Glacier-Slow Progress: Midyear economic outlook

By Joseph M. Kelly | Jul 15, 2012




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The protracted climb out of the recession continues with modest, incremental improvement. Residential construction remains the main drag on overall construction, but improvement appears to be on the horizon. However, growth will not come quickly nor with great fanfare.

No major surprises so far
Before 2012, most economists and indicators pointed to modest economic growth for the year, and so far, they were right. The emphasis, though, is on “modest,” not “growth.” Most recoveries from recession are much quicker; this one is moving slowly and is protracted by comparison. Three years into recovery, the pace remains glacier-slow.

According to Kiplinger’s midyear economic outlook, the U.S. economy will grow by a mere 2 percent to 2.3 percent in 2012.

“Although growth started and ended last year relatively strong, it faded badly in the middle,” the report states. “We expect the tempo this year to pick up in the second half of 2012 and stay up through year-end.”

Housing hurdle
In past climbs from recession, housing was the main driver. This time around, because of the depth of the Great Recession and various contributing factors, housing has become the primary hurdle.

“The housing sector holds the keys to a faster recovery,” according to American Bankers Association (ABA) Senior Economist Keith Leggett in the May/June 2012 issue of ABA Trust & Investments magazine. “In the typical economic recovery, a resurgent housing sector helps fuel employment and rising incomes. However, this scenario has not played out this time. The recovery of the housing sector has been frustratingly slow, despite record home affordability.”

The backlog of distressed properties continues to weigh down housing prices, but things are improving slightly. According to RealtyTrac’s U.S. Foreclosure Market Report (released April 12) for the first quarter of 2012, foreclosure filings—default notices, scheduled auctions and bank repossessions—were reported on 572,928 properties during the quarter, down 2 percent from the previous quarter and down 16 percent from the first quarter of 2011. The first quarter total was the lowest quarterly total since the fourth quarter of 2007. The report shows one in every 230 U.S. housing units with a foreclosure filing during the quarter.

According to the ABA’s Leggett, the Federal Reserve estimates that an additional 1 million foreclosed properties could hit the market in each of the next few years. He predicts it might take up to six years before the housing sector addresses its imbalances and returns to normal.

“The housing sector has yet to see the sun,” said Beth Ann Bovino, deputy chief economist at Standard & Poor’s during a March 30 webcast. “Just as existing home sales for February declined, new home sales for that month stumbled. With the recovery in housing sales still lackluster, January home prices fell yet again to a new record low, according to the S&P/Case-Shiller 20-City Home Price Index—keeping markets on the lookout for a bottom in prices.

“As we expected, the Case-Shiller 20-City Home Price Index fell 3.8 percent in January from a year ago, and, as a result, prices are down 34.4 percent from their bubble-era peak point in 2006—and yet another record low,” Bovino said.

Every time economists think the market has reached the “bottom” for home pricing, prices go down yet again. The new estimate from Bovino is that home prices will bottom out at 36 percent—peak-to-trough decline—sometime this fall.

Kermit Baker, chief economist for the American Institute of Architects, agreed during the May 3 webcast: “A Construction Recovery at Last—But How Long and How Strong?”

“We haven’t seen anything like this in history,” Baker said, adding that the industry sees signs of recovery and then bounces back again, and it’s been bouncing along the bottom for quite some time. Until the industry works through the huge inventory of distressed property, he said, this recovery will be extremely slow.

New home sales, Bovino said, fell more than 1 percent in February, which is weaker than expected.

“Sales are now only 13 percent above the record low seen after the tax credit expired,” she said. “The silver lining for homebuilders at least is that they have been successful in reducing inventory. Though the shadow inventory of distressed homes that still need to be unwound has kept the eventual turnaround for housing at bay, the month supply of unsold homes on the market in February now are at half the 12.2-month supply seen in 2009, giving them a boost once the economy eventually turns around.”

In addition, Baker said the home ownership rate rests around 65.4 percent, its lowest level since 2007 (prehousing boom).

New residential construction
On April 17, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD) jointly announced new residential construction data for March 2012, which further indicate a bouncing-up-and-down trend. Privately owned housing units authorized by building permits increased by 4.5 percent from February to 747,000 permits in March. February 2012 permits were up 34.3 percent from the same period in 2011. Single-family permits increased by 3.5 percent to 479,000 from February to March.

Privately owned housing starts in March slumped by 5.8 percent from February to 694,000 units in March—10.3 percent above the March 2011 figure. Single-family housing starts declined by 0.2 percent from February to March after slumping by 9.9 percent from January to February.

Privately owned housing completions in March, according to the Census Bureau and HUD, rose by 4.2 percent from February to March to a rate of 600,000. Single-family housing completions in March rose to 440,000, a 1.4 percent increase from February to March, after an 8.2 percent improvement between January and February.

Around press time, the Commerce Department released new, somewhat more optimistic housing numbers. The U.S. Census Bureau and HUD jointly announced new residential construction statistics for May 2012, finding that privately owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 780,000. This is 7.9 percent above the revised April rate of 723,000 and is 25.0 percent above the May 2011 estimate of 624,000. Single-family authorizations in May were at a rate of 494,000; this is 4.0 percent above the revised April figure of 475,000. Authorizations of units in buildings with five units or more were at a rate of 266,000 in May.

Privately owned housing starts in May were at a seasonally adjusted annual rate of 708,000. This is 4.8 percent below the revised April estimate of 744,000 but is 28.5 percent above the May 2011 rate of 551,000.

