The shape of the macroeconomic rebound is coming into focus as 2020 nears its end, said Connor Lokar, ITR Economics, during the GlassBuild Connect presentation on Sept. 8. Lokar, who described “macroeconomic carnage” during the July NGA Glass Conference, painted a picture of the shaky economic rebound, how construction fits into the economic landscape and what companies might consider as overall construction can anticipate a dry spell through 2021.
Although from a technical GDP perspective, the U.S. has been in a recovery for nearly 50 days, said Lokar, construction is a lagging sector and, as such, the industry likely hasn’t experienced the full effects of the economic shutdowns earlier this year.
Strength in Housing
Lokar says housing was set to have “a killer 2020 before it stumbled in March and April.” Nevertheless, the market is still a very positive signal with what he calls impressive single-family housing numbers and mortgage rates that are supportive of growth in single-family housing starts. He anticipates housing starts to continue their upward trajectory and encouraged suppliers to prepare for higher demand throughout the next year.
Despite his bullishness on single-family homes, Lokar is rather bearish on multifamily housing, anticipating a decline of 7 to 8 percent in the next year as more people work from home and move away from urban cores.
Macro Trends to Watch
Lokar acknowledged that though most are “COVID’ed out at this point,” it remains a chief driver among economic uncertainty right now and can’t be ignored. “The dust hasn’t even begun to settle,” he says, when assessing the true damage of COVID-related economic affects.
ITR Economics is closely monitoring what governors are doing. “The recession isn’t a direct byproduct of the pathogen itself,” explains Lokar. “It is more of an outcome of the shutdown measures that were ultimately taken to flatten the curve.” State reopening status is what matters right now, economically speaking. Lokar shared a map from the New York Times indicating approximately 10 states are reversing their reopening measures but that the majority are in “reopened” and “reopening” statuses.
Leading indicators ITR Economics follows all indicate the economy is set to rise, which is “why we’re so confident in a great 2021,” says Lokar. One of its own charts that tracks week-over-week economic trends shows a positive trend, but Lokar notes it is still off almost 4 percent compared to one year ago.
Nearly two-thirds of the U.S. economy is rooted in personal consumption. “The ability to go out and spend drives the economy,” Lokar says, which is why the shutdowns were so damaging. People resuming their retail spending habits is crucial to macroeconomic recovery and will stabilize the GDP, thereby stabilizing the economy so construction can confidently move forward.
The Stimulus Affect
The stimulus measures Congress passed earlier this year were “incredible in scope and dollars” and what Lokar described as “gargantuan” in comparison to the stimulus packages passed in 2008 and 2009. The Fed “emptied the kitchen sink, came out, fired both barrels and was on the scene very quickly,” Lokar said. “They threw everything they had to this.”
Although the money was supportive to the business cycle in the here and now, Lokar says the stimulus is akin to “pouring water on today’s fire and dumping gasoline on tomorrow’s fire.” He anticipates serious long-term debt issues. The government didn’t have that sum of money to spend so it will need to tax it back; print it, thereby causing inflation; or just continue borrowing. Millennials, Gen Xers and perhaps even some Gen Zers will assume most of that tax burden, says Lokar.
The CARES Act didn’t prevent a recession, but he said the second quarter numbers “almost certainly” would have been worse in the absence of the act. The downfall was quick – a 9.5 percent decrease quarter over quarter – and Lokar predicts it will take until mid-2022 for the economic pie to become as big as it was at the end of 2019. “This was a mega downturn that will take a long time to get out of,” he says.
The stimulus yielded some unintended consequences, too. “Every government decision is a trade off,” Lokar explains. “It always has outcomes and unintended consequences, and unintended consequences often exceed the intended consequences they’re trying to generate.” One such example is uncertainty with businesses that qualified for PPP loans and today’s lack of clarity around loan forgiveness. Another is labor market distortion from the juiced up unemployment benefits that, while vital to many recipients, are now hurting businesses looking for hourly wage workers as would-be candidates would actually take a pay cut to re-enter the workforce.