Economic Update: Recovery is underway, but expect a slow return to normal
July 17, 2020
Leading indicators of the health of the residential construction and remodeling market send mixed signals about the economic climate, but all agree that challenges exist as the economy emerges from the coronavirus-induced recession.
“The recession most likely ended in May as evidenced by the strong job gains in the month as businesses began the re-opening process,” says Richard Branch, chief economist at Dodge Data & Analytics. “June’s employment gain was further confirmation that the economy had taken real steps forward following the weakness in March and April. This recovery, however, is very tenuous. The acceleration in COVID-19 cases and the new business closures in California and Florida suggests that the economy is at risk of slipping back in the months to come. This could lead to a retrenchment in construction activity.”
New construction outlook
A report from the U.S. Housing and Urban Development and Commerce Department showed single-family building starts in June increased 17.2 percent, fueled in part by low mortgage rates and growing demand in lower-density markets.
Builder confidence is also back to pre-pandemic levels. The latest National Association of Home Builders/Wells Fargo Housing Market Index indicated builder confidence for newly built single-family homes returned to a solid reading on par with March.
“While the housing market is clearly rebounding, challenges exist,” says Robert Dietz, NAHB chief economist. “Lumber prices are at a two-year high, and builders are reporting rising costs for other building materials while lot and skilled labor availability issues persist. Nonetheless, the important story of the changing geography of housing demand is benefiting new construction. New home demand is improving in lower density markets, including small metro areas, rural markets and large metro exurbs, as people seek out larger homes and anticipate more flexibility for telework in the years ahead. Flight to the suburbs is real.”
According to Dodge, however, single-family residential building starts fell 7 percent in June compared to the previous month. Through the first six months of 2020, single-family construction starts were down 1 percent versus the same time period in 2019. For the 12 months ending in June, single-family starts were up 3 percent.
The Leading Indicator of Remodeling Activity, released by the Remodeling Futures Program at the Joint Center for Housing Studies at Harvard University, projects renovation and repair spending will decline 0.4 percent by the second quarter of 2021 in light of continued weakness in the broader economy due to the pandemic.
This projection takes into account several forecasts, including retail sales of building materials, home prices and GDP. Using its standard methodology, which does not include forecasted trends, the outlook would have reflected increased remodeling activity through the start of 2021.
“The remodeling market was buoyed through the early months of the pandemic as owners spent a considerable amount of time at home and realized the need to update or reconfigure indoor and outdoor spaces for work, school, play, exercise and more,” says Chris Herbert, managing director of the Joint Center for Housing Studies. “However, sharp declines in home sales and project permitting activity this spring, as well as record unemployment, suggest many homeowners will likely scale back plans for major renovations this year and next.”
“As the pace of do-it-yourself activity, maintenance work and exterior-focused projects begins to taper, annual expenditures by owners for home improvements and repairs are expected to shrink slightly to $326 billion by the middle of 2021,” says Abbe Will, associate project director in the Remodeling Futures Program at the Center. “Given the ongoing uncertainty surrounding the broader impact of the pandemic, the timing on when we’ll reach a bottom in the remodeling market also remains unclear.”
Despite an unclear future, remodeler sentiment is strong, according to NAHB's second quarter Remodeling Market Index, which revealed positive remodeler sentiment and a feeling that market conditions improved "substantially" since the first quarter.
The June jobs report made headlines with its unexpected news of the economy adding 4.8 million jobs, bringing unemployment down to 11.1 percent. “We had a historical drop, so of course we have a historical rebound,” said Ali Wolf, chief economist of Meyers Research, on a webinar on July 8.
States starting to reverse reopening plans and a spike in coronavirus cases all happened after the job report, though, she cautioned. As such, there are “a lot of question marks” about what the July jobs report will look like, though she predicts net gains will continue but not at the level in the June report.
Leisure and hospitality, trade, and education and healthcare jobs represented 75 percent of June’s growth. Manufacturing and construction saw gains of 3 percent and 2.3 percent, respectively.
In terms of COVID-related job losses, however, construction has recovered 56 percent of its lost jobs and manufacturing recovered 44 percent. “Unemployment is moving in the right direction and we’re at recession levels of unemployment, not depression levels,” concluded Wolf. Despite the positive movement, continued claims are at 19.3 million and initial jobless claims have exceeded 1 million for 15 consecutive weeks, which is still worse than the hardest-hit week during the Great Recession, said Wolf.