Do Numbers Matter Now?
Economists, financial analysts and private and government statisticians have repeatedly cautioned that many economic indicators are lagging, and thus don’t accurately reflect current conditions. However, economists all agree that the snapshot of how the economy was doing before CV19 will provide important benchmarks that will help gauge the strength and direction of the eventual recovery.
The Road to Recovery
Jurrien Timmer, Director of Global Macro for Fidelity, put where we are and where we might be going into perspective in his weekly Viewpoints the end of March.
Timmer pointed out that extreme times call for extreme measures, and while the virus dealt a sudden shocking blow that plunged the global economy into an unprecedented decline, the US fiscal/monetary policy response was equally shocking, albeit in a good way. The coordinated fiscal/monetary response in the US was about 20% of GDP and he believes it will likely rise. This war-time response was needed, as the world is at war with an invisible enemy.
Timmer notes that swift action in Washington by Congress and the Fed shows that they are ready and willing to act decisively and use the tools developed during the Great Recession, as well as take actions to stabilize the economy and help people and businesses such as the CARES stimulus package that are virtually unprecedented. That willingness and ability to act was one of the things the market was looking for. Now with a policy response in place, the next indicator will be the growth rate of CV19 peaking and eventually declining. CV19 is expected to peak in much of the country in mid-April, although there are individual states where it will not peak until sometime in May.
CV19 is now expected to curb global economic growth by 0.5% in 2020, up from forecasts of a 0.2% to 0.3% contraction made in February. Prior to the CV19 pandemic, global growth was expected to 2.1% this year. Moody’s expects global GDP to rebound in 2021 and expand 3.2%.The forecast reflects the severe curtailment of economic activity as the world works to contain the spread of the deadly virus.
Goldman Sachs believes that GDP will shrink by 6.2% this year in the US, dropping 9% in the first quarter and plummeting 34% in the second quarter, up from initial forecasts of a 24% slide, and then surging 19% in the third quarter as the government’s fiscal policies and monetary easing drive a bigger rebound than previously forecast.
Goldman’s downward revisions reflect the massive job losses as well as the larger-than-expected stimulus package. In economists’ view, the deeper trough will lead to a bigger and more sustained rebound. Goldman Sachs believes the jobless rate will hit 15% in the months ahead before America is able to go back to work.
Moody’s expects US GDP to contract 2.0% in 2020 after contracting 4.3% over the first two quarters of the year. Despite the rebound, Moody’s says it is doubtful that the output loss that will occur in the second quarter will be fully recovered.
CV19 and Residential Construction
Residential Construction of both single-family and multi-family housing was deemed an essential activity by the Department of Homeland Security and will therefore be permitted to continue during the CV19 pandemic. Construction must continue in ways that protects workers and the public from the virus. All in all, many sub-sectors of construction are included in the list of essentials, including hospital construction and most infrastructure construction.
The effort to have residential construction declared essential was spearheaded by NAHB. More than 90 companies and organizations lent their voices and support. Housing is currently 14.6% of GDP. The ruling means companies that supply construction companies with essential goods will also be permitted to stay in business. It is important to note the ruling from DHS is an advisory; it can be superseded by specific directives from the states. Some states have enacted orders that impact builders.
CV19 and Home Sales
Real estate has been declared an essential industry. However, both the National Association of Realtors (US) and the Canadian Realtors Association report that realtors are taking many precautions when showing listings in states and provinces where showings are still permitted, including prohibiting children, asking clients to open all the closets, drawers and doors so buyers do not have to touch anything, wiping everything down before and after and of course telling people who are experiencing any symptoms or are ill to stay home. Realtors are providing individually packaged beverages and treats instead of providing communal snacks. Virtual tours and virtual meetings are becoming much more common as people look for safe ways to move forward buying and selling homes. Many real estate boards have recommended against open houses and in-person sales activity, but even doing things remotely through video and virtual tours requires a team to go to the site in order to create the tour.
NAHB Chief Economist Robert Dietz:
The Federal Reserve’s actions have stabilized credit markets, with the 10-year Treasury near 0.8%. Mortgage interest rates have stabilized at above 3.5%. However, the residential mortgage market needs additional support for mortgage servicers who are projecting large cash shortfalls.
Based on survey data from the last week of March, NAHB compiled the top recent challenges reported by builders in the current environment. Falling buyer traffic was cited by 80% of builders, with half of respondents noting a major decline. Material supply issues were also noted. NAHB plans to survey the potential for third-party and virtual construction inspections, and in the April HMI, they will explore builder finance conditions.
CV19 and Construction Projects
The Associated General Contractors (AGC) said that many states and cities are allowing construction projects to proceed, but many are shutting down anyway as more shelter in place advisories are issued. Commercial projects are harder hit than residential building because these projects are planned many years in advance and truly rely on a robust global supply chain. However, many American builders have stockpiles on hand, especially for projects already in the works, and say they can continue operations for “quite a while” if allowed to.
Sourcing building materials will be challenging. Materials such as concrete and lumber can be domestically sourced, but countries like Italy and China, which have been profoundly impacted by the pandemic, are major players in this normally robust global supply chain. In addition to items like Italian marble, Chinese copper, and ceramic tile from Brazil, Turkey, Spain, and elsewhere, a slew of materials and equipment sourced from across the globe—paving stones, lighting, electrical equipment, elevators, and so on—have become scarce or are at risk of becoming scarce stateside due to shipping delays, travel bans, shuttered factories, and decimated workforces. Imports from China coming into the Port of Los Angeles were down 23% in February.
Construct Connect Chief Economist Alex Carrick:
Companies will respond to CV19 differently. Those struggling to survive will scale back pay hikes and other incentives; companies experiencing surging demand will offer increased pay and many other perks.
The unprecedented numbers of people working from home will make the concept of telecommuting seem more feasible. The longer this lasts, the more entrenched it may become. However, it is more difficult for construction workers to work remotely than those in many other industries.
An increase in online shopping may eventually give a boost to the construction of more ultra-large warehouses and fulfilment centers and a hiring blitz as companies search for employees to staff them.
The trend towards the globalization of supply chains was undertaken to save costs, but now it is clear that it comes with unexpected risks. The concept may come under review as world trade takes a hit and projects like port expansions are shelved for a while.
When the world begins to get CV19 under control, there will be a considerable backlog of delayed economic and other activity which will create a big rebound.
In backward looking data, the January and February new home sales numbers were the best since the Great Recession, and inventory had fallen to a 5 months’ supply. The demand is there, leading NAHB to forecast housing will play its traditional role of helping to lead the economy out of a recession later in 2020.
Big Tech May be a Big Winner
With more than three-quarters of the US sheltering in place, businesses shuttered and travel and entertainment severely restricted, more and more people are adopting technological solutions to their problems. People who would not have considered ordering groceries online are now counting their blessings they are able to do so. Tech giant Apple, which people initially thought might take a big hit because so many of their parts and products were manufactured in China, is on good footing, with many factories nearly back to normal and people spending more time and money on digital services. As customers try different services, there may be permanent shifts in buying habits, according to some consumer analysts. Digital platforms that bring people together, from Facebook to video conferencing company Zoom to streaming services are all experiencing record volume. Construction has notoriously lagged in adopting technology; CV19 may spur more rapid acceleration.
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