Economic Outlook Notes, July 2021 — by Randy Shaffer

NAXSA — Randy Shaffer

During a recent road trip, I met with 17 different companies and a recurring topic was the speed and sustainability of this recovery. A good part of the answer is that this economic downturn was not caused by economic issues but rather by the pandemic and the Government response to it, (shutting down much of the economy) and so the response is different from other recoveries. The strengths of the pre-pandemic economy are still in place and ready to resume as more restrictions are lifted and business activity returns. The following bullet points are just a few observations about the construction economy and where the strengths and weaknesses are. Some of these may sound familiar from previous outlooks, but they are still relevant.

  • Something that we can expect that will be positive for our industry is that we will probably get increased spending from separate infrastructure legislation on top of the Government stimulus to assist the recovery from the Covid-19 economic contraction. The current legislation under consideration looks like around 600 billion dollars for traditional infrastructure disbursed over 5 to 8 years. The disagreement seems to be on what else will be included. When you look at the current level of government spending on infrastructure that addition would be significant. Another positive is that contrary to expectations most states did not have significant reductions in tax revenue and will not have significant reductions in infrastructure spending.
  • The overall economy is recovering faster than expected, however employment gains have slowed. As of June, we are still 6 million jobs short of pre-pandemic levels with many jobs available, specifically in the service sector. Twenty-six states have now stopped issuing the Pandemic Unemployment Assistance payments to encourage people to get back into the work force and unless extended (not likely) the entire program ends in September. Consensus is that ending that program will bring many people back into the work force. On the construction side of the employment picture, we only have 10 states that have negative job growth from June of 2020. We have added 96 thousand jobs to residential building across the U.S. and the direction is positive. Not back to pre-pandemic levels yet but getting close.
  • I do not expect any changes to the current trend in the housing market. The inventory of unsold homes is only 1 or 2 months with many markets effectively at zero. The trend is away from apartments and condos and into single family homes or duplex and 4plex units with a yard. One of the effects of the Pandemic has been to lead people away from shared spaces in housing. Another influence here is investment. Throughout 2020 and continuing into 2021, housing prices have continued to increase and will continue to do so until we move from a sellers’ market to a buyers’ market. This will probably take us well into 2022 before we get to a 6-to-8-month inventory of unsold homes. With 30-year mortgage rates around 3% and possible changes in down payment requirements (policy driven) this sector should see growth for 2021 and 2022. Lumber prices are trending downward but are still 100% higher year over year.
  • The risks to the housing market are continued material price increases and/or inflation. The consumer price index increased by 5.4% in June, a significant increase not seen in years. The average price of a new home is currently about $18,000 higher just on the cost of lumber with steel and other commodities having increased as well. The average price of a new home for the total U.S. is now around $330,000 up from $220,000 a year ago. Much of the increase in average is being driven by more expensive homes in select markets and shows up in the individual state data. The real average for most of the country is around $250,000. This is still a significant increase where we risk pricing many people out of the market. The people who are being priced out of the market will return when the material input prices drop, and the market returns to more normal pricing. The Federal reserve has also indicated a rate increase for later this year or early in 2022.
  • The trend in housing is impacting the nonresidential sector as well. I expect declines in sectors like apartments and condos, brick and mortar retail, and office space. However, as more people move to the suburbs more infrastructure will be needed, water, sewer, power, and communications. It will also bring the normal building of grocery, medical, educational, etc. that follows population growth or migration. I still expect that nonresidential construction will be down in total dollars for 2021, but the housing trend may mitigate some of the decline. I have an increase in total nonresidential construction forecast for 2022 but not back to the levels of 2019.
  • There seems to be a shortage of about everything. From chips to tires to steel, many of the things we need to build equipment and stimulate the economy are in short supply. In a recent conversation with a manufacturer, he stated that even if you can find the supplies you need, finding shipping space is another challenge. We can expect lead times to stretch and prices to increase as we go forward. This situation does however raise the value of existing inventory and rental fleets allowing for higher margins. This applies to parts departments as well. The risk to the dealership here is over ordering and that manufacturers will be able to increase production allowing inventory to arrive quicker than expected. Fourth quarter 2021 conversions for tax purposes are expected to be higher than in recent years and may help with this scenario.
  • Despite the negatives in nonresidential construction, I am optimistic about the opportunities for 2021–2022. Economic activity continues to increase as more of the population is protected by the vaccine, and more states are eliminating business restrictions and we are moving toward a more historical level of economic activity. I believe this will continue as more states follow that trend.

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Randy is the founder of CTR Forecast in 1993, a NAXSA member. They provide custom sales and economic forecasting to construction machinery dealers and manufacturers.

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