Economic Forecast for US Construction: Strong Winds and Fog
When I turn on my computer and read the news of the day, it’s very difficult to make sense of all the different and conflicting stories about the economy and what part of it affects my business. It can be confusing and perhaps because we find ourselves, yet again, in uncharted waters.
Decreasing interest rates, slowing economic growth, a strong dollar and threats of tariffs are creating a complex dynamic for businesses and investors across the globe. For the US construction industry in particular, the effects of recent events in trade policy and monetary policy are yet unclear.
Slowing Economic Growth
The US economy has been steadily growing for the past 121 months — breaking the record for the longest US economic expansion in history. Cumulative GDP grew 25% since June of 2009, but this growth has been slower than previous expansions. This year’s first quarter saw a gain of 3.2%, but the second quarter will likely be lower, around 1.5% gain.
Torsten Slok, Deutsche Bank’s chief economist, has said, “We still do not see a recession, but we continue to worry more about downside risks than upside risks to the outlook. To counter the ongoing slowdown in the data and the uncertainty of how much longer the trade war will continue, we see the Fed cutting rates in July, September, and December.”
Decreasing Interest Rates
In July, the US Federal Reserve cut interest rates to a range of 2%-2.25% — the first-rate decrease since December 2008. The Guardian reported that the reasoning behind decreasing interest rates was to combat the disruptive effects of the US-China trade war and offset weak global growth. In addition, US inflation remains below the central bank’s 2% target, signaling the US economy may need further stimulus (additional interest rate decreases) as economic growth slows.
Currency War
China has historically maintained a symbolic 7-to-1 ratio to the dollar. But earlier this month, Beijing allowed the yuan to weaken beyond 7.5 against the US dollar. Analysts say China’s decision to allow the yuan to weaken is a result of US tariffs and is actually bringing the currency closer to its true market value. However, the natural effect of a weaker currency is making Chinese goods cheaper for buyers in other countries.
Many countries, including the U.S., have accused China of weakening its currency whenever it needed a boost in global trade. The US President has repeatedly called for a weaker dollar to boost US exports, and the recent decrease in interest rates could help the dollar fall.
Effects on Construction
Changes in interest rates, currency fluctuations and a slowing economy have impacted the US construction industry in the following ways:
1) Tariffs and labor shortages have contributed to an increase in building costs.
The result of U.S. imported tariffs on steel and other materials have raised building costs by 5%-10% for tall and supertall steel-framed core and shell construction. The International Construction Market Survey 2019 by Turner & Townsend named San Francisco as the city with the highest construction costs, leaving New York City in second place. In 2018, construction costs across the US increased by 5.86%.
2) Low interest rates have failed to boost the housing market.
Though interest rates have decreased, home sales have not risen in response, partly because of the increased uncertainty created by tariffs and trade conflict. According to the National Association of Home Builders, “while the costs of buying a home, developing land and building housing are now lower, caution is required by market participants because rates have declined on increased uncertainty.”
Looking Ahead
Though we can consider laws of economics and look to historical data to predict how construction will respond to uncertainties in prices and trade, only time will tell if the coming months will turn out as expected. QuickDraw is always looking ahead to changes in the industry. We will do our best to keep you informed and would love to hear your thoughts as well. Please drop us a note or give us a ring anytime.
Sources:
https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-economic-expansion-in-history.html
https://www.cnbc.com/2019/08/12/forex-markets-us-china-trade-concerns-remain.html
https://www.npr.org/2019/08/11/749655951/a-u-s-china-currency-war-what-you-need-to-know