A Deep and Dogged Recession Will Take a Bite Out of Inflation
There has been an economic coup d'etat, and no one seems to have noticed. After pundits gave tax cuts decades to prove their economic worth, those experts have been quick to declare Keynesian stimulus economics a failure after only a few years. Seemingly overnight, budget hawks seized the initiative and implemented an economic policy of austerity that slows down the recovery but does not address the high unemployment problem.
A brief refresher course on “Economic Budget Deficits 101” is in order. Spending and revenue don't need to match, but they should be close enough to hold deficits to a reasonable percentage of the nation's gross domestic product. Over the past few years, the current deficit has come into focus quickly, but there has been no pronounced increase in spending for the programs facing the budget ax. There are two expensive wars as well as inflation-driven increases in medical costs. Also, federal stimulus spending added to the deficit but saved the auto industry, staunched the hemorrhaging in the financial industry and kept thousands of workers off the unemployment line.
In the last few years, the U.S. has faced a financial and housing crisis, leading to the so-called Great Recession and a continuation of fiscally damaging tax cuts. The federal budget deficit is more of a revenue problem than a spending problem. Further, the best way to increase revenue is with a more robust recovery.
But that recovery does not seem to be an option, given the current economic and political climate. In fact, economists across the board are pulling back on their forecasts for construction markets in 2011.
Recession's Redoubt
“The forecasts for 2011 construction activity have been significantly pulled back,” says Anirban Basu, chief economist with the Associated Builders & Contractors, Washington, D.C. Last November, ABC predicted construction would decline another 1% in 2011; now it expects the market to shrink 3% to 5%. “That is meaningful but not a collapse,” he says.
Basu expects construction to start regaining momentum going into 2012 but says it will have to be led by the private commercial markets. “We know the recovery in construction will not be publicly financed,” he says.
A disappointing single-family housing market is the main reason most forecasters are toning down overall construction predictions for this year. The National Association of Home Builders, Washington, D.C., initially expected single-family housing to bounce back 37% this year to around 600,000 starts, which still would have been well below 2007's level. Instead, the market is “bouncing along the bottom,” says Robert Denk, NAHB's assistant vice president of forecasting. NAHB now sees 2011 generating only about 443,000 starts, 5.9% less than 2010. “Weak job recovery translates into weak consumer confidence. People will not buy a house if they have any concern about their employment,” Denk says.
Traditionally, housing has led the economic recovery, but NAHB does not believe that is going to happen this time around. “Housing will have to wait on a general upturn in the overall economy,” says Denk.
McGraw-Hill Construction, which updates its forecast quarterly, has grown gradually more pessimistic about overall construction starts for 2011. “The relative shifts in the forecast from what was previously estimated are sharply lower numbers for single-family housing and a steeper decline for public works,” says Robert Murray, MHC's chief economist. “However, the broad pattern that we had forecast is holding up, meaning stabilization of the commercial market at a low level and continued declines for schools and other institutional buildings. In addition, predicted increases in manufacturing work and multifamily housing work are holding up,” he says. Overall, total construction starts will remain flat this year.
Murray predicts the strong multi-family housing market will help offset a flat single-family market, leading to a 5% increase in total residential work this year. “The fiscal 2011 appropriation passed in April had some reductions for highways and bridges and also some steep reductions for [environmental] work, which led us to downgrade our outlook for public works,” Murray says.
Inflation Peaks
Weak construction demand also will help roll back industry inflation, which was recently bumped up by spikes in copper, aluminum and steel prices.
“Structural-steel and rebar prices are starting to come down after hitting their second-highest level on record earlier this year,” says John Anton, steel analyst for the forecasting firm IHS Global Insight, Washington, D.C. Prices were driven by a spike in scrap costs, but there is just not enough demand to support those prices, says Anton. He predicts structural steel will fall to $692 by next quarter from the first quarter's peak of $853 a ton.
Copper was subject to rising global demand and some investor speculation, which drove prices to an all-time high last February, says John Mothersole, Global Insight's copper specialist. He notes June prices are down 10% from that peak.
Lumber, plywood, wallboard and cement prices are all weak, adds Robert Martin, Global Insight's building materials specialist. “Overall, building materials have seen a mild increase, but there is not enough demand to push them any higher,” he says. “Building materials prices should move sideways and end the year at about where they are now,” Martin predicts.
