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 - Jun 10, 2011

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Economic and construction recoveries will be subpar for at least another year
Jim Haughey, RCD Chief Economist

Much of the growth dip to 2% in the first half of 2011 is due to the after effects of the Japanese earthquake and the sharp spike in energy and other commodity prices. The earthquake was unexpected and the commodity price surge was stronger than expected. Both of these events are temporary and qualify as “bumps in the road” that largely delay but do not cancel the spending plans in place before the events occurred.  If the earthquake and stronger than expected commodity price spike had not occurred, 2011 GDP growth would have been 0-3-0.4% higher at almost 3.0%.

3.0% economic growth in a year that began six months into the recovery period is subpar growth.  In past recoveries, economic growth at this stage of recovery has been near 4% and sometimes even higher. Washington should not focus on the temporary negative shocks. Equilibrium forces in the economy are already correcting them which will yield an upward bounce in growth during the summer quarter. Washington should focus on the longer term structural problems that are limiting GDP growth to 3% at a phase in the recovery when over 4% is more typical.

The underlying structural problem that is limiting GDP growth to 3% is threefold.  First, we are recovering from a bad debt generated recession. This process is always slow because every balance sheet – public, business and household –has to be purged of bad debts and assets have to be expanded through accumulated savings, either spending cuts or savings from economic growth, however slow it may be. We need to stop looking for someone to blame and punish and focus on a long period of restoring assets in all balance sheets.

Second, good public policy can speed up the needed fix in balance sheets.  Unfortunately, the response to the credit based recession has on balance not been good public policy. The stimulus plan and other similar spending initiatives were too slow and did not permanently lower the marginal cost of either consumption or investment. Instead, we spent most of the money on goods and services that households had clearly indicated by their pre-stimulus plan actions that they would not buy with household budget and did not want to buy with their withheld taxes. Yes, the stimulus and similar plans gave the economy a significant temporary boost. These funds are not largely exhausted and the permanent marginal incentives for consumption and investment are unchanged, possibly worse.

At the same time the public policy response to the housing crisis that came with the recession was not well designed. We spent too much time and about a $trillion trying to save financially stressed homeowners from the consequences of their own bad housing investment decisions. Several million were rescued. But most were not. Housing remains the major constraint on economic growth.  Tens of millions of households are locked out of the mortgage market by capital losses, poor credit scores, reduced income or tightened credit standards. Most of the households in this group did nothing wrong in their mortgage borrowing but were trapped by the mistakes of those who foolishly took mortgages that they could not afford even before the recession. Other than pointing fingers, Congress and the President appear to have no plan likely to attract the needed private investment into the residential mortgage market.

Third, the severity of the recession and the ineffective policy response to it exposed a long festering problem that would not have bubbled to the top for another decade. Governments at all levels have accumulated so much debt, including benefit and pension promises, that their ability to borrow and spend at the current level, or even a somewhat lower level, is no longer certain.  The recession and the expensive and the ineffective response to it aggravated the deficit problem.  The belated realization that public accounting practices that would be criminal in the private economy had been hiding the scale of the deficits prompted a consumer revolt that demanded public spending cuts. These cuts are now being implemented although most of the eventual federal cuts have yet to be defined and implemented.

These public spending cuts will temporarily reduced GDP growth in 2011-12 although the long term impact on the achievable economic growth rate will be positive. At this point there is nothing either the Congress or the President can do to eliminate the 3% speed governor on economic growth in the next 4-6 quarters. The Federal Reserve Board acknowledges this with its hints that it will continue its expansionary monetary policy at least through mid-2012.

 


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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
07/27 - Worry about the deficit not the debt limit
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
06/16 - Mays’ 3.5% gain in housing starts does not signal a housing recovery immediately ahead
06/15 - Cautious spending threatens to delay construction recovery
06/09 - NYC construction unions may agree to drop expensive work rules to spur more work
06/04 - Contractors add 2,000 jobs in May; overall job gain disappointingly low
05/25 - No consensus for 2nd quarter GDP growth

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