Special to CEG
(Written by FMI’s Thomas R. Loy, chief economist, and Bradley K. Walker, consultant.)
For a number of months recently, economists have been puzzled and handwringers 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 percent.
We still must face the fact, however, that the savings rate is declining. It was 8.7 percent in 1992 (just coming out of the last recession) and has dropped every year since, to 3.7 percent in 1998. It probably will be 2.3 percent 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 percent 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 percent below its June peak. Good news: unemployment has hit 4.1 percent, 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 percent.
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 Alan 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.
Actually, 1995 is not a bad model for what may be in store for us. Beginning in late 1994, the Fed raised interest rates on what seemed like a monthly frequency until we all retrenched a bit, and growth cooled to a level that seemed sustainable.
Real GDP growth in 1995 was about a point lower than in 1994 or 1996, but none of the quarters showed a loss. Consumer expectations (as measured by The Conference Board) peaked in December 1994 at 98.1 and declined to 84.5 by June 1995.
By August of 1996, however, it had regained all the lost ground and was in triple digits. Unemployment stopped its decline, which had started in 1992, and remained virtually flat for all of 1995; the worst month in 1995 was only 0.3 percent above the best month in 1994. The downward course in unemployment was resumed in the last half of 1996. Total building construction, adjusted for inflation, declined by about 0.2 percent, with a 9 percent drop in single-family housing construction being offset by growth in nonresidential construction, especially in nonresidential improvements.
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 percent in 1999, residential construction will be unchanged in 2000.
Nonresidential building construction grew by only 1 percent in 1999 but will rebound mildly to 4 percent growth in 2000. Nonbuilding structures jumped by 9 percent in 1999 and will grow by 8 percent 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 a $10.5-billion growth in 2000. Nonbuilding structures increased by $11 billion in 1999 and will show another $10-billion increase in 2000.
Nonresidential Construction
Strong demand for technologically and esthetically up-to-date facilities and low vacancy rates are two reasons why new privately-owned office and professional buildings will enjoy an eighth consecutive year of growth in 2000. While CB Richard Ellis reports that U.S. office vacancy rates have risen slightly to 9.6 percent, this figure still is low by historical standards.
Areas reporting high vacancy rates include Riverside/San Bernardino, CA (20.5 percent), Oklahoma City, OK (20.4 percent), and Dallas, TX (17.3 percent). The two lowest rates were reported by Seattle, WA (4.9 percent) and Austin, TX (6.2 percent). Overall, office construction grew $5.3 billion, or 16 percent in 1999 and will rise $3.4 billion, or 9 percent in 2000.
After a 5 percent decline in 1999, construction of nonresidential improvements will rebound with a 3 percent increase in 2000. This represents a dollar growth of almost $2.8 billion. Educational improvements will grow 9 percent in 2000, for an increase of $1.2 billion.
Other growth activity within the nonresidential building improvements sector will include retail, up nearly $500 million (4 percent) and healthcare, up over $300 million (3 percent).
The educational sector has enjoyed increased activity during 14 of the past 15 years. This growth will continue in 2000 due to widespread overcrowding in schools, rapidly rising enrollment figures and the dire need to upgrade current facilities. Although construction of private educational buildings will drop slightly (-2 percent), public educational construction will grow 11 percent next year. After jumping 8 percent, or $2.0 billion in 1999, new school and educational construction will rise 9 percent, or $2.6 billion in 2000.
Hotel and motel construction, driven by rising room rates and emerging niche markets, will experience its eighth straight year of growth in 2000. Areas for growth in this sector include Providence, RI, Baltimore, MD, and Niagara Falls, NY. After rising 11 percent, or $1.0 billion in 1999, hotel construction will grow another 9 percent, or more than $950 million in 2000.
For the first time since 1994, growth for new construction of public safety, administration and other miscellaneous public buildings slowed to less than 1 percent, or $30 million in 1999. This category will regain its momentum for the year 2000, growing 4 percent, or $700 million.
