Apr 2 2007 12:11PM | Permalink | Email this | Comments (3) |
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It depends on what you are building or which contactors you are supplying. The predominately sour recent news about the economy weakened the outlook for housing, at least temporarily stalled the expected growth in the heavy engineering sector but boosted the outlook for nonresidential buildings. Overall, the impact was negative for construction as reflected in the updated market and economic forecasts elsewhere on this site. It is possible the outlook may weaken very slightly more depending on how recent disappointing price, spending, investment orders and jobs data play out in business and consumer confidence.

GDP growth will be sub-par and steady but the spending mix changes

The revised 4th Quarter GDP report on Thursday was negative for the underlying demand for more space and facilities, and the confidence to contract for them. But Reed Construction Data believes that the negatives in this report are temporary and will be reversed with the GDP report for the 1st quarter on April 27th. We are more worried about consumer, and especially business confidence, being depressed by the weak GDP report and even more so by rising energy prices and the spending uncertainty generated by the early state to the 2008 election which daily produces headlines about what is wrong with the country and the economy. Our GDP outlook is 2.4% growth this year and 3.1% next year. This is approximately the consensus outlook which is holding firm but is less certain than a few months ago.

The election impact clearly cut spending late in 2004 and again late in 2006. Similar concerns about how well everything is going sharply cut spending during the lead in to both Gulf Wars.

While 4th quarter GDP growth was raised 0.3% to 2.5%, the mix of spending in the last quarter appears ominous for GDP growth in 2007. The “goods” portion of GDP declined for the first time in four years. This decline is often a signal of more weakness ahead and is already restraining business confidence. Consumption increased 2.5% and the change in the trade deficit added to GDP for the first time in many years, but investment plunged 15.2%. Housing and the efforts to trim excess inventory accounted for 80% of this decline. Both will decline again in the current quarter but much less so. The goods portion of GDP will rise in the current quarter and relieve some of the concern about an extended period of even slower economic growth. Typically, a two quarter decline in the goods portion of GDP precedes steep economic slowdowns and recessions.

Consumer confidence threatened by higher oil prices and a troubled real estate market

Oil prices, confidence and the election-generated malaise about the world we live in are more worrisome. We will have to live with the politicians shouting about what is wrong and hope that most people dismiss them not relevant. Crude oil prices have again surged to $65.00/bbl. and the risk that speculators may return to the market and temporarily push prices even higher has increased. The Energy Department projects that crude oil prices will stay at this level for a year but that gasoline pump prices will decline $0.20-0.25 beginning in about two months. Even if these averages proves to be accurate, pump prices may rise significantly above the current level for short periods and give speculators the entre they need to push prices well above the equilibrium price consistent with the underlying supply demand balance. Drops in consumer and business confidence would follow very quickly with spending cuts right behind.

Confidence is also being depressed by the housing problem. This is not about the affordability of new homes. While down from a few years ago, affordability remains above average and is rising. Rather it is about the affordability of staying in homes already purchased. Only the homeowners with teaser adjustable rates resetting much higher or with a sub-prime rate mortgage that does not fit in their monthly budget are directly affected. But all homeowners are indirectly affected because the value and the liquidity of their principal asset have been reduced. This is a depressing financial change for families that had planned to move to a different home or use their accumulated home equity for added spending. The eventual impact on confidence is fuzzy because we have no experience with this situation. It will be a huge disaster if the exaggerated claims of housing advocates calling for a government bailout of impacted homeowners prove accurate. The news media is mindlessly repeating their estimates of 1.5 million home foreclosures this year. 100,000 additional foreclosures (not foreclosure notices) is probably the upper limit. But it will take some time for indirectly impacted homeowners to realize this. Confidence is at risk until this occurs.

There is good news for the nonresidential building market

The good news is that the changing mix of spending is positive for the nonresidential building market. The service portion of GDP soared 6.5% higher in the last quarter and will expand at an above average pace for at least several more quarters. It is easy to see why. Service industry profits are soaring. While total corporate profit growth stalled in the last quarter, at the highest profit margin in more than 50 years, profits fell for manufacturers and other non-financial companies, especially oil companies and wholesalers but jumped higher for the financial industries, retailers, the information industry and investors in foreign companies. This adds to space demand and also the confidence to contract for more office, retail and service space.