Having been away for a few days in the southern United States has given me an opportunity to get a feel, on the ground, so to speak, as to whether the US truly is in economic distress or not. This is a subject about which there are conflicting opinions (as, indeed, there are conflicting opinions about whether and to what extent will Canada be affected).
I shall start by being quite clear on one point: I went convinced that the US had passed a tipping point last fall, and that the question was not whether years of economic mismanagement were going to have their revenge, but when and how deeply. Much of my examination, therefore, was done with a conscious attempt not to read too much into what I observed, to try, so to speak, to take the contrarian view and look for the bright side rather than confirm my own down side view.
I was at a conference this week which attracted the bulk of its attendees from across the United States — along with a few Canadians and a handful of people from Europe. First of all, attendance was off relative to prior sessions (this is a twice-a-year event). While the conference organizers tried to paint a positive picture, my crowd estimate is that attendance was down more than 33% from October. Normally, too, the audience tends to bias to the eastern half of the continent at the spring session (held in the east) and to the west in the fall session. Major sections of the east — mostly in the industrial belt, what Joel Garreau, in his 1981 book The Nine Nations of North America called “The Foundry” — were thin in terms of attendees. “Local” attendees — those who could have driven to the event to avoid the cost of flying — were practically non-existent. This is a radically-different profile from previous conferences of all types that I have attended in the Orlando area, as “taking the family” to an event there when you live in the south-eastern US is almost de rigeur.
The tollway from the airport to the hotel facility — this time, at the Universal complex rather than at Disney — doesn’t give one much opportunity to see the state of residential real estate. I was here just a year ago, however, when the billboards were filled with real estate ads: this time, nary a one was seen. Condo developments near highway I-4 were advertising rentals, rather than purchases (and I believe this walled and gated community was advertising as much holiday rentals as long-term ones). There is much unfinished construction, and no sign of continuing work.
Prices everywhere were up from a year ago. Diesel, for instance, is over US$4.00 per US gallon — about CAD 1.06 per litre. Regular petrols ranged between US$3.50 and $$3.70. Yes, they’re still cheaper than in Canada (and especially in Vancouver, which is consistently above the CAD 1.20/litre mark these day) but the differential has dramatically closed: Florida has always been relatively inexpensive, as it is quite close to the heart of the refining base (unlike, say, California). Such food prices as I was able to glean from the local newspaper and television advertising indicate 20% jumps from a year ago for the basics.
The attendees at the conference were glum — morose, even. Few felt that their companies would be doing much this year; many asked me for my thoughts on how to defend their budgets and staff base. There was a general feeling that harder times lay in their companies’ futures. Many capital projects had been cancelled or deferred. Many had had their contractors and consultants quietly purged and removed from the office. More than once I heard people say “thank goodness this was booked months ago, along with a non-refundable air ticket, or I wouldn’t be here”.
Local advertising was mostly for solicitors, especially to deal with foreclosure and to provide relief from dunning by creditors.
A friend of mine in Vancouver asked if (following up on some reading she had been doing) organizations like Starbucks were suffering more deeply than most. The lineup at Starbucks at both Vancouver and Toronto airports was its usual long self, with a full complement of serving staff to keep up with the demand. On the other hand, this morning, the airside (where no worries about liquids would be involved) Starbucks in the busier terminal at Orlando Airport had no lineup at all, and a skeleton (and obviously not well trained) staff. Having had an efficient and even relatively pleasant TSA experience, I had the time, so I sat where I could watch the outlet for about thirty minutes. Only one other person bought anything there during the entire time. Burger King coffee, on the other hand, was a much better seller (although not necessarily a better experience). Apparently people are cutting back.
I think there’s little doubt that Canada will experience some of the same experience over the next while: there are Canadian regions that have also experienced a housing bubble (no area can long sustain housing prices that require 70% or more of a two income family’s monthly net pay simply to pay the mortgage on the most generous [minimal down payment of 5%, 40 year amortization, lowest variable interest rate], as does Vancouver today). Garth Turner’s new book — based more generally in the Toronto region experience, which is equally overpriced — suggests the bubble is being burst this year. I concur. The adjustment — having lived through Connecticut eight years after its last housing bubble, where a 50% “adjustment to reality” was still required to awaken the local market — can be long and difficult, especially as real estate generally needn’t move.
For all that, we have done many things right. The West is unlikely to experience a slowdown (save only if the Bank of Canada does something really stupid and follows the Federal Reserve into the abyss of negative real interest rates). Central Canada has some adjustments, but these are as much due to the drying up of business on the US side of the border — work-out specialists from New York fill flights to Michigan, for instance, to restructure the extended automobile sector — as to the border shenanigans associated with the Department of Homeland Security’s flouting of the principles of NAFTA, to which the US was a willing signatory and remains a general beneficiary.
The Bank of Canada must resist the siren call to lower our interest rates: we do not need it for our domestic purposes, and indeed it would simply start an economic fire that would worsen our competitiveness for the future. (We must also, it goes without saying, eschew the “quick fix” handout mentality from the Opposition benches, from the Turners in the Liberal camp to the NDP at large.) On CNBC this morning the Bank of England was applauded by the stock junkies for having lowered rates “to help the United States” (the myopia of the US media continues unabated) and the European Central Bank was criticised for being “more concerned with European needs than ‘our’ needs”. Jean-Claude Trichet and his fellow ECB governors are to be applauded for paying attention to the people they are there to serve, and so, too, our central bank should do the same.
All in all, I come away thinking that the US had quite a bit further to fall. Until the hubris that leads to calls for others to suffer to “bail out” the US abate and Americans take responsibility for the shape they’re in — no one I talked to felt there was any connection between their own deficits, or their quest for endless growth, or their quest for a risk-free life and the conditions they are now experiencing — this downturn will continue to unfold. Only if we see responsibility being accepted, south of the border, should Canadians consider lending a hand. Certainly none of the candidates campaigning for office there show any sign of understanding how much bad policy exists, and how much they are espousing. In short, sauve qui peut — we should tend to our own health and well-being.