Masonry Magazine February 2000 Page. 40
2000 Construction Outlook
By Thomas R. Loy and Bradly K. Walker, FMI
For a number of months recently, economists have been puzzled and hand-wringers have been incensed that the personal savings rate in the U.S. has been negative. Economists, sociologists and moralists have offered a number of explanations. Doomsayers have taken this as an absolute sign that we are well down the proverbial slippery slope. Relax. The problem has been solved. The U.S. Bureau of Economic Analysis has sharpened its pencil as it does every 4 or 5 years "to improve and modernize its accounts to keep pace with the ever-changing U.S. economy," and reexamined the entire set of National Income and Product Accounts in some cases back to 1959. It will take quite some time to digest all the revisions, including those to the Gross Domestic Product itself, but we no longer need to live with the shame of collectively spending more than we earn. The personal savings rate in the third quarter of 1999 was 2.1%.
We still must face the fact, however, that the savings rate is declining. It was 8.7% in 1992 (just coming out of the last recession) and has dropped every year since, to 3.7% in 1998. It will probably be 2.3% for all of 1999.
Our current expansion shows a number of signs of weakening but at the same time shows many signs of continued strength. Good news: the advance estimate of real Gross Domestic Product shows it growing 4.8% in the third quarter of 1999; the fastest rate this year. Bad news: sales of existing homes have dropped for the third month in a row, on a seasonally-adjusted basis, and are now 8.8% below its June peak. Good news: unemployment has hit 4.1%, the lowest level since January 1970, almost 30 years ago. Bad news: The Fed may raise interest rates again. Good news: the Dow Jones Industrial Average is up 4.6% in the last 3 weeks (true as of this writing). We are again in one of those curious times when the stock market thinks that good news is bad, and bad news is good. The continuous media stream of good news/bad news makes us all dizzy, but the perspective view is this: Chairman Greenspan believes that the economy is on the verge of overheating, and has shown his intent to prevent that. But his demonstrated willingness to move proactively and his demonstrated ability to move successfully means that we have little reason to fear an economic downturn. A slowdown will suffice, and the term "soft landing", very popular in 1995, will be very popular again.
The major difference between 1999 and 1994 is that the exuberance was more rampant and had more momentum in 1994. Therefore, this time the therapeutic slowdown will be more gradual and more drawn-out. In the aggregate, 2000 will show less growth than 1999, and 2001 will show even less, but still positive, growth. Not all construction categories, however, will show positive growth in all years.
In 2000, as usual, construction of single-family homes will respond quickly and markedly to the changing economic climate. Nonresidential construction, as usual, will respond less noticeably and in a lagged fashion. After growing 9% in 1999, residential construction will be unchanged in 2000. Nonresidential building construction grew by only 1% in 1999 but will rebound mildly to 4% growth in 2000. Nonbuilding structures jumped by 9% in 1999 and will grow by 8% in 2000, helped substantially in both years by aggressive Federal help to highway construction.
In dollar terms, residential construction grew by $26 billion in 1999 but will decline by $0.4 billion in 2000. Nonresidential buildings grew by $2.4 billion in 1999 and will follow up with $10.5 billion growth in 2000. Nonbuilding structures increased by $11 billion in 1999 and will show another $10 billion increase in 2000.
Residential Construction
Single-family housing is the largest construction category, accounting for 30% of all construction. It is one of the 11 closely-watched Leading Indicators of the economy. It is sometimes quite volatile and plays the role of loose cannon; at other times, but not recently, the volatility is replaced by sullen independence, and the role of dead anchor is assumed. The four major drivers of new home construction are housing affordability, consumer confidence and household formation and unsatisfied demand. In 2000, with interest rates on the rise, a new house is becoming less affordable; with business conditions becoming more unsettled, consumer confidence is waning and behavior is becoming more cautious. Since, over the past five years, there have been nearly 6 new single-family homes built for every 5 new households formed, unsatisfied demand is minimal and there will be little impetus from household formations. All things considered, new single-family housing starts will be down about 7% in 2000. Since most of this drop will be in the lower end of the housing scale, the dollar value of new single-family home construction will not drop as steeply, and will be down only 1% in current dollars. Coming after 12% growth in 1999, the 2000 level will still be the second-best year on record. In dollar values,