Construction Industry Forecasts

All four North American stock market indices – Dow Jones Industrials, the S&P 500, NASDAQ and the TSX (Toronto Stock Exchange) - recorded 52-week highs in the month just ended, January 2011.

The indices have all made remarkable improvements. But none has quite returned to its previous peak. The DJI has recovered 70% of its peak-to-trough decline. The S&P 500 has made back 68%; NASDAQ, 89%; and the TSX, 82%.

One notable development has received very little attention. There’s little doubt the most recent world economic recession was the most difficult since World War II. Job displacement was even more severe than after the dot.com collapse in 2001.

Nevertheless, the degree of recovery in stock prices has occurred much quicker than last time. Versus the aftermath of the dot.com troubles, the approximate two-thirds recoveries in the DJI, S&P 500 and TSX have all happened in half the time, two-and-a-half years versus five.

Here are some other observations on the strength in equity prices.

Resource sector stocks are playing big roles. Copper prices are at an all-time record. Aluminum and nickel prices have moved to two-year highs. The cause is the demand-from-emerging-markets effect.

The commodity price increases are good for stimulating investment plans. They’re not such a great thing when it comes to input costs, however.

Canada gains an advantage over the U.S. from rising commodity prices. Almost all internationally-traded commodities are priced in U.S. dollars. Since the Canadian dollar has risen 5% versus the U.S. dollar year over year, the impact of higher commodity prices has been slightly muted in this country.

Equity prices reached their cyclical lows in February 2009. Versus its trough level, the TSX is +67%, the DJI is +68%; the S&P 500, +75%; and NASDAQ, +96%. NASDAQ share prices have almost doubled.

These are astounding gains. Consider these kinds of increases versus U.S. home prices, which are still headed down. But also consider that residential property prices will almost certainly bottom out this year. When the residential property-price turnaround comes, it may happen quicker than is widely anticipated.

The stronger share prices must be contributing to significant pick-ups in both business and consumer confidence. The consumer spending side of the economy has already seen some measure of frugality fatigue. Retail spending in the U.S. is climbing at the same rate as before the recession.

There is reason to expect the same effect will soon be seen on the corporate side. Firms have been towing the belt-tightening line for so long, some measure of frustration is beginning to creep in. The improvements in profits and share prices presents an opportunity to undertake spending again in areas such as staffing, machinery and equipment upgrades and even facilities expansions.

Another phenomenon has been unfolding in the background. Insider trading has picked up considerably. Some bearish analysts interpret this as corporate managers taking the opportunity to bail while the going is good.

Others are adopting a more optimistic interpretation. Hopefully, corporate managers simply have more discipline than most of us. Aware of the rise in share prices, they are content to take their gains without feeling the need to gamble on further appreciation.

U.S. “real” (i.e., inflation-adjusted) gross domestic product (GDP) growth in the fourth quarter of 2010 was a strong +3.2%. That was an acceleration versus Q3’s +2.6% and Q2’s +1.7%.

The latest reading on the U.S. manufacturing sector indicates a further speeding up of output. The January Purchasing Managers Index (PMI) of the Institute of Supply Management (ISM) was 60.8%, its highest level since May 2004. In March of last year, it was almost as strong, at 60.4%. Manufacturers’ activity levels have been growing for the past 18 straight months.

According to the ISM, a reading of 60.8% for the PMI corresponds with a “real” (i.e., inflation-adjusted) GDP growth rate of 6.4%. Manufacturing is currently being led by domestic sales in the auto sector and export shipments of construction and agricultural machinery and equipment.

The PMI is a composite of five diffusion indices (i.e., positive minus negative survey responses on new orders, production, employment, etc.) for the manufacturing sector.

Some of January’s sub-index results were particularly interesting. The new orders index jumped 5.8 percentage points to stand at an exceptionally strong 67.8%. And the customers’ inventories index remained low at 45.5%. Respondents believe many of their customers are carrying inventory levels that are too low.

This corroborates what happened to inventories in Q4 2010’s GDP results. There was a pause in adding to stockpiles. In the quarters ahead, inventory rebuilding will likely be a contributor to stronger GDP growth, as it was in the earliest stages of the recovery circa late 2009-early 2010.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.