The connection between new residential development and new retail construction is very strong. Simply put, when new neighborhoods are built, new stores and other mercantile buildings must be built to serve these communities.
As residential construction will start to slow in 2000, growth in new retail buildings also will begin to taper off. New retail construction has grown 5 percent in 1999 and will only grow by 3 percent in 2000. In dollars, this represents $1.0 billion in growth for 1999 and $575 million in growth for 2000.
After double-digit percentage growth in 1999 (10 percent), construction of privately-owned amusement and recreation buildings will suffer a 2 percent decline in 2000. In dollar terms, this category grew $400 million in 1999 and will fall nearly $70 million in 2000.
New warehouse construction will continue its gradually downward slide in 2000. This is supported by the slowing of retail construction growth, the continued decline of industrial construction, and the near completion of our inventorying revolution. In aggregate, new warehouse construction dropped 7 percent, or $1.2 billion in 1999 and will drop again slightly (less than 1 percent, or $10 million) in 2000.
As manufacturers become more efficient and produce more, better, faster and cheaper, new industrial construction continues to struggle. This transition to a new way of doing things has resulted in a weaker relationship between the manufacture of products and the construction of industrial facilities. Construction of new industrial buildings plummeted 18 percent, or $2.0 billion in 1999 and will fall another 5 percent, or $450 million in 2000.
Highway and
Utility Construction
Highway construction is the largest nonresidential construction category. Beginning in the federal fiscal year that started in October 1998, it was the beneficiary of “TEA-21,” a federal program designed to inject $56 billion new dollars into the highway construction scene over an eight-year period, or an average of $7 billion per year. This federal program was greeted by some analysts, not including FMI, with wild expectations. The graph shows how the first year went, and is very instructive.
In Quarter 1 (October-December 1998) it is obvious that it was simply too soon to have the funding, the plans and the contractors in place for any significant growth. In Quarter 2, the poorest quarter for roadwork, it looks as though the influx of federal money was put into projects already well organized, with immediate effects and a 16 percent growth. Then in Quarter 3 (April-June, normally a good time to build roads) with the already-in-place projects out of the way, there were not enough ready projects to continue the brisk growth rate of the prior quarter, with only a 10 percent growth. In Quarter 4 (the best weather, normally accounting for 30 to 40 percent of the year’s work), the growth was less than in either of the prior two quarters, not only percentage-wise (5 percent) but in total dollars ($0.7 billion, compared to $1.0 and $1.1 in the second and third quarters, respectively).
This suggests major constraints and brings to mind the shortage of labor that is almost every contractor’s number one complaint. It is clear that the system indeed was constrained throughout FFY 1998/1999, by the lack of some combination of funding, planning, contractor availability, equipment and labor that varied throughout the year and from place to place.
For the calendar year 1999, highway construction increased only 9 percent, $4.0 billion. In 2000, ways will have been found to ease the limitations somewhat, and a 12 percent, $6.1-billion growth will be seen.
Utility construction, led by ubiquitous activity in telecommunications, grew 6 percent or $1.8 billion. In 2000, this category will grow by 6 percent, or $2.0 billion. Double-digit growth in 2000 also is on tap for water supplies and sewer systems: 13 percent and 10 percent, respectively, which translates to $.9 and $1.0 billion.
In 1999 these increases were 16 percent ($1.0 billion) for water and 14 percent ($1.2 billion) for sewage. The combination of prolonged economic growth, increased environmental awareness and election-year politics is a powerful stimulus for these activities.
Contractor and Supplier
Self-Defense
We don’t think there is anything to worry about with the Y2K problem, but we do think that December 1999 should be a great month for burglars - there’s a lot of cash squirreled away in unprotected places. Our point is that everything brings opportunities.
In most places, in most lines of work, 2000 will be a lot like 1999 with a little less growth. A great time to review all the things that you know you should be doing - planning your future, improving your relationships and sharpening up your control. The following year is stacking up as a bit more of a crunch, and if you’re ready, you’ll be more able to take advantage of the opportunities.
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