Market Trends January 2022
Dodge Construction Forecast
Dodge Construction believes that the economic recovery has resumed following a setback in the third quarter and construction should follow suit. Dodge predicts a 12% increase in the dollar value of construction for 2021 with an overall 6% increase for 2022. With prices rising and materials and labor in short supply the ability to do more with less will be essential in order to keep moving forward. Meanwhile, more people working remotely and low interest rates continue to fuel the residential market, although the pace of starts is slowing.
The various forecasts for housing starts all agree that starts will drop next year from 2021 highs. ConstructConnect estimates a 16.7% increase in total residential work for 2021 and an additional 10.5% boost in 2022. Alex Carrick, ConstructConnect’s chief economist, noted that residential is currently accounting for half of the total volume, even though it’s traditional share is about 40%. Dodge forecast that single-family starts will end the year up 16% and increase another 4% in 2022. NAHB estimates that total housing starts will rise 13% in 2021 but will fall 1.7% in 2022
NAHB forecasts that single-family home starts will be up 10.7% in 2021 but inch up just 0.2% in 2022, and multi-family starts will drop 6.2% in 2022 after rising 19.3% in 2021. However, Robert Dietz, chief economist for NAHB, noted that even a flat year for single-family starts in 2022 will represent more than a 20% gain over pre-pandemic construction levels in 2019. All economists agree the substantial and unsustainable run-up in home prices during 2020 and 2021 will make affordability a key issue in 2022.
GDP Forecasts Revised
The rapid spread of the Omicron variant and continued outbreaks of Delta caused forecasters to revise GDP forecasts for the first quarter downward, as the outbreaks led to the cancellations of thousands of flights and events and a sharp pullback in entertaining and shopping in person. Forecasters expect that the first quarter slowdown will be temporary and activity in subsequent quarters will more than make up for it.
The Fed revised their previous forecasts for GDP, inflation and unemployment. They now expect GDP to grow 4.0% in 2022, up from their previous forecast of 3.8%. The Fed’s forecast for inflation in 2022 was also raised to 2.6% from 2.2% previously. The Fed sees core inflation at 2.7% in 2022 versus its previous estimate of 2.3%. The Fed lowered their forecast for unemployment and now expects a rate of 3.5% this year, down from its previous projection of 3.8%.
Goldman Sachs lowered their forecast for GDP for Q1 2022 to 2% from 3%, cut Q2 outlook to 3% from 3.5%, and Q3 forecast to 2.75% from 3%. They cut the forecast because President Biden’s massive Build Back Better bill has little chance of passing now that moderate Democrat Senator Joe Manchin has withdrawn his promised support. However, Goldman is holding off on a full-year forecast as their economists believe it is possible that a scaled down or smaller version of the bill may pass, or some elements may be enacted. Moody’s cut their Q1 forecast from 5.5% growth to 2.2%.
Fed Sees Rate Hikes Ahead
The Fed's plans to raise its benchmark short-term rate three times this year and pull back bond purchases more quickly than previously announced. The new targets, announced at the Fed’s two-day meeting in December, are up from just one rate hike projected in September. Economists say it is likely that the rate increases will start in the second half of the year. The Fed's key rate, now pinned near zero, influences many consumer and business loans, whose rates would likely also rise. The run-up in prices has persisted longer than the Fed expected and has spread from goods like food, energy and autos to services like apartment rents, restaurant meals and hotel rooms. Rising prices have weighed heavily on consumers, especially for lower-income households. Rising prices can also cancel out the higher wages many workers have received. The announcement is an indication that the Fed sees inflation as a bigger threat than unemployment, which has fallen quickly to a healthy 4.2%, down from 4.8% at its last meeting. Consumer prices soared 6.8% in November compared with a year earlier, the fastest pace in nearly four decades.
FTC Looks into the Supply Chain
The Federal Trade Commission (FTC) is looking into supply chain issues and problems. They asked several big companies, including Amazon, Procter & Gamble and Walmart, how they are handling supply chain slowdowns and problems. The FTC was quick to point out this wasn’t part of any law enforcement action. Rather, they want to understand the reasons behind the widespread supply chain problems that have hampered economic growth. However, companies are required to respond with 45 days and provide details about how they are navigating the supply chain crisis.
In a meeting with President Biden, Walmart CEO Doug McMillion said that their inventory levels were up by 10% ahead of the holiday season and they believe that port and transit delays are improving.
A new 90-day incentive programs for containers to be picked up more quickly from the ports of LA and Long Beach was instituted in December by CMA CGM Group, one of the largest international carriers.
