From a small northwestern observatory…

Finance and economics generally focused on real estate

Dallas Fed Econ Letter

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The February issue of the Dallas Fed’s Economic Letter hit my desk this week. The economic research staffs at various Federal Reserve Banks don’t directly compete with one another, but instead take very different slices of the same issues. As such, I try to glance at most of them from time to time. Dallas does a great job at the nuts-and-bolts of what makes up the economy.

The focus this month is on the way the world-wide recession has hit global trade, particularly durable goods. I won’t bore you with the whole thing — look it up yourself at However, they DO tend to assume that the reader is fully versed on how things work, and as such leave out a few details we would normally need to explain to Econ 101.

From an average persons perspective, world trade begins — and ends — with consumption. People want to buy stuff, and so other people somewhere else make it and ship it to them. If demand falls off, so does supply. Since one person’s consumption is another person’s income, a fall-off in demand creates a downward spiral that needs to be kick-started. It’s one reason why the Chinese are so apoplectic right now — they tend to be in the “supply” biz and Americans and Europeans are in the “consumption” biz. Ergo, if things get really bad, Chinese workers have too much spare time on their hands. Very few things frighten the Chinese leadership more than that.

And yes, trade REALLY got hit hard by this recession. On an annualized basis, U.S. imports fell about 15% in 4Q08 and another 35% in 1Q09 (U.S. exports fell by comparable percentages). Those are huge, but mild compare this to Japan’s experience. Remember — Japan is very much a trading hub. They import a huge share of their food and consumption and make a big chunk of their income by exporting stuff. Japan’s exports fell at an annual rate of about 45% in 4Q08 and a whopping 60% in 1Q09. Their imports fell as well, but not as badly because, let’s face it, if they don’t import stuff, they starve. (If the U.S. doesn’t import food, we end up having to eat domestic lettuce rather than Chilean arugula. It’s just not the same.)

Two things are missing from this equation, though, and need to be understood for a fuller appreciation of the trade problems. First, even if demand picks up (or for that matter, never fell off in the first place), world trade was going to get hit badly due to the almost total collapse of trade capital. Banks in free-fall were cutting lines of credit, and since import/export activities are among the riskiest (and require hedging, which was also in a tailspin), those lines got cut badly. If you were a major player, like Boeing or GE, you could finance yourself. However, if you were Joe’s Apple Orchard, you were out of business.

Second, this is interesting to the real estate community because the huge array of trade means a huge array of logistics — transportation, storage, port facilities, and associated properties dedicated to moving and storing stuff. If arugula needs to be imported from Chile, then consider all of the real estate devoted to getting a serving of it from the farm to a salad plate in middle-America.

Until credit is restored, the import-export game will continue to suffer, and the real estate devoted to serving that game will be “on hold”.

Written by johnkilpatrick

March 10, 2010 at 3:01 pm

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