Economist Gives Construction Industry the Lowdown

November 2nd, 2015 by Nick St. Denis

The 2016 Dodge Construction Outlook Conference got underway Friday morning, and from the beginning, it was all about the economy. Beth Ann Bovino, U.S. chief economist at Standard & Poor’s (S&P), gave attendees an update on the U.S. financial recovery from the perspective of “what matters to the Fed?”

“Optimism seems to be prevailing,” she said, “though it is tempered by risk.”

She said the Fed would normalize monetary policy this year because risks of a U.S. government budget impasse have eased, and the economy is seeing robust private demand and hiring. A strengthening housing market, the return of manufacturing into the U.S. and the fact that “consumers are opening their checkbooks” are also factors.

However, with the U.S. recovery in its sixth year, it still faces some headwinds. Variables include policy risks both in the U.S. and abroad, and an export slowdown due to a strong dollar. Other factors include an energy sector slump and inflation that’s below the Fed’s 2-percent target. Also, wages are struggling to climb higher, and the country is seeing a historically low labor participation rate.

The “good news,” she said, is that the economy is projected to see approximately 200,000 jobs added by the end of the year, and that “we’re also seeing businesses hold on to more workers,” which is also positive for the economic outlook.

From a construction standpoint, Bovino explained how the economic downturn affected nonresidential and multifamily construction and where things are headed now.

She noted that the job market directly affects office construction, because “if businesses don’t need to hire workers and are laying off employees, they don’t need that office space.”

Additionally, “if there are no paychecks going out the door, potential workers aren’t able to spend,” she said, “and that translates to retail space drying up.”

In the past, nonfarm employment and nonresidential construction have risen and fallen in a similar path. Bovino said that now, however, the two aren’t tracking as closely.

One reason for that is an increase in telecommuting, which has cut down on the office space needed. Another is that businesses are hiring more people but putting them in smaller spaces.

Looking at housing, multifamily ruled the day during the recession as people were inclined to rent due to their houses undergoing foreclosure. Also, with wages dropping and the stock market taking a big hit, potential buyers no longer had money for a down payment or the credit to sign a mortgage.

Multifamily housing has remained higher than single family through the recovery not only for those reasons, but also because millennials tend to rent both for economic reasons and for lifestyle preferences.

Bovino said single-family starts are rising, however. She said millennials weren’t buying “big-ticket” items during the few years following the recovery. That has changed, as that generation has made up the largest share of new car purchases in each of the last two years.

From a manufacturing standpoint, she has seen the sector manage to keep some strength despite challenges, and S&P projects that manufacturing will become much stronger in the near future.

Oil prices have been a factor, but she said things like “cyber risk” have had a hand in bringing manufacturing back to the U.S. “Rule of law matters,” she said.

Another driver in overall economic improvement is consumer financing, which is now improving.

The economy is in its slowest recovery in 50 years, as Bovino said the average household during the recession lost about 39 percent of its family assets, which is the equivalent of 20 years of wealth lost in a three-year period. Because of that, people wanted to spend less and save more.

The middle class lost 40 percent of wealth “because much of their assets are in their homes.”

Since then stock prices have improved, as have home prices. “That explains why their confidence is returning,” she said, adding that they’ve cut back on borrowing,

Overall, she said, “slow and steady wins the race.”

“The Fed has a ways to go, but we’re looking at an economy that seems to be improving,” said Bovino. As of now, she added “we’re looking at maybe two rates hikes” over the next year.

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