By George Ratiu, Research Economist

 

Economic activity continued its growth pattern in the fourth quarter 2009, with major indicators posting positive results. Gross domestic product (GDP) was positive for the second consecutive quarter, while industrial production continued its advance and manufacturing employment posted a slight increase.

Building on the third quarter’s advance, gross domestic product rose 5.9 percent in the fourth quarter of 2009. All GDP components except government spending posted positive figures. Consumers maintained a cautious approach to spending, pushing personal consumption expenditures up 1.7 percent. Spending on durable goods was up 0.2 percent, in spite of a 20.7 percent drop in spending on motor vehicles and parts. The furnishings and household equipment component was up 10.6 percent, while recreational goods and vehicles gained 16.6 percent. Meanwhile, spending on nondurable goods was also a positive 4.1 percent, helped in large part by spending on food and beverages (up 4.9%) and clothing and shoes (up 7.4%).

The economic stabilization and the move toward growth are mirrored in multiple indices. The Federal Reserve Bank of Chicago tracks 85 indicators of economic activity, which it combines in its national activity index—an index value greater than zero points to growth in the pace of economic activity. In January 2010, the index moved up to a value of 0.02 from negative 0.58 in December 2009. The main drivers for the index’s rise came from growth in production indicators.

Industrial production has been steadily rising for over six months. The Federal Reserve Board’s Industrial Production Index was up from a low of 95.8 in June to 100.1 in December 2009. In addition, the index rose to 101.1 in January 2010. All of the industrial production components that make up the index posted positive results at the end of 2009 and the start of 2010. On an annualized basis, manufacturing rose 11.5 percent in January 2010, driven by a surge in durable goods (up 18.3%). Nondurable goods manufacturing also increased 8.8 percent for the month. Electric and gas as well as mining also posted growth of 9.1 percent and 8.9 percent, respectively.

Source: Federal Reserve Board

However, while expectations for continued economic growth solidify, the stubborn level of unemployment dampens the outlook for 2010. Except for a solitary 0.6% rise in November 2009, payroll employment has been declining for two years. Over this period, 8.4 million jobs have been cut, leading many job seekers into longer job searches, and causing others to discontinue their attempts altogether. The number of people receiving unemployment benefits has been hovering around the 4.5 million mark. The unemployment rate jumped from 5.0% in December 2007 to 10.0 in December 2009.
The silver lining for employment has been the decline in the rate of employment cuts coupled with modest signs of improvement. Based on gains in industrial production and manufacturing, employers are showing renewed interest in making new hires. Payroll employment in manufacturing rose 1.2% in January 2010, the first positive figure since January 2007. Mining and logging also posted a positive 7.3% rate of growth. Nonetheless, there are large sectors of the economy that are still facing an uphill struggle. Employment in the construction sector fell 14.7% in January, while transportation and warehousing employment declined 5.4%.

Demand for manufacturing and warehousing space remains weak. In the fourth quarter 2009, net absorption dropped 38.1 million square feet, and it is projected to decline an additional 47.7 million square feet in the first quarter 2010. Looking at overall demand for 2009, the industrial sector closed the year with a negative 258.1 million square feet of net absorption, a significant drop from the negative 57.2 million square feet marked in 2008. The outlook for 2010 is dampened by overall employment conditions and weak consumer demand for products. Net absorption is expected to decline 93.5 million square feet over this year.

Meanwhile, supply of new industrial space has been declining steadily. Compared with 179.6 million square feet of new space in 2008, completions of industrial buildings totaled 70.1 million square feet in 2009 and are expected to reach only 37.4 million square feet in 2010.

In turn, the national industrial vacancy rate is projected to rise to 14.3 percent in the first quarter 2010, up from 13.9 in the fourth quarter. Looking ahead at 2010, availability of industrial space is expected to continue growing, reaching 14.9 percent by the fourth quarter 2010.

The regional impact of shrinking demand and growing vacancies is felt across all markets, with both inland and coastal markets feeling the pain. Markets with high vacancy rates include Detroit, Phoenix, Atlanta, Boston, and Columbus. Markets where vacancy rates are below the national average encompass Los Angeles (8.6%), Kansas City (9.9%), Long Island (10.7%) tied with San Francisco (10.7%) and Houston (10.7%).
Due to growing vacancies and weak demand, rent growth for industrial space has been declining. Rent dropped 10.9 percent in 2009 and is expected to decline an additional 9.6 percent in 2010. During the first quarter 2010 rent for industrial spaces is projected to decline 2.5 percent. The outlook for the industrial sector into 2010 provides for continued declines in demand, with an accompanying rise in vacancies and declines in rents.

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