Construction looks bubbly
The macroeconomic forces moving the construction industry came under scrutiny Wednesday in a fascinating talk by the Associated Builders and Contractors' (ABC) Chief Economist Anirban Basu.
In delivering his remarks in a webinar sponsored by Construction Executive magazine and Procore Technologies (software for projects managers), the economist pointed out two big problems for the construction: low birth rates in developed countries, and young American men who prefer staying home to play video games over working.
Basu, who works at the Sage policy Group in Baltimore, Maryland, also gave his predictions for construction activity in 2018.
Right now, things look good. "Construction has not had this kind of momentum for a decade," he said.
Shaky global economy
However, he pointed out that the global growth in GDP, in 2016, was the worst since the end of the Great Recession. (Without China and India bumping up the averages, 3.2 percent is not very impressive.)
"That was a sloppy, erratic, sporadic expansion cycle." 2017 is projected to be 3.6 percent and 2018 3. 7 percent. "There's a lot of fragility in the structural factors to this ongoing human economic progress."
One good thing is now most countries are doing well. "Right now, we're in a synchronized global economic recovery."
Developed and developing countries are each growing. For example, Japan is at 1 percent growth, projected to be 1.5 percent in 2018. The U.S. grew 1.5 percent in 2017, with projected 2.2 percent in 2018.
"And yet I feel the global economy is not in great shape. There is easy money and low interest rates, the end of austerity, governments engaging in deficit spending here and in Europe, stock markets doing well in places such as Italy, Slovenia and Ghana...But there's still the feeling that something is not quite right."
Population growth is high in countries with undeveloped economies, such as Nigeria and Ethiopia, which will have projected population growth of 115 percent and 82 percent by 2050. And it is low in developed ones, such as Germany (-3.5 percent) or Japan (-14.7 percent).
"If population is growing in places associated with less opportunity to be productive, population growth does not translate into output growth."
By 2050, the U.S. should have 390 million people, but it will do it by immigration rather than the birth rate. Since immigration policy is subject to change, economic predictions are hard to make.
"Global indebtedness is the kind of thing that keeps construction leaders awake at night," Basu declared. He was referring to the global debt of $153 trillion dollars, which has doubled since 2000.
"Much of our income is being deflected to debt servicing, leaving less money for capital investment in humans." He said a debt downturn could be worse than the most recent economic downturn — and that would be very bad.
Basu pointed out that the U.S. economy has been good the last quarter because consumer confidence is at a 17 year high. People are spending money, and not just on holiday gifts, but at Lowes and Home Depot too, as they invest in their homes.
The U.S. added 2 million net new jobs in the last year, including 536,000 professional business services jobs.
"So why do I observe so much idleness in America?"
The U.S. employment to population ratio is not approaching 2001 or 2007 levels. He believes many abled-bodied males have stopped working or looking for work and just stay at home, supported by partners or parents. His theory is they are playing immersive video games — and according to a Princeton University study, are far happier doing it than young men who work.
Construction added 187,000 jobs in 2016, but in the last few months that has slowed. "They're running out of people to hire. They're turning away work because they can't find welders, electricians and AC professionals."
Also, the effect of hurricanes Harvey and Irma and the California wildfires means much construction activity now is rebuilding rather than growing the infrastructure.
Break out the bubbly
There are signs of mini bubbles forming in commercial real estate sectors such as office, lodging and multifamily.
Demand for homes is growing, but the last few years single family homes have lagged demand. Instead, construction of multi-family dwellings (apartments) has been booming. Much of this has been driven by foreign capital and real estate in the U.S. is still considered a relatively safe bet.
Non-residential construction can be tracked by the Architecture Billings Index. Whatever architects are working on today is usually "downstream" or under construction in nine months to a year.
As for crypto currencies, "Bitcoin gets everyone's attention when it goes up 800 percent in a year. People are always telling me, 'I'm not telling anyone but I am dabbling in Bitcoin...' That might take away some of the momentum from commercial real estate investing. But in CRE you are doing it for income. Bitcoin is not for income, it's more the home run." The return comes in a different form."
He is watching to see what businesses do with their tax cuts under the Trump administration's plan. Will they take the form of stock buy-backs and shareholder dividends? Or will they result in investment in constructing factories and hiring workers? He suspects CEOs will choose the former, because it boosts shareholder value and CEOs get compensated as stocks go up.
As for taxes, "Business people don't speculate on policy changes, they wait for them," he said. Confidence is up, it's high. 2019 should be good too. But I see inflation in healthcare, air fares, tuition. "It feels dot-commy," he said, referring to the year 2000 bubble in tech stocks.
As for infrastructure development (roads, bridges and pipelines) states have to balance their budgets, unlike the federal government, and they may have to forego big highway projects at a time when they are paying more for Medicaid and unfunded pensions.
Overall, he said the global economy is expanding but it could easily get knocked sideways, and that always hits construction hard.
Reporter, The Business Tribune
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