The dark days of the recession—which is estimated to have lasted about 20 months—are over, though it likely will take a while for the clouds to break up and signal widespread economic relief.
On the positive side of the ledger, real gross domestic product (GDP) is expected to expand 2 percent to 3 percent during the fourth quarter of 2009 and an additional 2 percent in 2010. Arguably more important than the fact that the economy is expanding again are the various sources of improvement. Fixed investment, which declined at a 39 percent annualized rate during the first quarter of 2009, declined at a more manageable 12.5 percent annualized rate during the second quarter.
Exports, which declined at a 30 percent annualized rate during the first quarter, declined 4.1 percent during the second quarter. Government spending, off 2.6 percent during the first quarter, was up 6.7 percent during the second quarter (though this may not be seen universally as a positive).
Real final sales of domestic products, which include GDP minus the change in inventories, were up 0.6 percent during the second quarter after declining 1 percent in the first. In other words, demand for U.S. goods and services has been stabilizing—an extremely positive sign.
Additionally, year-to-date, the Dow is up 18 percent, the NASDAQ is up 38 percent, the S&P 500 is up 22 percent, and the Russell 2000 is up 20 percent. Moreover, the CBOE VIX, which reflects market volatility, is down 43 percent.
Despite these rays of hope, the recovery promises to be sluggish for a number of reasons.
- Household balance sheets are overleveraged, and the debt service ratio remains high.
- Commercial real estate’s downturn just began, and many key sub-segments will require years to recover.
- Unemployment will continue to rise during the initial months of recovery, likely reaching 10.5 percent in 2010.
- Housing prices continue to decline, due in large measure to rising delinquencies, defaults and foreclosures.
- Though improving, corporate earnings will not expand briskly in 2010 in many key industries, including those that serve consumers directly, because of a lack of profit margin. However, corporate America has wielded the cost-cutting axe during the recession, which suggests higher profitability is in store.
- With the exception of China and India, the global economy remains weak, which will hamper export growth. But, exports will climb, due in part to recent declines in the dollar and the stabilization of Western European economies.
- Fears of shifting regulations, future tax increases and interest rate hikes will dampen business enthusiasm.
- Immigration will not drive the economy forward as forcefully as it has in the past.
- Income growth will remain weak, particularly because many of the manufacturing and distribution jobs lost during the recession cycle will not be regained.
- State and local governments remain under significant fiscal duress.
Making Sense of the Ups and DownsPersonal income stabilized in July and August after surging in May due to stimulus payments of $250 to individuals receiving Social Security, veterans benefits and railroad retirement benefits from the government. In June, wage and salary income fell for an eighth consecutive month due to job losses, mandatory furloughs and wage/salary cuts.
Through August, wage income was roughly 5 percent below its year-ago level. Dividend income also continues to plunge, which is an issue both for government tax collection and consumer spending. Dividend income was approximately 25 percent below its year-ago level in August, according to
Moody’s Economy.com.
Another factor influencing the end of the recession was industrial production, which increased 0.7 percent in September for the third consecutive month. Manufacturing production increased 0.9 percent in September following a 1.2 percent gain in August. For the third quarter as a whole, manufacturing output increased at a 7.7 percent annual rate, the biggest increase since the fourth quarter of 1999. (Manufacturing output had declined at a 9.9 percent annual rate in the second quarter.)
Programs such as “Cash for Clunkers” induced domestic producers to ramp up production and boosted August sales, but lower September figures imply this may have been a short-term surge in auto purchasing that failed to sustain momentum. Still, manufacturing utilization is now above 70 percent and has been climbing through the third quarter of 2009.
A host of indicators characterize sales activity in the nation’s manufacturing sector, which is experiencing an increase in orders due to stepped up consumer spending. For instance, the Manufacturers Alliance/MAPI composite index for June improved slightly to 24 percent, up 3 percentage points from the record low set during the previous quarter.
With respect to retail sales—a reflection of consumer confidence and willingness to engage the marketplace—September sales fell 1.5 percent, but were up 0.5 percent excluding auto sales. On a year-over-year basis, retail and food service sales were down 5.7 percent in September—signaling mild stabilization.
Foreign demand also exhibits genuine signs of improvement in the form of expanding export orders and prospective exports indices. Durable goods shipments increased in June and July before sliding back a bit in August. Demand from China and other emerging markets is becoming increasingly apparent, and the dollar’s recent decline supports export stabilization.
The notion that manufacturing is climbing out of the recession is further supported by the Institute for Supply Management’s (ISM) manufacturing index, which rose to 52.9 in August—marking the eighth consecutive increase and placing the index at its highest level since August 2008. According to Moody’s Economy.com, a sustained reading near 47 on the ISM manufacturing index historically is consistent with expanding real GDP.
What’s in Store for Employment?
In October, the nation lost another 190,000 jobs—73,000 fewer than in September—bringing total job loss to 5.5 million since October 2008. Unemployment rose to 10.2 percent in October, the highest level in 26 years.
Although 2010 will not produce the same volume of job losses as 2009, it also will not be a year of significant job augmentation. The most positive outlook is that job losses will effectively end in the summer of 2010, making it a transitional year to a potentially much better 2011 and 2012. The consensus among economists is the United States must create about 20 million jobs during the next decade to bring the nation’s unemployment back to where it was just four years ago.
