The U.S. Department of Commerce’s initial assessment of the first quarter 2009 gross domestic product (GDP) revealed a 6.1 percent decline, marking the third consecutive quarterly decline in GDP. In short, the economy is still shrinking, and the pace of economic retrenchment continues to be brisk.
However, some good news came out of the overwhelmingly negative data. Personal consumption expenditures registered an annualized increase of 2.2 percent after declining 4.3 percent during the prior quarter. This was largely attributed to an improvement in sales of durable goods, which rose 9.4 percent on an annualized basis after declining 22.1 percent during the prior quarter.
Consumers apparently are more confident than they admit, and this confidence is translating into a modest rebound in spending. With the American Recovery and Reinvestment Act of 2009 (ARRA), and a large amount of additional stimulus funding from the U.S. Treasury Department and the Federal Reserve, the ongoing recession may end just as many economists have predicted—during the very late stages of 2009.
Unemployment
Still, more pain may be on the way for the nation’s beleaguered labor markets. Since the onset of the recession in December 2007, the nation has lost 5.7 million jobs. The bulk of these jobs (5.4 million) have been lost since March 2008, and more than half were lost between November 2008 and April 2009.
Approximately 25 million workers, or more than 15 percent of the workforce, are either unemployed or underemployed. The only industries that have added to payrolls during the past year are health, utilities and the federal government.
According to Moody’s economy.com, not a single metropolitan area (out of 380 areas) in the United States is experiencing robust job expansion. As of March, only three states were deemed to be “at risk” of recession as opposed to being in recession: North Dakota, Wyoming and Alaska, which are characterized by small populations and disproportionate reliance on commodities as engines of economic activity.
The unemployment rate data for April reveal widespread and deepening labor market weakness. Jobless rates have been climbing fastest in the West and in Florida due to significant regional concentrations in tourism, housing, finance, retail and international trade. Ongoing restructuring in the auto industry, as well as slowing industrial exports, have impacted the industrial Midwest.
California, Texas and Michigan posted the largest monthly declines in employment in April, losing a combined 141,600 jobs, according to the U.S. Labor Department. The latest reading on California’s unemployment rate is 11 percent—the highest April unemployment rate in more than 30 years. Overall, the West continues to boast the highest unemployment rate (9.7 percent), while the Northeast continues to fare the best at 7.9 percent.
One of the most alarming issues is the massive uptick in unemployment claims, which increased to 6.56 million for the week ending May 2. At some point, a significant number of Americans will begin losing their unemployment insurance. Absent congressional action or an increase in job availabilityby the third quarter, this will lead to greater hardship.
Positive Indicators
Beyond the slight boost in consumer spending, other factors are working in the economy’s favor, including the lack of inflation. Though many Americans are deeply concerned with prospects of future inflation and interest rate hikes, inflationary pressures remain muted for now. During the past 12 months, total prices as measured by the consumer price index were down 0.6 percent, largely due to a precipitous drop in energy prices.
Another positive aspect of the ongoing economic adjustments is the sharp reduction in inventory at every level of the supply chain. Though in the short term this inventory adjustment means lower industrial output and fewer retail jobs, it better positions the broader economy in the long term. Total business inventories declined 1 percent in March. Manufacturers’ inventories fell 0.8 percent, while wholesale inventories were trimmed by 1.6 percent. Retail inventories fell 0.7 percent in March and are now nearly 7.2 percent lower than a year ago.
An additional bright spot is the recent upswing in the official U.S. savings rate. From October 2008 to March 2009, monthly personal income declined five times, but the U.S. savings rate rose from 2.6 percent to 4.2 percent. This reflects the deep-seated fear among many Americans regarding their near-term economic prospects.
Many households also are striving to replace at least some of their household wealth. With that in mind, the higher savings rate translates into expanded spending power that should become more evident during the course of the year.
Construction Forecast
In general, nonresidential construction continues to be decimated by the lack of available financing, including from non-bank credit markets, and the lack of appetite for risk related to real estate development and investment. During the course of the first quarter, nearly 50,000 construction jobs were lost and job losses exceeded 90,000 jobs on a year-over-year basis.
While there is emerging evidence of repair within credit markets, near-term prospects for industry-wide recovery remain poor as demand for space continues to decline. For instance, the nation’s office vacancy rate rose throughout 2008, and by the end of the year it stood at nearly15 percent. New completions totaled 14.7 million square feet, according to CB Richard Ellis, with only 33 percent of new space pre-leased. Ongoing job losses in professional services, finance and information imply the demand for space will continue to crumble, driving the office vacancy rate higher and the demand for new construction lower.
The same phenomena can be observed in industrial markets. According to CB Richard Ellis, the North American industrial availability rate rose by 90 basis points to 10.9 percent during the first quarter of 2009. This is significantly higher than the 8.5 percent availability rate that characterized the marketplace a year earlier. Markets with particularly high availability rates include Austin, Texas (22 percent); Stamford, Conn. (21.4 percent); Boston (20.9 percent); San Antonio (17.7 percent); and Baltimore (17.3 percent).
According to McGraw-Hill Construction, new construction starts overall are estimated at $463.1 billion, down 15 percent despite being somewhat cushioned by the ARRA. Public works will experience the most immediate relief from the stimulus package, with construction starts expected to rise 10 percent, including a 15 percent increase for highways and bridges. By contrast, commercial building is anticipated to decline 27 percent this year after falling 17 percent last year.
That said, some “green shoots”—a term Federal Reserve Chairman Ben Bernanke first used to signal evidence of economic recovery—are emerging. Economists recently spotted green shoots almost everywhere, including in data that normally would be viewed as cataclysmic, but in the present context serve to fill the glass halfway.
With respect to nonresidential construction, one of the most frequently cited green shoots is the architecture billings index. The index, viewed as a leading indicator of U.S. nonresidential construction activity, leapt in March to its highest level since August 2008. Though the index is not close to crossing 50, the threshold that indicates improving demand for architectural services, the March increase suggests the pace of industry deterioration is moderating and more visible signs of improvement will be evident later this year.