Bob Johnson was traveling this week, so we are featuring this recently filmed video report in place of his regular Saturday column.
Jason Stipp: I'm Jason Stipp for Morningstar.
In 2011, the economy has seen a lot of ups and downs, and there are certainly still a lot of headwinds facing the economy going into 2012.
But Morningstar's Bob Johnson says there are a few potential positive upsides that may be under the radar of most investors and market watchers. He's here to explain today. Thanks for joining me, Bob.
Bob Johnson: Nice to be here.
Stipp: So, four things that we might be able to look forward to in 2012 that could give some boost to the economy.
The first one has to do with one specific company. What is that company and how is that one company might be offering a boost to the whole economy?
Johnson: Sure, and again, these are things that ... are a little bit unanticipated; it isn't built into people's forecast. It could be an upside surprise. And these are things that aren't necessarily for sure going to happen. But ... people always worry about this bad thing and that bad thing. Well, let's do the other side of the equation, and talk about different things that could be upside.
Boeing is certainly one of those. Boeing has, in some ways, kind of been a perennial disappointment. In fact, they've cried wolf one too many times about ramping up their production. Then the 787 doesn't fly right, or they have some production issue and have to go back to the drawing board. So, I think this may be the year that Boeing finally takes off, and they are projecting some pretty dramatic increases in the production of their aircraft.
They're going to move this 787 over the next few years from two aircraft a month to 10 aircraft a month. So, a really big number. And that's a $200 million piece of business for each airplane. So, that's a big number.
Stipp: So, that could be good for Boeing, but how does this trickle through, and how is it good for the economy overall?
Johnson: Well, you know, everybody has been so focused on manufacturing. I've been trying to tell people to take their eye off that just a little bit, but Boeing is a big payer. Certainly as Boeing goes, it moves a lot of the other manufacturing companies that supply them, and it also helps all the production and manufacturing indexes that we look at. So, I think it would make everybody feel better about the manufacturing economy, as Boeing really comes online here. And I think they'll make a difference.
I think people forget that so many of the production indexes are really driven by autos and Boeing, frankly. It's because they touch so many industries that even though their direct impact isn't huge, they buy from so many other companies that it has a side effect that's difficult to quantify.
Stipp: The second potential upside surprise has to do with the energy industry. We've talked about this, actually we talked about it a few weeks ago, and I've seen more and more about this in the news since then. How might energy be an upside potential surprise for the U.S. economy next year?
Johnson: There are a few different ways that energy can help us out. Certainly as an economist, one of the things that it helps is the trade deficit. As we find more oil and gas here and substitute gas and oil products from here, it reduces our balance of trade, which has always been something that's been on everybody's mind. And half of that is energy-related--our balance of trade deficit. And if we could ever cure the oil and energy part of it, we'd be substantially a long way in curing our overall trade deficit.
So, that's one of the real reasons that I like the number. And ... our oil team might argue there are issues with peak oil and maybe we're not finding all that much more worldwide, but there's certainly a shift to more oil and gas production in the Western hemisphere.
Stipp: So what's behind that? Because we've known that there have been energy issues for a long time. We've been dependent on foreign countries for this. What's changed that now we have more potential domestically?
Johnson: I think it slipped under a lot of people's radar screens. Part of it is because of the biggest boom areas in North Dakota and parts of South Texas, and those are not areas that are exactly in people's focus. And oil and gas production in North Dakota is just booming. If you look at a graph, it's straight up, the production increases they've gotten there. In Texas, it's kind of a similar thing.
A couple of things have allowed that to happen. One, the new technologies that you hear so much about that they've done with gas, and some of the different drilling processes and procedures. Some of them can apply to oil just as well. So that certainly helped.
Stipp: So that's unlocked some reserves they couldn't get to before?
Johnson: Couldn't get to, literally.
Secondly, is price. Certainly some of these things wouldn't have made any sense to do at $40 or $50 a barrel, but now that we've had a relatively sustained price level at $80 to $100 or $110, people have felt a little bit more comfortable in making the investments, and it takes a little while to put those in place, and I think that's been put in place, and now we are seeing the fruits of that every month. And the curves are pretty high. I think that's going to be really good news, and I think that's going to be the biggest surprise next year.
