This is a post from Jim Haughey's blog that covers the US construction industry.

Jim Haughey is the Chief Economist for Reed Construction Data and has over thirty years experience as a business economist, including twenty years monitoring the construction market. He has a Ph.D. degree in economics from the University of Michigan and has previously taught at the University of Michigan, Ohio University, Michigan State University and the University of Massachusetts.

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Construction Industry Forecasts

Notes from Jim Haughey - Mar 17, 2009

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Construction recovery threatened by loss of foreign capital
Jim Haughey, RCD Chief Economist

Normally, a monthly net loss of over $100 billion in short-term capital would be a major shock to the financial markets.  But the recent loss appears to be partly the reversal of the $433 billion net capital inflow in September and October when investors sought a safe haven at the beginning of the financial crisis. Monthly net flows are very volatile. January’s net outflow of $43 billion in long-term capital and $106 billion in short-term capital contains very little information about the magnitude and direction of flows in the following few months.

The US economy dodged a bullet again.  And again we postponed the day when we have to bear the consequences of rising foreign indebtedness. Uniquely, the US can isolate the domestic economy from foreign capital flows because this country is perceived by foreign investors to have relatively deep and hence stable credit markets with minimal risk of default or nationalization and a strong tradition of responsibility in repaying debts.

The US reputation for relatively low default rates is eroding with the subprime defaults and the follow on defaults of major financial and manufacturing companies.  Even our reputation as a country when borrowers feel morally obliged to repay even when it is difficult is being tarnished. US public policy is that loan defaulters are victims not villains and lenders’ attempt to enforce repayment is no longer responsible business policy but greed.

The US environment for borrowing and building has changed permanently. Monetary policy now has to be conducted with an eye to avoid chasing away foreign lenders.  If the US were a smaller country we would now be forced to rein in the economy to preserve foreign capital investment in the country. Recall what happened recently in tiny Iceland. Excessive foreign borrowing collapsed the economy within a few days when lenders realized that massive defaults were inevitable.  Ireland, Singapore and Taiwan are now experiencing deep recessions for the same reasons. The huge US economy would counter similar problems with several years of sluggish growth and high credit costs. This is now a much bigger risk than it was even six months ago.


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Read Other Recent Jim Haughey Posts

08/15 - Contractor Survey: Work backlog rises in 2nd Q but may fall in the summer
08/09 - Modest construction recovery will be supported by two more years of cheap credit
07/29 - Sour economic growth report threatens construction recovery
07/27 - Worry about the deficit not the debt limit
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07/27 - Worry about the deficit not the debt limit
07/19 - Housing starts rebound.6% in June after two weak months
07/18 - Congress prepares to postpone resolving the deficit crisis assuring an extended period of subpar eco
07/12 - House Transportation Committee proposes to keep federal highway funding at fuel tax receipt level
07/09 - Don’t count on debt limit deal to restart sustained high economic growth
07/08 - Contractors cut 9,000 jobs in June
07/05 - The cost and frustration of selling a home contributes to the delayed housing recovery
07/05 - May construction spending down 0.6%; recovery still on hold
07/01 - FAA stops works on federally funded runway and control tower projects
06/21 - It is not more jobs that will quicken the economic recovery
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