The US construction industry has enjoyed expansion over the last three years, but we are now seeing a slowdown in this growth. Construction starts grew by 7% in both 2016 and 2017 and slowed to 3% in 2018.
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Even slower growth is now projected as we head into the 4th quarter of 2019, which is in line with Goldman Sach’s prediction of 2.5% annual growth for 2019. Having said that, some analysts now believe that the final growth figures for 2019 may end up closer to 2.3%.
Further slowdown in GDP growth is expected to continue into early 2020 as a result of the impact of tariffs and softening of investment spending. The path forward for the U.S. economy will depend on whether the Federal Reserve can cut rates enough to stabilize China/U.S. trade tremors. The consensus now seems to be that GDP growth of 1.8% in 2020 is a realistic forecast.
The Business Cycle Index (BCI) model, which uses a range of economic and financial variables to estimate the strength of the U.S. economy and to forecast the probability of recession, is still in "risk-of" territory. Although short-term risks remain low, the BCI model estimates the probability of a U.S. recession in 12 months at 32%, this model is now past the 30% warning threshold and historical data clearly indicates that a recession is looming in the near future.
The consensus now seems to be that GDP growth of 1.8% in 2020 is a realistic forecast.
Deloitte using the Oxford Global Economic Model is predicting that the unemployment rate in the USA will rise by 0.3% in 2020 and remain at a steady rate of 4% through to 2024. On the cost of employment, the forecast is stating that the current 2.9% annual increase in cost will remain the same in 2020 with a decline in the annual growth rate of 0.5% from 2021 onwards. These annual increases in labor costs are against the background of projected Consumer Price Index (CPI) rates of between 1.8 to 1.9% per annum.
The volatility of the stock market is concerning. Mid-July to mid-August saw a drop of 5% in the value of stocks. As Deloitte noted in their Q3 2019 Insight, the reaction of the bond market is more troubling, bond yields have dropped by almost a full percentage point. By mid-August, the 10-year Treasury note was yielding about 1.%.
Factors affecting the construction outlook
2019 construction growth is on target to achieve an increase of 3% year on year in 2019, despite the predicted challenges around the availability of both skilled and unskilled labor, which remains a significant challenge for the industry. New construction starts in 2019 are also on target to achieve a 3% increase in volume but even with these moderate increases in construction activity, concern for shortages in the US labor market will soon translate to the stifling of growth in some sectors and/or regions of the country.
The potential escalation of the China/US trade war looms like a dark cloud over the US Construction industry. Cristian deRitis, senior director, Moody’s Analytics has an interesting observation in relation to same, “the first round of tariffs [25 percent of $34 billion of Chinese goods] had a negligible effect,” he said. “The second round [$200 billion of goods] will affect more consumer goods but won’t push us into recession. A full-scale trade war at $500 billion would hurt us and maybe push a recession”. The Bureau of Economics Analysis / Moody’s Analytics forecast that there could be an overall negative affect of -1.5% against US National GDP in the event of a full-scale trade war.
As predicted the cost of construction has continued to rise in 2019 and it currently looks like the predicted general rise of 3% will be exceeded this year, with some analysists predicting rise in the cost of non-residential building of greater than 5%. These increases are being driven primarily by the trade tariffs, labor shortages and continued growth, albeit a slower growth rate than previous years.
The residential building market has weakened and the forecast for housing starts is set to decrease as economic growth declines and population growth slows. Housing accounts for approximately 4% of GDP and the forecast decline in activity is not expected to be a major contributing factor to the start of the next recession.