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 06, 2010

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Euro deficit crisis will restrain US construction recovery
Jim Haughey, RCD Chief Economist

The root cause of the credit problem in Europe is the social welfare state gone berserk.  Governments, especially in southern, Europe borrowed heavily to hire too many public employees, pay them too much and provide them with too generous pensions as well to cover the soaring costs of maintaining a large share of unemployed people. Eventually, lenders balked at further loans. And the governments of northern Europe demanded public budget cuts in southern Europe to preserve the solvency of the common Euro currency.

The initial phase of the fix required legislative votes in Germany to fund its share of emergency loans and legislative votes in Greece, Portugal, Spain and Italy to enact deep cuts in public spending. This has now happened although many of the votes were very close. The Spanish austerity budget passed by one vote. Opposition to the austerity plans is intense. There have violent riots in Greece. A general strike is scheduled for tomorrow in Spain .It is not yet certain that the austerity plans can be followed through long enough to repay current debts and reduce future borrowing enough to current high risk premium in borrowing costs.

The European spending cuts are real not the phony Washington style cuts we are used to here when a planned 10% spending rise is trimmed to 6% and claimed to be a 4% spending cut. In southern Europe, spending is being cut 5-10% from year to year with public worker layoffs and public employee wage and pension cuts. If this sounds familiar, this is what is happening now here in New Jersey, California, New York, Illinois and Maryland.

How does the problem in Europe reach the US construction market?  There are two routes. The first is through trade.  The European Union accounts for only 14% of US exports, just slightly more than Canada. Nonetheless, the impact will be felt by US manufacturers and business service suppliers when European consumers are forced to reduce spending in a weaker economy.  The deficit crisis has cut the outlook for European GDP growth in the next year by at least 0.3% and perhaps double that drop. While the direct trade impact is small, a weaker Europe also means a somewhat weaker Latin America and Asia.

The second route is through the financial system.  US lenders have some exposure to European public debt. They have already raised their loss reserves, making fewer funds available for lending.  If the plan to fix the problem is implemented slowly or is not bold enough they will have to raise loss reserves further and may suffer some defaults or losses from concessionary terms. This is exactly what happened in the subprime mortgage crisis.  Lenders suffered a progressively larger loss of loan capacity and protected themselves by tightening credit standards for their lenders.

It is too soon in the fix process to know the ultimate outcome.  All we know for sure now is that the current impact for US construction is slightly positive because of the cut in interest rates and import costs but will turn at least slightly negative in several quarters when the trade and credit access impacts hit.



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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
06/10 - Economic and construction recoveries will be subpar for at least another year
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

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