Despite apparent economic softness during much of the first half of 2015, certain aspects of U.S. performance reflect underlying strength. For instance, the dollar has become more valuable relative to a number of key currencies, in large measure because of faster growth here than in the rest of the advanced world. Corporate earnings remain elevated, and various stock market indices remain near record highs.

That said, the initial months of 2015 will be remembered as disappointing ones, though activity has picked up more recently as the effects of winter wear off and as the lingering effects of a West Coast port slowdown steadily fade.

Coming into 2015, many economists forecasted growth exceeding 3 percent. Tailwinds such as a booming stock market, lower fuel prices, rapid job growth and early evidence of sharper wage gains led forecasters to believe 2015 was shaping up to be the best year for the economy since 2005—the last time the U.S. economy expanded more than 3 percent during the course of a calendar year (3.4 percent).

Certain near-term headwinds were partially foreseeable. Winter snow predictably delays projects every year, although ice storms stretched even deeper into the South this year than normal. A stronger U.S. dollar frustrated export growth. Many economists were already aware that issues at the nation’s West Coast ports would slow commerce, but the impacts turned out to be far more severe than most anticipated.

The real source of disappointment is consumer spending. Given recent job creation and wage growth, as well as lower fuel prices, retail sales were expected to be stronger. Every penny consumers save per gallon at the pump during the course of a year translates into approximately a billion dollars of additional consumer spending power.

To date, consumers are putting away more of their fuel savings than anticipated. According to the Census Bureau, sales from the nation’s retail and food sectors dropped 0.8 percent and 0.6 percent in January and February, respectively. While saving money is typically viewed as positive, it isn’t necessarily good for short-term economic performance. Between November 2014 and April 2015, the U.S. personal savings rate climbed from 4.5 percent to 5.6 percent, according to the Bureau of Economic Analysis. Consumers will have to pick up spending considerably if the economy hopes to hit the 3 percent growth mark this year or anything approaching that threshold. 

According to the Bureau of Labor Statistics (BLS), the nation added only 119,000 jobs in March. This represented the worst monthly performance since December 2013. Since then, the nation’s job market has rebounded. The nation added 221,000 jobs in April and then blew through consensus estimates by adding 280,000 jobs in May, according to the government’s initial estimate. The consensus expectation called for around 225,000 net new jobs.

Eventually, lower oil prices will translate into faster economic growth. To date, that has not been the case. Lower fuel prices coincide with large layoffs or layoff announcements among companies such as Halliburton, Schlumberger and Baker Hughes. The economies of Oklahoma, North Dakota, Wyoming and Texas have stuttered as oil prices have fallen to around $60 per barrel. Recent data regarding oil production and inventories indicate prices are unlikely to begin rising rapidly anytime soon.

The presumption is that consumers eventually will begin to spend a larger portion of their savings. Broader retail gains are likely as the economy proceeds through the second and third quarters of the year.

Recovery Continues in Nonresidential Construction
In April, nonresidential construction rose 3.2 percent on a monthly basis. Spending is up by a solid 8.8 percent during the past 12 months. April nonresidential construction spending totaled $646.7 billion on a seasonally adjusted, annualized basis. The Census Bureau also recently upwardly revised its estimate for March construction spending from $611.8 billion to $626.8 billion.

With construction remaining in recovery, wage pressures are building. The construction unemployment rate recently dipped below 7 percent. Shortages of workers are becoming more apparent in many markets despite the higher availability of workers who had previously been toiling in energy exploration and production-related segments. Nonresidential construction added 8,200 net new jobs in May, with nonresidential specialty trade contractors leading the way (5,600 net new jobs).

However, materials prices have been moving in the opposite direction. Commodity prices have fallen sharply during the past year, led by steep declines in both crude oil and natural gas.

Private categories continue to pace nonresidential construction recovery. Public segments continue to be hamstrung by inadequate levels of funding.

For the U.S. economy, the primary issue during the year ahead appears to be the direction of the dollar. Already, GDP data have been impacted in the form of rising trade deficits and softer overall growth as the dollar appreciates against the euro, yen, Canadian dollar and other key currencies. If the dollar strengthens further, U.S. companies with significant export exposure will be heavily impacted, which could add to equity market volatility and produce more sideways action in stock prices (and maybe worse).

Recent increases in long-term interest rates also represent some cause for concern, though most financial economists do not anticipate massive additional increases in long-term rates during the balance of 2015.

The Department of Commerce recently announced the U.S. trade deficit dropped to $40.9 billion in April, down $9.7 billion from $50.6 billion in March. Year to date, the nation’s trade deficit is up 0.9 percent, with imports actually declining $16.8 billion, or 1.8 percent. Should this pattern continue, the U.S. economy can reach 3 percent growth this year, but only if consumers begin to behave as anticipated.

Looking Ahead
There’s still time for this to be a decent year for the U.S. economy. Last year, the U.S. economy actually shrank significantly during the first quarter. The economy picked up thereafter, and it ended up expanding 2.4 percent. While this year’s first quarter was disappointing, it was still better than 2014. Second quarter growth will improve despite the fact inventories entered the quarter at higher levels than one might have hoped. This will translate into somewhat suppressed orders for goods.

Construction segments that are likely to lead the way in terms of spending growth include health care, commercial and lodging. The direction of manufacturing-related construction has become less clear. Manufacturing activity has been slower of late, and some manufacturers may delay projects in light of a strong U.S. dollar.

However, during the past year, no nonresidential segment has experienced as much percentage growth in construction spending as manufacturing, implying that many companies are overlooking near-term dynamics and anticipating a broadening renaissance in U.S. industrial production. 


Anirban Basu is chief economist of Associated Builders and Contractors. For more information, visit www.abc.org.