How High do Trees Grow?

When we hear on the news and read in the paper the dire pronouncements about the fragility of the U.S. economy, the slowdown in housing starts, the uncertainty in the stock market, and the volatility of oil prices, we are concerned for those who take these snapshot pronouncements at face value, using the "information" to make business decisions. Why? Because the news doesn't tell all. Driven by the "sky is falling" approach of network news and internet sites, which need blaring headlines to get us to tune in and "click through," the current take on the economy provides little real analysis and makes no effort to put its "news" into perspective. Unless we dig deeper on our own we simply can't learn much from the "fact-of-the-day" approach to news.

The media focuses on housing starts, prices, and sales because that news hits us where we live, literally. But there's more going on out there than housing starts. Consider these June 2006 figures from the federal government:

  • Commercial construction was up 16%
  • Private construction (factories, warehouses) was up almost 24%
  • Road and highway work was up 20%

But since the "talking heads" want to focus on housing starts, let's take a closer look at them. It's true that housing starts dipped 6% to a seasonally adjusted annual rate of 1.665 million in August, just as it's true that sales have slowed and housing prices have declined (at least in some areas). But that's just the sound-bite picture. Viewed from a broader historical perspective, housing starts for the last six years have been at unsustainably high levels, significantly higher than they have been for the last 20 years. So, is there anyone out there who didn't think a correction like this would happen once interest rates returned to their historically more-normal, pre-Alan Greenspan levels?

Just like the stock market, the housing market is correcting to what used to be acceptable levels. We had a good run there, and any contractor working in that sector likely had a good run too. (And don't forget, once any pavement is constructed it provides maintenance work for years.) So view the economic "news" with a grain of salt, and don't get too pessimistic. There's an old investor maxim that "no tree grows to the sky," and that's probably as good a way as any to view the current economic situation.

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