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 - Jul 27, 2011

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Worry about the deficit not the debt limit
Jim Haughey, RCD Chief Economist

Too much focus is being put on the debt limit increase and too little on the deficit spending problem.  Yes, there would be chaos in financial markets, perhaps worse than in September 2008, if the US defaults on bond interest payments. But the probability of this happening is near zero. Even if the debt limit is raised a few weeks late, annoyed bondholders would be patient because they would still expect to be paid in full. The concern set off by late payments would take a big bite out of 3rd quarter GDP but would not lead to a recession.

Deficit spending remains the core problem. This is already constraining economic growth. The phase out of the various stimulus plans and the effective freeze put on federal spending by congressional republicans has turned the federal fiscal impact negative.  Reduced federal spending cut at least 0.5% from 1st Q GDP growth.  This almost certainty continued through spring and into the summer.

Larger federal spending cuts would add to the constraint on economic growth for a while before they freed up capital and boosted confidence enough for added private spending to offset reduced government spending.  But there is little likelihood of large immediate spending cuts. No one in Washington wants to face a crowd of constituents who did not get the federal check they were expecting. Even the proposals offered by the republicans have been progressively backing down on the amount of immediate spending cuts. The deficit reduction commission (Simpson-Bowles) had the most and each successive plan has had less.  This includes the 10-year budget plan passed by the House of Representatives earlier this year, the Cut, Cap and Balance plan passed by the House last week and the scaled down spending cut-debt limit increase being offered by the House republicans this week. This plan includes only $1 Billion in spending cuts in FY 2013 in a ten year $850 Billion plan.

Your plans should expect subpar economic growth for several years averaging about 2.5% but likely below this later this year and correspondingly above the average in 2012.  Then we will repeat the debt limit crisis in 2013 when the accumulated debt has risen to $17 billion.



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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
07/19 - 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
05/25 - No consensus for 2nd quarter GDP growth

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