There are other indicators of ongoing duress in labor markets. The median and average durations of unemployment remain at or near record levels. Further, the construction industry continues to post large losses, and the proportion of workers who have suffered dislocation for more than half a year is still rising.
Building Off a Period of DeclineTotal construction volume is likely to rise in 2010, but much of the gain is expected to originate from residential construction, which appears poised to avoid a fifth consecutive year of decline. With the possible exception of foreclosures, the worst of the housing recession is over. Existing home sales rose 13.5 percent between January and August on a seasonally adjusted basis. Sales of new homes rose 30.3 percent during this same period, and residential construction, while still suppressed, is up 20.3 percent since the beginning of the year.
Building permit data signal ongoing expansion in construction activity in the months ahead. As of August, the inventory of unsold homes in America stood at 8.5 months—still high but moving toward equilibrium.
The multifamily housing market, on the other hand, is just beginning to correct itself following massive declines in 2009. Apartment vacancy rates continue to rise in much of the nation, and the condominium market remains depressed in most major metropolitan areas.
Nonresidential construction segments such as commercial, office and lodging also will continue to slump as vacancy rates rise, occupancy rates fall and the credit market remains tight. Though consumer spending has begun to recover, retail activity will remain somewhat subdued, as will the appetite for new retail space.
Manufacturing construction is expected to decelerate sharply in 2010, though projects related to alternative energy will counter this decline to some extent.
Institutional construction will be soft due to depleted state and local budgets and significant pressure to contain health care costs. Two bright spots include Veteran’s Administration hospitals and school laboratories.
Undoubtedly, due to the American Recovery and Reinvestment Act, the major growth outlet in 2010 will be the public sector. Public buildings—particularly courthouses and federal facilities in need of modernization—will receive a nice bump in 2010 due to stimulus funds reaching the market. Stimulus funding tied to alternative sources of energy and “smart grid” development also could provide a boost to electric utility construction, especially power lines.
Stimulus funds will bolster highway and bridge, mass transit and environmental public works construction as well. Associated Builders and Contractors’ Construction Backlog Indicator (CBI)—a national economic assessment of the U.S. commercial/institutional and industrial construction industry—has been registering gains in backlog among infrastructure-oriented firms since last summer. All other segments’ backlogs have remained flat or declined since the CBI was launched in November 2008.
Despite forecasts for a subdued economic recovery and a relative dearth of nonresidential building construction during the next one to four years, rising construction costs will be an issue due to a number of global factors, including China’s increasing demand for construction materials. Construction firms should prepare for 4 percent to 6 percent growth in construction costs per annum during the next several years, which is considerably lower than the two-year average for 2008 and 2009.
Commodity prices are now rising rapidly for certain materials and products, including oil and copper, in recent months. In addition to currency declines and stabilizing/growing demand, speculation appears to be returning to commodity markets as a growing number of investors bet against the U.S. dollar and take positions in assets that are shielded from ongoing devaluation.
Conversely, average hourly earnings for construction workers have flattened considerably during the past 18 months, which undoubtedly will continue given the elevated levels of unemployment among construction workers in most parts of the nation. This may impact nonresidential construction workers more than residential construction workers, as well as workers involved in industries directly impacted by the stimulus package. The effect of public policy in determining the share of public work performed by union workers versus open shop workers also will impact the distribution and level of total industry compensation.
It may seem unfair, but the U.S. economy has begun to stabilize initially in the states that suffered the briefest and mildest recessions, including Nebraska, South Dakota, North Dakota, Montana and Iowa. None of these states fell prey to the housing bubble that swept much of the nation earlier this decade, and therefore are generally characterized by greater stability in construction levels, home prices and bank lending.
By contrast, the weakest regions remain the industrial Midwest and the West.
Unemployment tends to be highest in states with still ragged housing markets, including California, Nevada, Rhode Island, Florida and Georgia, as well as in manufacturing-intensive states such as Michigan, Ohio, South Carolina and Indiana.
The next regions to rebound are more closely aligned with the global economy: Washington, D.C.; Boston; Austin, Texas; Oregon and Washington. These areas also benefit from a steadily declining U.S. dollar, which renders U.S. products and services more competitive globally. Moreover, as the global economy picks up steam, global transportation hubs such as Los Angeles; Houston; Chicago; Kansas City, Mo.; Miami; Norfolk, Va.; Baltimore; New York and New Jersey also should experience greater activity.
Associated Builders and Contractors’ Construction Backlog Indicator provides insight into regional dynamics. The Northeast’s backlog stood at 6.2 months in September, the fourth consecutive month of improvement and a 7.3 percent increase compared to August. The South, which is home to many of the states associated with high unemployment, has experienced the largest decline in backlog since November 2008 (8.7 months to 5.8 months). The lengthiest average backlog is in the West (6.3 months in September), which is largely due to a significant rebound in infrastructure-related contracting.
Despite recent stabilization, the Middle States continue to report the lowest backlog (5.6 months in September). Though this region includes a group of states that enjoy low unemployment rates and more stable construction activity, the presence of economically beleaguered states such as Michigan and Ohio appears to be the most significant determinant of performance.