The Transportation Department said they would extend the flexibility on the number of hours truck drivers can drive through February and allow users of terminal gates at ports to be exempt from paying fees for night and weekend pickup of containers. Labor problems are particularly acute for big-rig and long-haul trucking firms because their drivers need more credentials, including commercial drivers’ licenses, and insurance companies often demand two years’ experience before they will provide coverage.
Costs have risen exponentially, with the cost of bringing a standard shipping container from China to LA now $18,730, more than 13 times the pre-pandemic price, according to the Freightos Index. Long-distance trucking costs have risen 27% over the same time period, according to the Bureau of Labor Statistics.
The fact that many companies are buying more than they need and stockpiling parts and components is actually contributing to shortages. Supply chain consulting company Proxima expects companies to emerge from the pandemic with a hybrid procurement model that blends the elements of traditional just-in-time operations with the more cautious and costly “just-in-case” model that developed during the pandemic.
The share of total imports goods from China has fallen from almost 21% of total imports in 2019 to 17.5% through the first nine months of 2021. Many companies have adopted a “China+One” manufacturing and procurement strategy to try and lessen their dependence on China. Vietnam, India and Indonesia have become more important centers for manufacturing and procurement. China is also experiencing shortages of labor and containers and dealing with supply chain problems.
When will the supply chain get back to normal? Some business analysts believe that unless demand falls it could be late 2022 or even 2023 before the global supply chain begins to regain some degree of normalcy. Since April 2020 consumer spending on goods has jumped 32% and is now 15% above the pre-pandemic level in 2019. Goods now accounts for 40% of consumer spending, up from the category’s 36% pre-pandemic share.
Second-Home Construction Booming, Urban Exodus Slowing
The second-home building market is booming and the mass exodus from cities to suburbs and beyond has slowed and in some areas reversed, according to NAHB’s third quarter Home Building Geography Index (HBGI).
Workers transitioning back to the office spurred a rebound in housing production in urban core markets and fueled growth in exurban areas. The four-quarter moving average for large metro core area single-family permit growth between the third quarter of 2019 and 2020 was 5.6%, while exurbs grew at a rate of 12.3%. Over this same four-quarter period between 2020 and 2021 new permit rate of growth increased to 21.1% for large metro core markets and 30.8% for the exurbs.
Second home markets continue to see construction growth. The permit growth rate was higher in traditional second home markets (counties with a large share of existing second homes). Between the third quarter of 2020 and 2021, the growth rate for single-family home building in these second home markets was 36.1%, compared to an average of 23.2% for non-second home markets.
Big-name tech firms such as Google, Lenovo and Intel cancelled plans to attend January’s Consumer Electronics Show in Las Vegas, joining an exodus fueled by fear of Covid-19. The three are part of a growing list of companies opting not to put employees at risk by staffing events, exhibits or briefings at the annual gadget extravaganza. Facebook parent company Meta, Amazon, T-Mobile and Twitter also canceled their appearances. Exhibitors confirmed to attend had topped 2,100. Show organizers offered free Covid-19 rapid testing kits to attendees as an added level of safety and reminded all attendees that they must be fully vaccinated.
Another major conference planned for January, the World Economic Forum, is delaying its annual meeting of the world’s economic leaders in Davos, Switzerland, due to Omicron. They hope to reschedule for summer.
Many companies have once again delayed plans to have employees return to the office and some universities have already postponed the start of classes or gone virtual.
Retail Crime Spree
Organized retail theft has become an even bigger issue than usual, with retailers plagued by well-run gangs and flash mobs that overwhelm a store and make off with thousands of dollars’ worth of merchandise in just minutes. The National Retail Federation estimates that $719,458 dollars were lost to theft for every $1 billion in sales.
Criminals are capitalizing on the anonymity of the internet which makes it easy for them to unload stolen brand-name goods. Thieves were captured on camera making a raid on one Home Depot store and making off with sledgehammers, undoubtedly to use in attacking other retailers.
CEOs from 20 major retailers, including The Home Depot, asked Congress for help. There is some bipartisan support for the Integrity, Notification and Fairness in Online Retail Marketplaces (INFORM) Consumers Act, which aims to increase transparency for online retail marketplaces, slow the sale of counterfeit goods online and increase verification protocols for buyers. Organized crime and looting that takes place during business hours while customers are present has caused some retailers to close stores in high-problem areas.
Point of Sale Activation is one tool that retailers are using to deter the in-store theft of pricey power tools and other electronics. POSA is powered by Bluetooth technology built into certain products with an on/off switch that must be activated at the register. If it isn’t, the product won’t turn on, making it worthless to thieves. The Home Depot has been testing a POSA system and plans to extend its use to more stores and potentially more product categories.
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