U.S. Economic and Construction Outlooks as the Vote Hangs in the Balance

Article source: ConstructConnect

U.S. gross domestic product (GDP) in Q3 2020 increased by about 1/3 after falling to about the same degree in Q2, but it is still 5% under what it would have been without the onset of the coronavirus crisis.

There are two jobs numbers that will tell us when the economy has returned to nearly robust health:

• Versus the huge drop in employment between February and April, the number of jobs recovered to date has yielded a decent claw-back ratio (50%), but it needs to rise a lot higher. Not until the jobs-recovery ratio approaches 90% will there be strong confidence that the economy is firmly back on track.

• The weekly initial jobless claims number is proving to be sticky. For more than 30 weeks, it has exceeded its peak level (just under 700,000) achieved in the 2008-2009 recession. Last week, it was close to 800,000. I’d like to see the figure drop to at least 400,000 … and 300,000 or lower would be that much better.

Everyone knows that consumer spending comprises 70% of U.S. gross domestic product (GDP). In turn, retail sales make up a little less than half of consumer spending. Monthly retail sales numbers say a great deal about what is going on both in society and in the economy.

Presently, Internet sales are ahead by one-quarter year over year, because of the surge in shopping from home that is taking place. This also explains why ‘bricks and mortar’ retail in shopping malls is so distressed.

Three other categories of strong retail sales (y/y) are to be found with motor vehicle dealers (where lockdowns caused a huge drop that has since been reversed), building materials sellers (who didn’t feel much impact earlier this year as construction stayed open in the spring) and grocery stores.

Two areas of particular weakness in retail sales have been in ‘clothing and accessories’ (many of us don’t have to dress for the office anymore) and at gasoline service stations (less commuting and lower-priced petrol).

The famous V-shaped recover is apparent in retail sales. It’s been partly supported, however, by the income supplement programs that have now expired, with Congress still working to find replacements.

Without extra government income support, retail activity will likely tail off in Q4. Most analysts are expecting GDP growth in Q4 to flatten. Next-wave coronavirus infections, which are putting a hold on or causing reversals of re-opening plans, are proving to be a major inhibitor as well.

Next to retail, the other big component of consumer spending ties to ‘services’ and this is where the most devastating softness is to be found. Specifically, employment in the travel sector, including accommodation (hotels and motels), and in bars and restaurants, will take another year or two to fully bounce back.

There’s one incredible statistic that has come to the fore in the pandemic. The savings rate (household income minus taxes) has shot up to 16% from a long-term average level of 8%. The fact that potential home-buying individuals and households aren’t spending on meals out on Friday or Saturday night, nor on concerts and travel, is allowing them to accumulate down payments faster. As a result, residential construction is holding up well.

Housing starts are also being aided by millennials, freed to work from home and looking to escape crowded urban cores, moving to the suburbs.

Plus, there are the bargain interest rates that are being offered. The 30-year fixed mortgage rate is as low as it’s ever been, less than 3.00%.

In ConstructConnect’s latest ‘starts’ forecasts, we have residential performing relatively well, with all the decline coming from the multi-unit market (condos) as opposed to singles. In dollar-volume terms, our residential starts forecasts are -7% y/y in 2020 and +7% in 2021.

In engineering construction, our projections are -16% in 2020, to be followed by +14% in 2021.

It’s nonresidential building that will take the big hit, -31% in 2020, with a comeback of only +14% in 2021.

Grand total starts will be -19% this year, with a recovery of +11% next year.

As for the economic implications of who becomes President, if Mr. Trump is returned to power, it will be more of the same. If Mr. Biden is elected, there are three broad areas of difference.

• The democrats will be more inclined to raise taxes on corporations and for high wage earners and to provide extra income support for the those at the lower end of the earnings spectrum.

• Biden will opt for more international engagement (e.g., the Trans-Pacific Partnership while still promoting ‘Buy America’) and will open the door wider to international students and foreign temporary workers.

• Environmental considerations will rise as a priority. Many of the regulation rollbacks pursued by the Trump Administration will be reinstated. New infrastructure investments will favor projects geared towards lower carbon emissions and sustainability (e.g., wind, solar and geothermal power).

Finally, whoever becomes President will face some daunting challenges. In the 00s, there was much talk about the ‘nightmare’ of the Twin Deficits, in the federal budget and in foreign trade. After the Global Financial Crisis in 08-09, they both eased for a while.

But guess what? They’ve now both returned with a vengeance. The latest annual fiscal figures out of Washington indicate a revenues-to-expenditures shortfall of more that -$3 trillion. Also, in September, the ‘goods’ trade deficit (annualized) exceeded -$1 trillion for the first time in history.

Fixing the goods trade deficit will entail one or more of three unpalatable choices: erecting a more formidable tariff wall, with unknown consequences in terms of retaliation and harm done to domestic exporters; allowing the U.S. dollar to slide, to help exporters while discouraging imports; and/or raising interest rates to attract more foreign capital.

In international transactions, the Balance of Payments is always zero. BoP is comprised of two opposite and equal measures, the ‘current account’ (exports and imports) and the ‘capital account’. If money is flowing out of the country in the current account, it must be enticed back in through the capital account. Hence, the Federal Reserve may be blowing smoke when it says U.S. interest rates can be kept near zero forever.

Category: ConstructConnect

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