Sep 1 2006 12:00AM | Permalink | Email this | Comments (0) |
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While it is good news for construction demand that 2nd quarter GDP growth was revised up from 2.5% to 2.9%, the relative growth of different parts of the economy suggests that the economic environment for construction will improve more slowly than it has in the last few years. That is because services grew faster than goods for the first time in three years. This only happens in two circumstances. Services grow faster than goods for about five quarters during a recession. And services grow faster than goods for a stray quarter when the economy abruptly transitions from above average to below average GDP growth.

This is likely what happened in the spring quarter. Preliminary spending reports for July and August show enough of a summer rebound in the purchases of consumer durables and business equipment, as well as added merchandise exports, to assure than the growth of the goods portion of GDP has improved from the spring. So the economy is not heading into a recession now. But since this is the election season you will hear that suggestion made frequently.

Services spending rose 3.7% in the 2nd quarter while goods spending increased only 2.3%. In the previous quarter, goods spending had increased 10.3% and spending on services increased 0.2%. The growth of goods spending averaged six times faster than the growth of services spending over the three years before the last quarter.

Cheaper credit always accompanies a weaker economy but this does not fully offset the negative impact on construction demand from slowing economic growth. The lower expectations for economic growth dropped the 10-Year T-bill yield — the benchmark rate for long term mortgages — 50 basis points since early July, providing some much needed support to the floundering housing market.