 7,949. The BDI is now 28% lower than its 13 November 2007 record peak of 11,039.
Since the general trend in all shipping is down, and the BDI appears to be collapsing, it is unlikely that the Port of Galveston will be a major boost to the local economy during a national recession.
Oil and Gas Service Industry:
The Dow Jones Oil Equipment, Services & Distribution Index (DJUSOQ) peaked on 15 October 2007, and has rallied off its November low, so it is only down 9%. 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.
With six out of the top ten local employers providing government services, this is the dominate 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. These same woes are very likely to happen here.
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.
Apparently, some years ago, the city government was in a financial crisis, so it set off on a course to build up its property tax base. The idea was to increase its operating income, and to bolster reserves, as well as to insulate it from the ups and downs of the income that it receives through sales tax. This plan has been fairly successful, but it has strained the partnership that the City has with local businesses. Now that it has partially insulated itself from the local business cycle, the City seems to be indifferent to how well local business is doing, since it believes that its fortunes do not depend primarily on sales tax revenues any longer.
This disconnect has created a situation where the City government not only does not assist local business, but places many obstacles in its path. This condition can be reversed by identifying the problems that the city government is creating, using an Ease of Doing Business survey, making the necessary changes, and then getting the City to build and implement a comprehensive marketing plan through its agency, the Park Board.
If changes are not forth coming, Galveston will not only experience the recession that is sweeping across the country, the next leg down in the decline, that started in the 1980’s, is going to be very painful.
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