Again, that's not really built into everybody's numbers. And like I say, it helps the trade deficit, it helps employment, and more production means probably more stable prices, so we don't have to look forward to another spike. So that’s good for consumers. So, it's a multi-layered good approach. Even our housing analysts wanted to know where all these workers were finding homes in North Dakota, but I don't think we've found a lot there, unfortunately.
Stipp: So you mentioned housing. This is the third one you've identified as a potential upside surprise.
I feel like we sit here every year and say, next year we might see something better in housing, and it continues to somewhat disappoint. You just don't see the growth there that we really want to see. Why might 2012 be a better year for housing?
Johnson: Well, I think the problem with housing has been that so many people haven't had the confidence. Really, we've got a generational situation where people in their 20s can either opt to rent or own a home or move in with their folks. And a tremendous number, literally in the millions, have decided to move in with their parents. And those are new households that aren't formed out there, at the beginning of the food chain if you will. If new people aren't buying, then other people five years out can't go buy their next home because they can't sell it to the first group.
So, it's really had that knock-on effect. This group of people that have been psychologically afraid to own a home. I think we've now gotten to the point where we're getting past that a little bit. I think we are going to see next year, just because it's been going on so long, people aren't going to keep living at home. Yes, maybe all 22-year-olds will now live at home for one year, but I don't think it's going to be all 23-year-olds, 24-year-olds, 25-year-olds. We've hit the first batch of people, and now it's going to be steady state. So I am optimistic from that standpoint.
And I will admit that I thought this would have turned sooner based on affordability. Homes are basically almost twice as affordable as they were 10 years ago, and the mortgage payments are so dramatically less on a home today. In fact, I would wager in most places, it's cheaper to own a low-end home than it is to rent. Now you don't have the flexibility [when you own] and a few other issues, but with rates so low and prices so low, combined, it really is an attractive package for somebody to own instead of rent.
Stipp: What about the availability of financing? I know this is something that folks have worried about. There might be homes out there that might be affordable, but people just can't get those loans and get these deals closed.
Is there any hope that that might improve? Might some of these other factors that could help the employment market help the housing market on that front?
Johnson: I absolutely think so, and I think we are seeing some better news there. Again, it's on the edges. ... We all thought maybe these non-conforming mortgages, these large jumbo mortgages, so to speak, might be an issue going forward to get one. And frankly, it's become much easier, and the availability of those has improved dramatically, and that may be something that helps out.
So we're seeing some loosening in that, and as we get the employment numbers better and people get past maybe the payment or two they missed in 2008 when they didn't have a job or whatever, as we start to move past some of those things, I think people will have a better ability.
But it's still been an issue. We've talked about how the pending home sales have really done quite well, and it's one of the reasons I'm optimistic for 2012. We had a 10% gain in pending home sales in the last reading, which is a really nice number to see. On a year-over-year basis, it's one of the best we've seen in a long, long time. And I think that bodes well for next year. But we do have to be a little cautious because appraisals haven't come through, and pretty tight mortgage standards have still kept a little bit of a lid on that.
Stipp: So pending is the key word there. Even though they are pending, they all haven't been getting done.
Johnson: Closed--actually finished and off the market, right.
Stipp: The last one, Bob, has to do with the auto industry. This is one we've talked about a lot this year. They've seen some momentum this year. What's going to keep that going into 2012?
Johnson: I think it's this whole phenomenon that people have just hung on to cars as long as they could, and I think that they've [now] reached a breaking point where they just have to buy a car. And the population keeps going up every year, and people want more fuel efficient cars--although they're also buying SUVs again, now the gas prices have gone down a little bit--and you're seeing this step-up. But I think you're seeing an unfreezing of that market.
I don't know that it's necessarily going to boom, but Ford and some of the others are talking about production increases again in the first quarter. With a $14 million run rate to close out the year here, that's a real necessity to hire more workers to work in the auto industry and kind of step it up.
If we get back to that $16 million to $18 million level, that's just what I think we need. That isn't even catching up for what we lost. I don't think, because the financing and things that are a little bit different this time, I'm not projecting we're going to get to 20,000 or anything like that, but I think next year will be a solid year for the auto industry, and they're going to step-up employment and production, and I think that may surprise some people.
Stipp: And similar to Boeing, there are a lot of knock-on effects from that as far as all the industries that touch autos and more employment in all of those industries, and then all of those towns, more employment potentially for all the ancillary services.
Stipp: OK Bob, thanks so much for giving me potentially what could be some good news for 2012. Always like to end the year with some positive notes. Thanks for joining me today.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.