2006 forecast: Looking globally

Economists, politicians and pontificators have been trying to figure out where the economy will go. My job is to translate their views into a crisp, clear forecast for the glass and related industries. Undaunted by this year’s uncertainty and abreast on various expert opinions, what follows is my best attempt.

Storm surge or low tide?
The key underlying factor for the 2006 economy will be the rate of gross domestic product growth. Most forecasters recognize that the horrific human tragedy caused by hurricanes Katrina and Rita has been matched by a devastating impact on our economic growth, especially in the areas of energy pricing and availability. The economic effect to date has been similar to a tidal wave concentrated in the Gulf Coast between Houston and New Orleans, and washing over all of us with the effects diminishing farther out from the epicenter.

An example of the hurricanes’ continuing ripple effect can be seen in my hometown’s residential construction industry in Kingsport, Tenn. Our builders are already concerned about the loss of skilled tradespeople to the inevitably higher-paying work in the hurricane-ravaged areas of the South. While we understand the need to support the rebuilding of these regions and enthusiastically support the recovery from these disasters, the massive rebuilding effort will have unexpected effects for local construction markets, as well as a tremendous overall impact on available U.S. labor. This simple example illustrates the many unforeseen effects of the hurricanes that will continue to foster economic uncertainty across the United States.

The analysts’ best guess is there will be a 0.5 percent decline in overall economic growth in third quarter 2005 and a full percent drop in the fourth quarter. The revised annual GDP forecast estimates a decline from 4.2 percent to 3.5 percent. This seems to make sense, but the potential softening forecast from Blue Chip for 2006—from 3.5 percent to 3.3 percent—is likely more tenuous.

Here’s why. Look at some common economic indicators. Automotive sales saw a significant decrease in September. Consumer confidence has dropped. Energy costs have shot up. Building materials, across the board, have come into short supply and prices have increased. Commercial construction appears to have a solid and reasonable growth rate. Residential construction remains at an exceptional level, but the building “bubble” looms in the background. Add up all these traditional economic indicators, and you have, at best, murky waters.


Global perspective
It’s important to remember, however, that the United States does not weather the current economic climate alone. In a global economy, we need to assess current conditions elsewhere in the world.

The rate of growth for the United States—and North America—GDP represents only about 40 percent of China’s growth rate. But it is double the GDP growth rate of our European friends. In fact, the major European countries, such as France and Germany, have a growth rate of less than 2 percent, with an unemployment level of more than 10 percent. While those numbers in the United States would probably lead to a recall petition for the president, the fundamental difference between our economic paradigms is that the American market-based system combines flexibility with productivity. To our nimble Asian competitors, we might appear to be a middle-aged man with a pot belly, but, compared with most of Europe, we’re a veritable spring chicken.

The Western European countries, such as France and Germany, suffer from the weight of their social programs, low productivity levels and stringent union-related work rules. The Europeans I have worked with are extremely intelligent, work long hours and are very creative, but it is difficult to overcome the weight of the yoke they bear around their collective necks. The bright spots in that region are the former Eastern European countries that have a flat income tax, eager-to-work labor force, minimal regulatory interference and modest social costs.



Why take such a hard look at other regions of the world? We cannot hide our heads in the sand. We are part of a global economy and we must figure out how to survive, continue to excel, grow and profit from the challenges ahead. We have much to learn from the economies of other regions of the globe. In addition, the conditions that influence our economy, our businesses and our daily lives will continue to become more complicated and intertwined with others who have different cultures and different values, and, in some cases, simple dislike for us.

Raise our sails or batten down hatches?
Glass is liquid in its natural state, and liquids seek their own level. So, it’s logical to assume that when we experience a downward fluctuation in one market—such as automotive or residential construction—the glass flows to other markets.

Based upon a pre-Katrina analysis, North American float-glass capacity utilization was expected to be at 92-to-95 percent. Even with a slowdown in overall demand, the unusual number of float-tank rebuilds will probably keep glass in fairly tight supply for 2006. If post-Katrina construction exceeds current forecasts, glass could become an extremely tight commodity.

Opportunities and risks for 2006 depend on the confluence of many factors, including consumer confidence, consumer and business spending, housing inventories, growing housing prices, commercial vacancy rates, energy costs and availability, and real income growth. These are the potentially dangerous pins that could pop the virtual “bubble” everyone is talking about, and they are all tied to one another.

Housing outlook varies by region
While the U.S. housing market might seem cloudy, some facts remain clear. The rising cost of energy keeps major segments of our population from buying new homes or moving up to larger ones. Increasing housing prices stimulate speculative investment, resulting in a large inventory of new houses and condos. When the euphoria of double-digit housing inflation ebbs, this existing inventory of units will fall back on builders, who then will pull back from additional new construction. The overriding question is: Will the economy fall off the cliff, slide down the hill, or merely stumble but keep right on walking? The only real answer is yes. Overheated housing markets have the farthest to fall, and they will. However, that is a relatively small number, in comparison to the total number of U.S. regional markets, and I believe that more reasonably priced markets will drop a little and then move ahead.

Analysts who contribute to the excellent site www.economy.com forecast that the cleanup from hurricanes Katrina and Rita will follow a clear path: cleanup, remodeling of the homes that can be saved, and then new construction to replace destroyed buildings. These analysts forecast that the second quarter of 2006 will represent the “high tide” in the construction cycle, and that it will take more than a year for the majority of the work to be completed. Unfortunately for the residents of affected areas, it could take much longer.


Overall, the U.S. residential market is forecast to be down 4 percent in 2006, with existing home sales down 6.5 percent and remodeling up 4.7 percent. All of this is, of course, dependent on the factors already discussed. Officials at the National Association of Home Builders in Washington, D.C., forecast that out of the 350,000 housing units destroyed in the hurricanes in the Gulf, 38,000 will be rebuilt next year, and an additional 38,000 in 2007. While the cost of rebuilding this area has increased because of the cost of building materials and scarce labor, one economist has forecast that U.S. housing prices might decline overall by an average of 3 percent next year: On p.58 of the September issue of Money Magazine in “Cuckoo for Condos!” Stephen Gandel quoted economist Gleb Nachayev of Torto Wheaton Research saying, “To some degree, what’s driving condo prices is sheer greed.” Torto Wheaton Research of Boston forecasted a relatively mild drop of as much as 3 percent for U.S. housing prices overall in the next year, Gandel wrote. If that proves true, it will put pressure on builders’ margins due to inflation in building materials, and put pricing pressure on the manufacturers of windows and other fenestration products.



Commercial sector salvation
Looking for bluer skies? The U.S. commercial construction market appears to have a solid 4.5 percent growth rate for 2005 and 2006. While commercial vacancy rates are declining from 18.5 percent to 15 percent, they are still high. Retail construction is forecast to slide slightly, except for the national retail chains. Construction of schools and hospitals and clinics will continue to grow, while the fastest growth is projected to be in the hotel and motel segment—the smallest of the commercial markets.

Automotive conundrum
The U.S. automotive market is forecast at 16 million units, but the skyrocketing price of gasoline—affecting both the type of vehicles sold, and consumers’ ability to purchase them—makes fore- casting especially challenging. From the glass industry’s perspective, the move to smaller, more fuel-efficient vehicles will reduce the volume of glass per unit, currently averaging almost 50 square feet in a van or sports utility vehicle.



This is the most speculative forecast I have ever written. While I want my predictions to prove helpful, in this uncertain economic weather, even the best analysts struggle for a clear view.