Notes from Jim Haughey

May 25 2006 12:59PM | Permalink | Email this | Comments (0) |
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If your orders are being hurt by the ongoing inventory adjustment by homebuilders there is some solace in today’s upward revision of 1st quarter GDP from 4.8% to 5.3%. Solid economic growth is boosting the rest of the construction market. And high productivity gains are keeping inflation contained. Together, these provides a very high floor to housing demand once the excess supply of new homes is worked off.

Construction spending for nonresidential buildings and structures contributed 0.3% of the 5.3% economic growth during the winter. The average over the last three years was 0.0%. The nonresidential sector is expected to keep expanding at this pace through next year, offsetting much of the expected decline in the residential market. The first data for the spring quarter show that the expansion is continuing. The value of Reed Construction Data’s starts in April was 22% above the first quarter average, a larger gain than the usual seasonal improvement. April starts were 39% above last April for nonresidential buildings and 19% higher for heavy projects.

The strong nonresidential expansion is being driven by an economy wide investment and export boom. Excluding construction, investment contributed 1.1% to 1st quarter GDP growth. This is nearly a quarter higher than the contribution in the last two years and double the average over the last ten years. Investment will keep growing at about this pace. Unfilled orders for durable goods are 23% higher than a year ago. The corporate profit margin, after taxes, has soared to an all time high 8.9% which obviously is prompting further investment.

Exports contributed 1.5% to the economic growth in the last quarter, double the average of the last two years. Export growth will continue strong because the world economy is in the third year of unusually strong economic growth with little letup expected over the next year. And with the $US now declining again the US share of the world market will be rising.

This favorable economic environment will keep demand for housing near the recent level minus much of the speculative buying and all of the speculative overbuilding by contractors. That is about 1.85-1.90 million starts although starts will dip below this level for some months until the current surplus of about 150,000-170,000 unsold new homes is worked off.