Yogi Berra said of predicting, “It’s difficult, especially about the future.” And our intent with this post isn’t to make any predictions. Rather, we want to assimilate a number of reports of economic activity and forecasts to give you a broader picture of the economy across a number of industries. We hope you find it useful.
Rosy Picture for US Overall
PNC Financial Services Group of Pittsburgh, PA painted a very positive picture of the US economy in the executive summary to their National Economic Outlook report. Key points made by PNC are as follows:
- Strong jobs picture: With above average growth in the number of new jobs in both January and February, the unemployment rate fell to pre-recession levels, 4.1%. There has also been growth in the size of the labor market as more “drop-outs” have returned to look for work. This kind of growth in the labor market typically portends stronger overall growth.
- Other growth indicators: GDP, adjusted for inflation, was at 2.5% for the 4th quarter of 2017. Demand for goods, consumer spending, business fixed investment, government growth, and investment in housing (much of it from hurricane rebuilding) all showed good growth. The only negative, they called trade a “large drag.”
- Inflation up: Both overall and core inflation are up. PNC says wage growth is accelerating, leading to higher labor costs, which could cause producers to raise prices. Other sources indicate bewilderment that wage growth is so tepid, considering the tighter labor market (see below).
- Fiscal policy: Fiscal policies such as tax cuts and raising spending caps on government spending are expected to accelerate the economy in 2018 and cause it to remain strong in 2019. As a result of the large increases in federal spending, GDP is expected to reach 2.8% in 2018 and 2.9% in 2019. PNC also suggests that the unemployment rate in 2019 will reach a 50-year low of 3.5%.
- Risks: The increases in federal spending, coupled with decreases in tax revenues, will likely lead to larger deficits. Consequences of deficits at such levels are unknown. Also unknown are the ultimate impacts of tariff increases on steel and aluminum imports, as well as the recently announced tariffs on Chinese imports.
One contradiction to PNC’s report of accelerating wages came from Bloomberg View in Industry Week. The article describes wages as being “disturbingly subdued” but “superficially healthy.” Average hourly wages are up 2.9%, but consumer prices are up 2.1% for the same period, meaning that real earnings grew by only 0.8%, less than half the real growth rate of the overall economy. Considering the tight labor market, this appears to be in contradiction to basic economic theory.
One possible explanation is that employers have increased in power. As businesses merge, concentration in labor markets means fewer employers are competing for workers, causing the supply and demand model to break down, which has led to suppression of wages. Another possible explanation is that lower unemployment has led to lower productivity, which does have some effect on wages. Yet a third possibility is that employers are still cautious since the Great Recession and are holding back on raises until they’re sure the current boom is sustained.
Outlook for American steel is favorable according to PNC. Capital expenditures, consumer spending, energy production, and exports are improving, supported by higher oil prices and a weaker US dollar. This positive outlook extends to the steel industry, driving up demand. Construction growth, is being fueled by increases in investment in residential and non-residential buildings. With construction representing more than 40% of the domestic steel market, this growth is a significant factor in steel’s growth, expected by PNC to be 2.3–2.8 percent in 2018. Auto demand is mixed, as sales forecasts are only modestly up. If infrastructure legislation is enacted, demand for steel could increase even more.
Both market share and prices for domestic producers are expected to remain stable. Futures markets are reflecting this. The impact of tariffs on steel imports remains to be seen. Steel consumers are unhappy, but the effect on consumer prices for goods using steel is unknown. US Steel has restarted a blast furnace in Illinois to handle the increased demand it expects because of the tariffs
Engineering News Record’s (ENR’s) report on construction spending would seem to contradict, at least in part, PNC’s picture of construction growth. ENR reported spending on construction spending in January was unchanged, due in large part to a sharp fall in commercial real estate building. Construction of commercial projects fell by 2.7% and construction on power plants fell by 6.2%. Total private construction fell 0.5% in January. Residential construction (single family homes) rose 0.6%, but apartment building growth fell. Federal spending (up 14.9%) helped offset some of the declining numbers. Road building was up 4.4% and construction of schools went up 2.1%.
Yet another report, from ConstructConnect, projects mixed construction growth for 2018. They forecast construction starts to increase by 4.8%, with commercial construction to have a 12.4% increase in starts and strong growth through 2021. However, industrial construction (manufacturing facilities and warehouses) is expected to decline by 5.6%, and retail construction starts are expected to continue their 2017 decline with another 2.8% drop in 2018.
Comparisons between sources are a bit tricky as it depends on what’s being measured, spending or starts. The ConstructConnect report projects an increase in total construction spending of 2% to 7% for 2018, with private residential construction showing the strongest growth at 6% to 9% and private nonresidential construction growing at 1% to 5%. AIA’s forecast panel sees nonresidential building construction growing 3.6% in 2018, with a 4% increase in commercial construction spending, less than half of the 2017 numbers.
New NFL stadiums are planned for Los Angeles and Las Vegas, and there’s a Major League Soccer expansion taking place in Miami and some other cities in the next few years. Airport construction, in the form of expansions of runways and terminals, is expected to put public construction into positive territory in 2018. Lodging construction is expected to be down this year.
ConstructConnect agrees that retail construction will continue to decline in 2018. Highway construction is a question mark, depending on what type of infrastructure legislation comes out of Congress, though many states are pursuing gas tax increases and public-private partnerships to fund local road construction on their own.
A major challenge to the construction industry is the shortage of workers in all major trades, with 70% of firms polled indicating they were having trouble filling hourly craft positions. This shortage is expected to persist for several years to come. Rising prices for building materials and commodities are another negative factor. Construction firms will be forced to either accept lower profit margins or will have to increase costs to their clients.
In part two of our presentation, we’ll be talking about textiles and non-wovens, wood products, and oil and gas industries.