RSSSinking Confidence Restrains Construction Outlook
Summer GDP growth will soon be revised from an already high 3.9% to a booming 4.5-5.0% pace. Normally, this would be great news for construction demand — but not this time. The growth spurt is due to accumulating unwanted inventories and slowing import growth to accommodate more cautious consumers. The growth spurt is the prelude to several quarters of 1-2% economic growth, possibly lower, that will stretch out the already long process of absorbing the huge excess of homes for sale, reduce the expected profitability of new commercial buildings and also reduce the growth in tax receipts and investment earnings that finance institutional buildings and public works. The impact on housing will be more immediate than on nonresidential construction spending.
Some of these developments have been anticipated in the Reed Construction Data construction outlook for more than year. But we may have underestimated the negative impact on construction. High oil prices have persisted longer than expected. Together with the huge loss reserves recently taken by banks and other investment managers to cover expected subprime mortgage losses, consumer and business confidence has fallen sharply in the last two months. While the liquidity problem is being well managed by the Federal Reserve Board, confidence has become a restraint on spending and investing in the US economy.
This is a forecasting dilemma. Three of the key variables in the GDP and construction spending outlook over the next year have no timely, comprehensive and reliable market measures to use for guidance. Indeed, in the short-term, they are dominated by non-market forces.
Oil prices are now being dominated by supply shut-ins and speculative buying. The shut-ins are due to violence in oil fields or at pipelines and shipping terminals and possibly deliberate hold-backs to raise prices. Saudi Arabia has reserve capacity that in not being used now. The current price in the $90s includes about a $20/bbl. premium for hoarding by speculators expecting the price to rise further. If the oil demand-supply balance worsens, the price could soar well over $100. But if the balance improves the price could quickly plunge to the $60s which is where the Department of Energy believes the equilibrium price is in a “normal” market. $115/bbl. oil yields a much different GDP and construction outlook than $65/bbl. oil.
China’s GDP growth is also a forecasting nightmare. It has recently been in the 12% range which draws in a flood of exports from the US economy to offset the weakness in the US housing and motor vehicle markets. China’s government knows that this is an unsustainable pace but has been unable slow spending growth to the 8% target rate. Eventually the boom will end either in a controlled fashion — there have been rumors in recent days of an edict to freeze bank loans — or with a crash. Either way, the negative impact on US GDP and construction demand is huge. But when? The key decisions are made behind closed doors and are not announced.
The third leg of the forecasting dilemma is US business and consumer credit approval standards. Credit score and collateral requirements for loan approval have been tightened considerably over the last year, especially in the last few months. More tightening is likely but it will not be announced in newspaper ads or window banners. And it will be impossible to summarize thousands of individual lender decisions into an “index of credit standards”.
The Reed Construction Data forecast assumes we muddle through all of these unknowable perils. But it will be an ugly business environment well into next year.
