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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 »

U.S. Economy and Construction Markets – Executive Summary for Greenbuild

November 13th, 2015 by Alex Carrick, Chief Economist at ConstructConnect

Article source: CMDGroup

  • Globally, the U.S. economy is outperforming all others.
  • Europe is still sluggish and the ECB (European Central Bank) may embark on more quantitative easing. Likewise Japan and its central bank. China’s monetary agency has been lowering interest rates to stimulate growth.
  • In the mid-00s, China accounted for 40% to 50% of world demand for most commodities. With China’s slowdown, prices for raw materials worldwide are in the doldrums.
  • The present economic forecast can be labeled a ‘throwback’ in the sense that it’s similar to the 1990s and earlier when the U.S. always led growth internationally.
  • Furthermore, in those ‘old’ days, U.S. prospects were limited by large-volume foreign energy imports. Now, thanks to domestic fracking, that handicap has been lifted.
  • The U.S. monthly foreign trade deficit (annualized) has shrunk from a range of -$600 to -$800 (billions) to -$400 to -$600 (billions). The reduction is quite positive for GDP.
  • China’s growth has dimmed from a range of +10% to +12% to an ‘official figure’ of +6.5%. Many analysts believe the nation’s annual advance may truly be closer to +3.5%.
  • In an unprecedented turnaround, there have been several months this year when the U.S. has recorded a trade surplus with both OPEC and Saudi Arabia. A cause for headlines.
  • The Federal Reserve will likely begin to hike the federal funds rate in December. The increments over the next couple of years will almost certainly be tiny (100 basis points at most each year, where 100 basis points = 1.00%).
  • When the U.S. economy is functioning on all cylinders, annual ‘real’ (i.e., adjusted for inflation) gross domestic product (GDP) growth is +3.5%. From 2015 through 2017, probably the best that can be hoped for is +2.0% to +2.5%.

  • The two biggest factors working against a faster rate of U.S. GDP growth are: 1) capital spending cutbacks in the energy sector, on account of the plunge in world energy prices (initiated by Saudi Arabia); and 2) the extraordinary strength in value of the U.S. dollar, which is inhibiting the export orders success of American manufacturers.
  • As is the case in many other countries, U.S. fiscal policy (i.e., spending above receipts collection) is not matching monetary policy (e.g., low interest rates) for stimulus.
  • The public sector’s fixation on austerity is easing, though, especially at the state and local levels. More revenue is flowing into public coffers from income, sales and property taxes.
  • The consumer sector is now in better shape thanks to cheap gasoline, employment increases (the unemployment rate is only 5.0%) and (albeit moderate so far) wage gains.
  • The Purchasing Managers’ Index (PMI) of the Institute of Supply Management (ISM) is slightly above 50%, indicating sales by manufacturers are still on an uptrend, but barely.
  • Motor vehicle sales, however, are currently as high as they have ever been. This is being achieved despite cars lasting longer (an average of 11 years versus six a couple of decades ago) and reduced demand from young adults. The latter have become more interested in electronic gadgets and paying back their student loans. Besides, to demonstrate their ‘green credentials’, they want to ride their bikes to work, or take transit.
  • In residential construction, the multi-family segment – at approximately 500,000 units seasonally adjusted and annualized (SAAR) − has returned to its pre-recession peak.
  • The single-family housing market, at 700,000 units, remains well below what might be considered its long-term ‘norm’ of about 1.2 million units. Single-family starts have underperformed for 8 years. Huge pent-up demand is accumulating.
  • An increase in mortgage rates may encourage potential buyers to commit. History has shown purchasers will take the leap when rates are climbing. They fear further upticks.
  • Hotel and motel construction is currently on a growth tear. Investment in this sector is highly cyclical. When one competitor initiates upgrades or new projects, others feel they must do so too in order to stay ‘fresh’. There’s a definite copycat effect.
  • Tourist and business travel in the U.S. is on an upswing, due to the improving economy and cheap energy costs (e.g., for gas and jet fuel). Foreign visitors, however, are more standoffish, on account of the surge in value of the greenback.
  • Retail construction is performing better than one might suppose, given all the talk about the rise of the Internet. As house prices advance, homeowners are buoyed by a positive ‘sense-of-wealth’ effect, plus consumer confidence has gained a boost from better job prospects. Cheap petrol and gradual wage increases are also spurs to retail spending.
  • Warehouse construction ties in not only to bricks and mortar retail spending, but also as a key cog in the logistics of delivering web-based product sales to customers. I like to anticipate the future role of warehouses by referring to them as ‘drone docking stations’.
  • The U.S. economy is benefitting from a super-strong high-tech sector – i.e., one that provides STEM (science, technology, engineering and mathematics) jobs. One side-effect has been a spate of mega-sized data and call center projects in diverse locations.
  • Office-based employment is on the rise and vacancy rates are at their lowest levels in many years. Still, the number of new office projects has been disappointing in CMD’s starts statistics. Some of this work is buried or hidden within mixed-use projects.
  • Employment at institutions of higher learning (colleges and universities) has flattened noticeably over the past several years. Enrolments at the level of higher education take a hit when the jobless rate is low. Also, students now know they can take courses over the Internet. Plus high tuition costs are an inhibiting factor for student sign-ups.
  • The growth in educational construction is occurring at the level of elementary and secondary schooling and it’s to accommodate the grandchildren of Baby Boomers.
  • Manufacturing construction is strong in the Census Bureau’s put-in-place stats year to date (+50%). But the capacity utilization rate of manufacturing is only 75%. The usual benchmark for when this sector goes into investment spending launch mode is 85%.
  • Everyone knows how important it is to finance new and repair infrastructure projects. Too often, in an age of sequestration, work has been proceeding based on extensions to spending bills. The new speaker of the House, Paul Ryan, has managed to lengthen the provisions of the Highway Trust Fund to 2017 − a big plus for civil engineering work.
  • The following are some key employment changes year over year:
    • Total all nonfarm jobs, +2.0%
    • Computer system design and related services, +5.8%
    • Accounting and bookkeeping services, +5.0%;
    • Construction, +3.8%;
    • Hospitals, +3.5%;
    • Architectural & engineering services (leading indicator for construction), +3.0%;
    • Manufacturing, +0.7%;
    • Oil and natural gas extraction, -7.0%;
  • There are 50 cities in the U.S. with populations of one million or more. The ten with the lowest unemployment rates, currently, are: Minneapolis-St. Paul (3.1%); Salt Lake City (3.1%); Denver (3.2%); Austin (3.3%); Oklahoma City (3.6%); Columbus, Ohio (3.7%); San Antonio (3.7%); San Jose (3.7%); Indianapolis (3.8%); and San Francisco (3.8%).
  • Atlanta presently ranks 35th for its unemployment rate (5.5%); Houston used to be among the leaders with respect to low jobless rate, but has now slipped to 19th position (4.6%).
  • The major stock market indices nosedived in late August of this year. Since then, the S&P 500 is +11.4%; the DJI is +14.9%; and NASDAQ, +17.8%.
  • The U.S. needs to stop looking in the rearview mirror. Drawing an analogy from the first Jurassic Park movie, the Great Recession’s T-Rex has given up the chase to catch the madly-driving-away band of heroes. There’s justification for a little more swagger in the nation’s economic step.

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Category: CMD Group

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