Despite Signs of Slowing, Economist Predicts Continued Record Levels of Construction
The CEO Breakfast, held in conjunction with the Construction Specifications Institute’s annual convention, attracted nearly 150 construction industry executives anxious to hear Toal’s midyear construction forecast. As chief economist with the Portland Cement Association, Toal is a leading forecaster and analyst of construction activity in the United States. His experience includes seven years with the Federal Reserve Bank in Atlanta, and he told the group that slowing in the industry is occurring as a direct result of the Fed’s increases in interest rates.
“The Fed is paranoid of inflation and looks constantly at economic indicators,” Toal said. These key indicators now reflect a slowing in economic activity and a slight increase in inflation. The producer price index is up, unemployment is the lowest it has been in 30 years at 4%, and now labor shortages are occurring. Short-term and long-term federal fund rates are now close together, yet another sign that the economy is slowing, said Toal, who forecasted an inflation rate of 3.5% for the near future.
Overall, the forecast for the remainder of 2000 was positive: “On an annual basis for this year we see the economy growing at almost 5%. This is the highest growth rate in 30 years,” said Toal. “If we have no growth for the rest of the year we would still be growing 3% over last year,” he said.
What could go wrong? A number of things, the economist told the group. In year 10 of economic expansion, the longest in 200 years, there is no precedent to follow. Consumer spending may end. The household savings rate is at 2.5%, the lowest it has been in 40 years. Consumer debt is at the highest level it has ever been. “People are making spending decisions based on their 401k balance and extrapolating,” Toal added.
He also expressed concern about ballooning trade deficits and unrealistic price earnings ratios in the stock market. “When we have a problem strike the economy, it’s actually something unknown that hits us, like an OPEC situation,” Toal explained. And, of special relevance for the United States in this election year, he noted that of the 11 recessions in this country since 1930, nine began in the first year of a new presidential term.
On the positive side, the corporate debt equity ratio is the lowest it has been in 30 years, which bodes well for future commercial construction. Other market segments will not fare as well, according to Toal. “I see declines ahead in residential construction, particularly single family,” he said. “We have starts dropping about 200,000 units; multifamily will turn up because basic population trends show that.” For 2000, Toal forecasted 1.6 million U.S. housing starts, and 1.4 million for the next two years. He noted that the figure was 1 million in 1990.
For nonresidential construction, steady activity was predicted. While industrial and hotel segments will drop slightly, Toal said the education market will continue to be hot, the school age population is rising, and most U.S. schools were built before 1970. The office market also continues to be strong. “Metropolitan vacancy rates were 25% in late 80s and they are 9% today,” the economist noted.
Public construction has been increasing steadily since the early 1980s, and Toal cited a number of reasons for this: state and local government budgets are posting surpluses of nearly $50 billion, meaning that, among other building programs, municipalities can now participate in more federal fund matching projects. A 44% increase in federal funding for highways was passed several years ago, the effects of which are now being recognized. An increase in funding for airport construction was also recently passed. For public construction, Toal forecasted a 3% increase this year. “Very positive,” he commented.
On a regional basis, the economist noted that some parts of the country will be booming while others are down. “By region, most are growing in the residential segment from 2% to 4%, except New England,” he said. “The commercial hot spots are on the West Coast and in New York City.” Conversely, parts of California, New York state and Texas are experiencing very high vacancy rates.
Federal funding, allocated by formula, will be highest this year in Georgia, South Carolina, Tennessee, Idaho, and Nevada. Hardest hit will be Massachusetts, experiencing a 41% reduction, largely related to Big Dig funding in Boston.
According to Toal, Georgia is outperforming the rest of the country on nearly all indicators. Hot spots for the state include multifamily residential, office, educational, institutional, public works, highways, bridges, and airport construction.
Overall, Toal was positive about the construction outlook for the country through the rest of 2000 and into 2001. “Trends will flatten out, but we won’t see the declines of the late 80s,” he told the group of construction executives. “There will be no major downturn, and given today’s levels of activity, that is very positive for you.”