Single-family housing starts in May were at a rate of 516,000; this is 3.2 percent above the revised April figure of 500,000. The May rate for units in buildings with five units or more was 179,000.

Privately owned housing completions in May were at a seasonally adjusted annual rate of 598,000. This is 10.3 percent below the revised April estimate of 667,000 but is 10.1 percent above the May 2011 rate of 543,000.

Single-family housing completions in May were at a rate of 458,000; this is 6.3 percent below the revised April rate of 489,000. The May rate for units in buildings with five units or more was 130,000.

Overall, new residential construction saw month-to-month variation but year-over-year improvement.

Existing-home sales
According to the National Association of Realtors (NAR), March existing-home sales declined 2.6 percent to a seasonally adjusted annual rate of 4.48 million units in March, from a revised February figure of 4.59 million units. The March total is 5.2 percent higher than the 4.26 million units reported in March 2011. For this data, transactions include single-family homes, townhouses, condos and co-ops.

“The recovery is happening though not at a breakout pace, but we have seen nine consecutive months of year-over-year sales increases,” said Lawrence Yun, NAR chief economist, in an April 19 statement. “Existing home sales are moving up and down in a fairly narrow range that is well above the level of activity during the first half of last year.”

Kiplinger’s expects existing-home sales to edge up about 3 percent in 2012 to about 4.4 million units, or about twice as much as 2011’s gain.

Overall construction spending
The U.S. Census Bureau announced May 1 that overall construction spending during March 2012 rested at a seasonally adjusted annual rate of $808.1 billion, or 0.1 percent above the revised February estimate. The March figure is 6 percent greater than the March 2011 estimate. During the first three months of 2012, overall construction spending amounted to $171.2 billion, or 6.7 percent above the $160.4 billion reported for the same period in 2011.

Spending on private construction rested at a seasonally adjusted rate of $531.9 billion, 0.7 percent greater than the $528.1 billion revised estimate for February 2012. Nonresidential construction came in at $287.8 billion in March, a modest 0.7 percent increase from February’s $285.7 billion estimate.

Public construction spending rested at $276.2 billion, a 1.1 percent decline from the previous month. Education construction was 1.2 percent below February’s total with a February figure of $69.1 billion. Spending on highway construction slumped by 0.8 percent between February and March to $77.6 billion.

So overall, despite some setbacks in specific markets—some of which could be contributed to typical winter lulls—construction spending has seen modest growth.

In many ways, construction markets ebb and flow based on confidence. Whether that refers to confidence from home-buyers, homebuilders or investors, confidence means something.

Leggett writes that consumer confidence improved since last summer after dipping to near-record lows, but it remains low.

“However, consumer confidence tends to be extremely sensitive to movements in equity and job markets,” he writes.

The National Association of Home Builders (NAHB) tracks builder confidence and suggests that it is holding at its highest level since June 2007. In its March 10 release, NAHB reported that builder confidence in the market for newly built, single-family homes was unchanged in March from a revised level of 28 on the NAHB/Wells Fargo Housing Market Index (HMI). The HMI gauges builder perceptions through several components. Scores in several components are calculated into the index number. Any number above 50 indicates that more builders view conditions as good versus poor.

The HMI component that examines current sales conditions declined one point in March to 29, but the component gauging sales expectations for the next six months increased by two points to 36. The component tracking prospective buyers held steady at 22.

If you drill down into the HMI’s regional data, the Northeast gained five points to 25, the Midwest increased by two points to 32, and the South went up two points to 27. After a 22-point gain in February, the West suffered a 10-point setback in March down to 32.

“While builders are still very cautious at this time, there is a sense that many local housing markets have started to move in the right direction and that prospects for future sales are improving,” said Barry Rutenberg, chairman of the NAHB and a Gainesville, Fla.-based builder. “This is demonstrated by the fact that the HMI component measuring builder expectations continued climbing for a sixth straight month in March to its highest level in more than four years.”

What to expect
According to Bernard Markstein, U.S. chief economist for Reed Construction Data, the makeup of the construction market has changed dramatically because of the recession and the housing market collapse. During a May 3 webcast, he said residential construction was 55.9 percent of the $1.104 billion construction market in 2005. In 2011, residential was a mere 31.1 percent of the $790 billion construction market. During that six-year period, heavy construction jumped from 16.7 percent to 33.7 percent of the overall construction market, while nonresidential went from 27.3 percent to 35.2 percent. In other words, heavy construction took over a greater share of the overall market out of necessity and because of government stimulus, but the overall construction market is still down considerably, and residential is the biggest drag.

Leading construction indicators are now starting to trend upward, but only at glacier speed. It is frustrating for contractors but the plan must be patience. Better times are coming. When they will arrive is the big question. No one really has that answer, so stay tuned.

KELLY, former editor of ELECTRICAL CONTRACTOR, is a Baltimore-based freelance writer. Reach him at [email protected].

About The Author

Joe Kelly, is currently senior editor in the Periodicals Group at the American Bankers Association, has been a magazine editor and writer for the bulk of his career. In 1998, Kelly became associate editor of ELECTRICAL CONTRACTOR magazine and was named editor in January 2000, a position he held until May 2003. He was instrumental in the 2002 ELECTRICAL CONTRACTOR magazine redesign and the 2003 Web site redesign. In addition, he helped launch Security + Life Safety Systems, in March 2003.

Kelly currently lives in Baltimore with his wife and two children and frequently contributes to ELECTRICAL CONTRACTOR.

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