Having just returned from a research trip to the US, I wanted to share my key findings. My first stop was in Oil Country – Austin, Texas to be exact. There I rubbed shoulders with the world’s top oil companies, oil drillers and oil services companies. Then, I was on to Houston, where I met one of the largest homebuilders in the US. Finally, I made my way to the “Big Apple” – New York – to attend two conferences, one on global financials and one on the pet industry.
This is what we learned about different facets of the US economy and the opportunities that emerged from our conversations and experiences over there.
Oil outlook: a river of oil could be coming
The key takeaway from the oil conference was that oil is likely range bound. This is despite OPEC (the intergovernmental group that produces about a third of the world’s oil) extending their output cut, which means less oil produced.
Generally, when less oil is produced, the price of oil will go up. However, this time is different.
While OPEC is reducing oil production, US shale oil producers are accelerating production, negating the impact of OPEC’s cuts. At the conference, US shale oil producers were emphasising the dramatic productivity improvements they have made. This means they are now profitable at much lower oil prices. In essence, US oil producers can now extract oil using fewer oil rigs and less crew, making the whole process a lot more efficient. This has changed the dynamics in the oil market. With a potential doubling of new US shale oil flooding into the market, things could get worse for OPEC.
US housing market improving
About 35 minutes outside Houston, I visited a new development called Tamarron being built by developer D.R. Horton. When completed, this development will include over 4,000 homes ranging from NZ $300,000-$600,000 in price. Like Auckland, Houston is a fast-growing city, but there is one big difference: You still get value for your money.
I like a bargain like everyone else and the home in the picture below could be yours for less than NZ$600,000. Not only does it look great, but it comes with all the trimmings. Five bedrooms including guest suite, four baths, two powder rooms, four-car tandem garage, and a games room for entertainment. Feedback from sales staff is that demand trends are very strong.
Looking ahead, we expect the US housing market to continue its recovery at a measured pace. US housing demand is well supported by population growth and a strong job market. Affordability remains very good, with mortgage interest rates still low and banks happy to lend.
Brick and mortar retailers getting “Amazoned”
Brick and mortar retailers (i.e. physical stores) are really struggling in the US. I was surprised in Manhattan – some might say the “home of retail” – that there were so many vacant shops. The only store that had significant customer traffic was Amazon’s first book store (see picture below).
Online giant Amazon has changed the way we shop by taking us online, to the demise of many brick and mortar retailers. Amazon is now changing strategy and moving into physical stores. An interesting feature of the store is that the books displayed are based on customer ratings from their website and popularity in the area where the bookstore is located. For example, New Yorkers buy a large amount of cooking books on Amazon.com, so the physical store had a very large cooking section. The Amazon threat will only spread, with grocery stores potentially the next victim.
Personal investment in pets increasing
A clear takeaway from the pet conference I attended is that Americans are spending more than ever on their pets. As one broker mentioned to me “pets are people too” and increasingly we are treating our furry friends like members of the family.
From Bloomingdales, to Starbucks, to my internal United flight, dogs are everywhere and treated better than many humans (see picture below). Pet spending remains one of the strongest categories of consumer spending. This is part of why we are looking for more opportunities in this niche area of the market.
What are the key takeaways?
Overall, we remain optimistic about the outlook for the US economy. We expect slow but steady economic growth ahead, despite the political noise coming out of Washington. The backdrop is almost a Goldilocks scenario. The economic growth is not too hot causing inflation and forcing the central bank to lift interest rates aggressively. And not too cold either, as economic growth should be solid this year – with a slight acceleration from 2016.
Despite the political rhetoric, companies we met on the trip were upbeat about the future, due to the administration’s pro-growth agenda. They were also very encouraged about the prospects of less regulation, which was seen as a roadblock under the Obama administration.