|Photo credit: istockphoto.com/Mark Winfrey|
The Dodge Momentum Index, a McGraw-Hill component of planning for new construction, indicates that commercial construction is showing flickering signs of new life. It does not, however, seem to have gained substantial footing after a late 2007 peak index of near 190 and a bottom of 75 as 2011 ended. The year 2000 is the index base of 100.
Since commercial construction includes development of shopping malls, stores, warehouses and office buildings, it represents the overall outlook of domestic U.S. economic expectations and that sector’s willingness to intensify investment in all aspects of commercial expansion.
Despite a hesitating respite in early 2012, confrontation over the federal debt ceiling still could have a negative impact on commercial and military expenditures. This will depend on how and if a comprehensive solution is implemented.
Early economic indicators are signaling cutbacks in domestic U.S. hiring as well as greater emphasis on bottom-line productivity through companies embracing technology in the back office and on the industrial shop floor. Also of concern to store-based retailers is the greater shift to online purchasing, which is now experiencing a yet undetermined surge.
My interviews with many players in the retail arena, which has been at the heart of America’s world-leading consumer consumption section, have elicited overwhelming concern with dictums emanating from the federal government. These are universally regarded as destructive to business growth. Mentioned most often are Obamacare and “oppressive” financial regulations, which force additional paperwork on small businesses. These are considered especially frustrating when companies say they are forced to hire “paper shufflers” while cutting back on “productive” personnel.
Also of concern to retailers are the restraints of the 2% annual employee withholding tax, which will discourage many shoppers from discretionary purchases. My interviewees were firm in their conviction that such negative emanations from Washington will likely lead to additional government action. These could include initiatives related to the climate, gun control and immigration, which could hamper improvement in both consumer spending and employment.
Such overwhelming, but anecdotal, remarks seem to indicate that 2013 commercial construction expansion will become a lagging indicator as the new year progresses.
Of the many housing-related statistics pointing to a potential construction/sales comeback in the foreseeable future, the most impressive is the dwindling of existing single-family home inventory. Since hitting the peak of a nearly one-year backlog in mid-2010, this number has been ratcheting downward, almost uninterruptedly, to 4.4 months in December 2012 at the present sales pace.
This lowest inventory level, however, is due to a mixed bag, formed by depressed construction, sellers waiting for better prices and a declining level of foreclosures. Most impressive at year’s end was that U.S. existing home sales in 2012 rose to their highest level in five years and registered their largest year-to-year jump since 2004.
Unquestionably, the Federal Reserve’s rock-bottom interest rates, driving 30-year mortgage percentages into the 3% range, have been a major contributing factor, coupled with the investment money coming from abroad from such diverse sources as China and Canada. Both new construction and existing home sales, plus sharply higher prices in key areas, appear to have found a new life.
This consumer-driven demand upset the balance that had been achieved in the 1950s as America benefited from its post-war construction, internal population growth and the increasing demand for its goods worldwide.
This increasing out-of-control imbalance, which led to significant leaps in population growth, consumer demand and overbearing wage pressures, caused unprecedented price increases, sky-high interest rates and capitulation to wage demands by most major companies that could not afford the interruption of lengthy strikes. The end to the post-1950s era of rising wages, prices and product shortages was dramatically assuaged by the unexpected appearance of globalization, which led to the opening of American markets to imports.
It started quietly in the mid-1970s but became a virtual torrent by the early 1980s, which gave a particular glow to the economic success of the eight-year Reagan administration, still celebrated nostalgically by millions of Americans.
The opening of a surging flow of sophisticated technology from Japan, followed by a rush of everyday commodities from China, and then India, Vietnam, Philippines and much of the rest of Southeast Asia, made the universal breadth of cheap goods readily available. The wholesale transfer of production facilities by America’s embryonic multinationals made many popular U.S. products, manufactured outside the 50 states, readily available at low prices, but with the security of American brand names.
The latter-day acceleration of U.S. exports and the most recent trend of “in sourcing” may address some of the imbalance created by the deflationary impact of imports and its consequent impact on unemployment. It’s reasonable to expect that the excess of worldwide goods, surplus labor and the “post-recession” reduction of demand globally will prevent the ravages of hyper-inflation making themselves felt in the foreseeable future.