Open side-bar Menu
 The AEC Lens
Alex Carrick, Chief Economist at ConstructConnect
Alex Carrick, Chief Economist at ConstructConnect
Alex Carrick is Chief Economist for ConstructConnect. He is a frequent contributor to the Daily Commercial News and the Journal of Commerce. He has delivered presentations throughout North America on the Canadian, United States and world construction outlooks. A trusted and often-quoted source for … More »

As Fall Approaches, Key Aspects of The U.S. and Canadian Construction Outlooks

August 24th, 2015 by Alex Carrick, Chief Economist at ConstructConnect

Article source: CMDGroup

Yes, there are ongoing caveats concerning the U.S. economy – a disproportionate number of part-time as opposed to full-time jobs; high levels of student debt; the psychological hangover of recession-era foreclosures in the housing market; etc. Nevertheless, proof of greater strength is everywhere.

The bellwether initial jobless claims figure has been below 300,000 for 24 weeks in a row. This proxy measure for layoffs, during the week ending July 18, fell to its lowest level since 1973, when total employment was nothing like as high as it is now.

In both June and July of this year, total housing starts in America climbed above 1.2 million units (annualized) for the first time since before the recession. This was the logical result of residential building permits bettering 1.3 million units (annualized) in June.

And the almighty ‘greenback’ has become even more powerful, soaring above every other major currency, mostly by percentage changes that are in double-digits-plus.

Even China, the major ‘pretender’ in the contest to be the world’s leading economy, has abandoned parity with the U.S. dollar and has orchestrated a small yuan pull-back.

What’s frustrating, though, is that non-residential construction activity seems stuck in neutral.

CMD’s non-residential construction starts in the standalone month of July retreated to $22.4 billion, or about where they were in each of the first four months of this year. In May and June, they rose above $31.0 billion, but that was mainly due to several individual outsized projects.

The Census Bureau’s put-in-place construction-spending figure has finally exceeded $1 trillion in each of the past four months, but that’s after a gap of nearly seven years.

Why has a return to better capital spending been so slow to materialize? Four explanations immediately come to mind.

(1) Non-residential construction traditionally lags an improvement in the overall economy. Companies need to be earning greater profits, hiring more staff and pushing the limits of what they can produce in their present locations before they expand facilities.

As shown by the upward leaps in stock market indices, profits aren’t the problem. Other issues prevail. While office vacancy rates have declined significantly, they still aren’t tight enough to inspire wide-scale new investments. Plant capacity utilization rates have improved, but they still haven’t pushed past the 80% level that would spark a new wave of positive spending decisions.

(2) It’s easy to forget that for several years after the recession, owners were reluctant to hire back workers because they remained wary that the better times might not last.

As demonstrated by a quite low 5.3% unemployment rate, that hurdle has been overcome in the labor market. But as a way of thinking, it’s still having an influence on construction intentions.

Moreover, it’s easy to find ongoing justification for caution. Seemingly ‘out of the blue’, the world price of oil tumbled a year ago, taking a large bite out of project initiations in the energy sector.

Currently, there’s a great deal of uncertainty about the consequences of an interest rate hike, which is under serious consideration by the Federal Reserve.

The reward for lenders from interest earnings is made up of several components; a hedge against inflation, although that’s almost non-existent at this time; payment for foregoing one’s own present consumption (i.e., lending the money out rather than spending it); and payment for taking on a risk (i.e., putting one’s funds in the hands of another). On counts two and three, higher yields are warranted.

But interest rates play another role in the real world that is often overlooked. They influence exchange rates. The Fed will be taking a gamble with a greenback that is already lofty and throwing up a barrier to U.S. manufacturers’ export sales if it proceeds with a step up too early.

(3) Thanks to the Internet, a great many options are sidetracking the building of additional square footage. The first to learn this lesson, at their own great cost, were old-style booksellers, video rental stores and travel agents. The ‘bricks and mortars’ versus online-selling-opportunities debate has been raging for more than a decade, with the latter mostly thumping the former.

With the rise of the ‘sharing economy’, the ripple effects on construction have spread wider. The question now is bank branches versus PayPal; more hotel rooms versus an expanding bed and breakfast (e.g., Airbnb) culture; and university or college classrooms versus online courses.

(4) Demography is also playing a part. An aging population, requiring greater health care and pension support from a working-age base that is becoming relatively smaller, is forcing governments to keep a closer eye on their finances.

As has already been seen, obtaining approvals to spend public money on capital projects – even on critical infrastructure repairs, let alone new undertakings – has become harder to achieve.

On the plus side, the door is being shoved open for alternative and mainly private-sector driven financing measures.

I have no doubt that U.S. non-residential construction will continue to trend higher. At the same time, it seems likely that the upward progression will be more drawn-out than in the past.

In Canada, national output so far this year has been mostly flat. When 2015’s second quarter gross domestic product (GDP) number is published by Statistics Canada, it may verify the presence of a technical recession (i.e., two consecutive quarters of negative GDP change).  Cutbacks in energy spending in Alberta have been most harmful.

The construction scene nation-wide has long had a uniquely regional flair, with resource-rich provinces – mainly in the West − possessing a distinct advantage.

But now, Western Canada is no longer looking as upbeat as in the past – certainly not until commodity prices start to improve again.

World trade remains weak. The devaluation of the yuan is an indication of ongoing problems in China’s economy. In the mid-00s, China accounted for 40% of world demand in nearly every raw material category. As a major supplier, Canada enjoyed a huge benefit. China’s growth rate is now estimated to be in the 6% to 7% range, down from 10%-plus; and that’s if it is to be believed, and not politically motivated.

Construction investment in Canada’s manufacturing sector should pick up, especially in Ontario and Quebec, thanks to the decline in value of the ‘loonie’ (i.e., the nation’s currency).

As for cross-border shopping, some Americans will undoubtedly make a trip north to purchase retail articles that have become cheaper on account of the exchange rate drop. But with Target’s departure, and the closure of its numerous stores, Canada’s retail sector has become overburdened with vacant space.

Health care spending will be driven by the aging population. Governments at all levels will stay stingy, though, until their economies turn around. They need more tax dollars.

Canada remains heavily dependent on resource development. As long as such work fails to resume as in ‘glory days’, the economy will struggle. While it might be nice to think otherwise, an adequate number of new job opportunities won’t magically appear – at least, not in the short-run − in some new-age niche.

Tags: , , ,

Category: CMD Group

Leave a Reply

Kenesto: 30 day trial - Countless CAD add-ons, plug-ins and more.

Internet Business Systems © 2018 Internet Business Systems, Inc.
25 North 14th Steet, Suite 710, San Jose, CA 95112
+1 (408) 882-6554 — Contact Us, or visit our other sites:
TechJobsCafe - Technical Jobs and Resumes EDACafe - Electronic Design Automation GISCafe - Geographical Information Services  MCADCafe - Mechanical Design and Engineering ShareCG - Share Computer Graphic (CG) Animation, 3D Art and 3D Models
  Privacy PolicyAdvertise