If we examine the national economy it is obvious that something is not quite right. We seem to be coming down with something. It could be a cold, maybe the flu. At this stage the signs aren’t clear enough to know for sure.
Even the highly skilled economic diagnosticians at the Federal Reserve aren’t certain how ill our economy might be, but they aren’t waiting around to see. The recent Fed Funds rate cut of 50 basis points was big medicine, at least by Fed standards. Like a shot of antibiotics straight in the “keister.”
But like so many bugs these days, this current one that ails us might be resistant to treatment. What is even more difficult to take is that unlike the malady that befell the national economy in 2001, we in Northwest Arkansas aren’t immune this time around.
The 2001-2002 recession was a function of a speculative bubble in the stock market, particularly within technology stocks.
Once that tech bubble burst, huge sums of paper wealth were destroyed. The erosion of tech wealth eventually impacted the entire economy.
Of course it shouldn’t have been surprising considering companies with no revenues and pre-recession valuations that exceeded brick and mortar companies with decades of earnings performance became worth what financial principles said they should be worth – next to nothing.
This is not to say those of us working in areas with a relatively small tech sector weren’t effected. Our stock portfolios and 401(k)s suffered as equity prices fell and then struggled to gain momentum.
I still own a few hundred almost worthless shares of a company that was going to be the next Yahoo! or Google.
The current economic infirmity is and will affect Northwest Arkansas for the foreseeable future. Stagnant and declining real estate values across the country are eroding personal wealth. As wealth is eroded people feel less secure about their economic future.
For many Americans, their primary residence is their single most important source of savings for retirement. If home prices fall, the perceived wealth of millions declines, inducing them to increase savings for retirement. Given U.S. savings rates, this may seem like a good thing.
There are two problems with that conclusion.
First, declining real estate values negatively impact the financial industry, destroying liquidity and putting upward pressure on interest rates. Higher interest rates won’t help areas with excess residential inventories. They also won’t help marginal homebuyers whose mortgage payments are about to reset.
Second, the consumer drives the U.S. economy. We are a society of consumers. Eroded wealth due to declining real estate asset values will reduce consumption.
In the short run, people might maintain their consumption patterns. But in the long run, they will respond to economic uncertainty by reducing household expenditures. Reduced consumption due to difficulties in real estate nationwide is the single greatest risk factor to the U.S. economy.
So how does this effect Northwest Arkansas? In order to grow the local economy, we are dependent on immigration from other parts of the country. The folks we would like to move here to work for local businesses have to be able to sell their homes.
Most potential Northwest Arkansans are unwilling to take a loss to move to a new job. It seems obvious that the problems of the national real estate market are certainly part of the explanation of the observed slowdown in the local growth rate over the last several quarters.
While the local real estate story differs from the national story in that it was more about rapid build-up of high-end residential coupled with hyper-competition in banking, as opposed to easy money for marginal homebuyers, the end result is the same. Slowed local growth will postpone a return to health in the local commercial and residential real estate market. Therein lies the rub.
So this time around, Northwest Arkansas doesn’t get a pass, blithely going along on our economic way while others suffer. Should the U.S. economy slip into recession we will struggle to grow.
Further, diminished job creation will affect everything from absorption of professional office space and residential subdivisions to slow local tax revenue collections. Let’s hope the Fed has the right prescription, that the current economic illness is short-lived.
If it requires another shot in the keister, I say let’s have it.
(Jeff Collins, Ph.D., is an economist and partner in Fayetteville’s Streetsmart Data Inc. The company produces a quarterly report on all aspects of real estate in Northwest Arkansas. More information may be obtained by calling (479) 872-1000.)