By Tom Henderson, Strategist JBH Capital
I am always looking for an edge in the markets. I read many different periodicals, attend as many conferences as I can and participate in as many earnings conference calls as possible. Conference calls are particularly helpful as I learn a lot about how businesses are doing and about their visibility. All of these activities have helped me understand what is happening with businesses and the economy.
Another very useful way (and at times more important way) in which I learn about the state of the economy is by gathering information from my everyday experiences. The famed Jim Rogers is a big proponent of this method. After all, Jimmy was the guy who jumped on his motorcycle and traveled the world to directly see which countries’ economies were doing well.
Before I relay the findings of my local research, there is an important flaw in my argument I will point out. This article is on my findings in and around the tri-state New York area which relies very heavily on the finance industry. Finance is by far the most important driver of economic activity for the region.
Since I live and work in and around the New York City, the information I pick up from my surrounding day to day activities will be greatly skewed due to heavy reliance on finance. This could give me a skewed picture because even if the rest of the economy is doing well, if finance is suffering, the economy in and around New York City will continue to weaken.
However, this information may still be useful as many of New York’s businesses can be linked to how businesses in other parts of the country are doing.
Recently, I have seen continued and possibly even deepening weakness in the economy in and around the New York City region. For example, in Manhattan, on Broadway as I walked north from Houston Street, I noticed many new commercial vacancies. I am familiar with the area and had noticed a sharp increase in store vacancies over the past 3 months even during the prime spring and summer seasons.
As I walked around, I saw ads in commercial buildings that read, “3,000 square feet available… 5,000 square feet available…” It was not an isolated case but rather one window after another.
Another area I have observed is the residential real estate, particularly in Manhattan. Manhattan apartment prices have been dropping sharply. To put things in some perspective though with prices down about on average 25%, they are still up on average about 200 – 300% since the 1990s swoon. The main problems for Manhattan real estate seems to be financing and job losses. Since Manhattan apartment prices often go well over $700,000, jumbo loans are needed and the lenders have been very stingy for those loans.
However, the deterioration in the residential rental market has also been very vicious. Two weeks ago I spent some time doing research on Manhattan Apartment rentals. The open houses I attended were mostly empty (empty even for summer). One agent said that inventory had soared and that landlords were now paying fees. There were even some incentives for the higher priced apartments. The main culprit here is renters losing jobs.
Also of note, are the vacation rentals in the tri-state area. I have seen an abundance of homes for rent on the east end of long island as well as a massive price drop in the asking price for these summer rentals. Earlier in the summer I spent a weekend on the east end and spoke to restaurant and bar owners who told me that business was down sharply. They were very concerned about when things were going to get better. The culprit here seems to be the consumer pulling back on discretionary spending.
One last area of focus that I am able to measure easily is the hot dog and pretzel vendors in midtown Manhattan not far from Rockefeller Center. I have been walking through midtown for twenty years and am familiar with what these vendors usually charge. As I walked through, one of the first things I noticed is the return of the $1 hot dog and pretzel. Over the past 15 years or so, as tourists have flooded the streets of Manhattan, these vendors used to charge a minimum of $2, and often much more for a pretzel or hot dog. The current hot dog vendor price of $1 is the approximate price pretzels and hot dogs were selling for in the early 1990s. Tourist spending is the culprit here.
From this information, I can hypothesize that maybe the following is currently happening:
- The commercial leasing business retrenchment shows that businesses are cutting back their spending. This could be due to a decline in consumer spending, business spending or government spending. Regardless of the reason, this clearly reads economic retrenchment.
- Residential real estate shows no signs of a bounce. Residential rentals are also feeling the pain, an unusual event particularly for Manhattan.
- Movers are suffering. If commercial and residential real estate are suffering, the moving industry is also suffering.
- Real estate brokers are feeling the decline. If the number of sales continues to drop, the commissions that brokers receive have to be falling too.
- Discretionary spending on vacation rentals, motels, and hotels continue their retrenchment. A family that usually is inclined to travel on vacation is less likely to spend extravagantly on a vacation rental. The abundance of homes for rent on the east end of long island and their accompanying price cuts shows this.
- This goes with the above. Tourism spending is dropping If New York City hot dog vendors are charging $1 in and around Rockefeller Center, tourists are either holding onto their dollars closely or there are less tourists around that are spending.
- State and local government revenues are suffering from weaker consumer and business spending. If business does not start to improve soon, local governments have to cut back on spending or increase taxes. The extreme case is currently happening in California.
- All of the above are suffering from the weakness in finance. If you are a business or consumer, access to money is more difficult than it has been in many years. Access to money or the business of finance is contracting. Since finance drives the residential and commercial real estate, movers and real estate brokers are affected. With less money to extract from home equity withdrawals, vacations are more difficult to finance and popular trips with the family are put on hold. When that happens the midtown Manhattan hot dog cart vendor has to cut the asking price on his pretzel and hot dog back to early 1990s prices.
There are areas of improvement, notably in the financial markets. The financial markets have drastically improved from where they were late in 2008 and early 2009. Spreads have come in as evidence by the Ted Spread. Banks have replenished their depleting capital bases by raising capital.
However, capital is still difficult to get and the real economy where the consumer lives and buys things continues to retrench. At some point one of three things will happen:
- The improvement in the financial economy will continue and help the real economy improve;
- The deterioration in the real economy will act as an obstacle for continued improvement in the financial markets (please note this is Bernanke’s worst nightmare and is known as a negative feedback loop); or
- We slog our way through this as the consumer builds up his savings, the economy shifts some of its output away from the consumer, and the excesses are worked off.
I do not know what will happen but I have my radar up for the day that the midtown Manhattan hot dog vendor raises the price back to $2 or higher as a sign that things are stabilizing.