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 14, 2011

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Japanese earthquake will have marginal negative impact on US
Jim Haughey, RCD Chief Economist

Unlike Haiti, Japan will, clear the rubble and begin rebuilding very quickly so the impact will shift from short term to long term within a few months. The economic impact in Japan will obviously be larger. The Japanese economy has been sluggish recently so the earthquake will cause a one or two quarter recession and reduce world GDP growth in 2011 a few tenths of a percent from the previously estimated 4.5%.

World commodity prices have already begun to weaken and will provide some near term relief to US contractors, especially for metals.  This is the result of Japanese factories being forced to shut down for lack of electricity. Probable rolling blackouts for several months will keep manufacturing output and materials use restrained for several months. Lesser price weakness is likely briefly for lumber – Japan is a large importer from North America. The impact on oil prices is uncertain and, in any case, will be overwhelmed by whatever happens in the Middle East.  No price decline is expected for cement since US imports are now quite low and increased Japanese cement use for transportation rebuilding will begin very quickly. These commodity price declines will be very brief – 1-3 months – and then will reverse when widespread rebuilding begins.

The loss of electric generating capacity in Japan is the key risk to the US economy and construction through the yet unknown restraint on Japanese manufacturing. Nuclear generation provides 40% of Japanese electric power. Three sites will multiple generating stations appear unlikely to be restarted.  The unavailability of a single small part can cause production shutdowns and layoffs at US machinery, auto or electronics plants.

US consumer and business confidence can absorb the earthquake and tsunami with no measurable impact.  But nuclear meltdowns, even if contained, are more disturbing. Any enhanced caution will delay spending and reduce the demand for building space and facility capacity.

Within a few months the ramp up of the rebuilding process will reverse the weakness in commodity prices and put upward pressure on borrowing costs as Japan draws back some of its short term financial investments in the US to finance the rebuilding. By summer short term borrowing rates will be at least 10-15 basis points higher and much of this will also creep into long term rates.

Clearing rubble and rebuilding is very equipment intensive. The US construction equipment market is already surging at a double digit pace with inventories more than adequate but not significantly in surplus.  This a world market so higher equipment needs in Japan for several years will spill over into slightly higher prices in the US for both equipment buyers and renters.

 


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