Macroeconomic Rebound in Focus

The shape of the macroeconomic rebound is coming into focus as 2020 nears its end, said Connor Lokar, ITR Economics, during the GlassBuild Connect presentation on Sept. 8. Lokar, who described “macroeconomic carnage” during the July NGA Glass Conference, painted a picture of the shaky economic rebound, how construction fits into the economic landscape and what companies might consider as overall construction can anticipate a dry spell through 2021.

Encore presentation: Annual Industry Economic Forecast with Connor Lokar, Tuesday, Sept. 22, at 4 p.m. ET. There is a $50 registration fee for this session; complimentary with promo code from a GlassBuild Connect exhibitor

From a technical GDP perspective, the U.S. has been in a recovery for nearly 50 days, said Lokar, but construction is a lagging sector and, as such, the industry likely hasn’t experienced the full effects of the economic shutdowns earlier this year. 

Nonresidential Construction

Although the worst is behind us from an economic standpoint, says Lokar, the opposite likely holds true for the commercial construction industry. Most in the construction industry experienced immediate disruptions related to the shutdowns and picked up where they left off with preexisting projects; however, few have felt the full force of the demand pullback.

The next chapter will stem from top of the funnel issues such as what projects did not get greenlit and calls that aren’t going to architects, says Lokar. He anticipates a “lingering hangover in terms of absence of new work” and encourages professionals to tighten and lengthen existing backlogs and keep cash flow going before things come back online.

The nearly half-trillion dollar nonresidential construction market is just moving into a recessionary trend now, says Lokar. “There’s a pretty significant pullback coming in nonresidential construction,” he predicts. History indicates the sector continues falling long after the economy bottoms out. “The worst is yet to come for non-residential construction spending,” Lokar cautions. He anticipates seeing issues, or at least a lack of demand, until the mid-point of 2021, with some market downturns, such as office and lodging construction, lingering throughout 2021.

Lokar encourages people to pay attention to the American Institute of Architects’ Architecture Billings Index. Any reading below 50 is a bad number and right now, the commercial/industrial sector national number is at 35.4. “We think it’ll contract 10, 12, 14 percent year over year, at worst,” Lokar says. “It’ll take until 2022 until we see those growth rates get resoundingly positive.”

The publicly funded project side isn’t a “green pasture” either, says Lokar. State budgets took a “huge hit” and tax revenue had its most severe second quarter drop off in the history of the data set, dating back to the 1940s. Lokar thinks the market for publicly funded projects will hold up relatively well in 2020, which would be consistent with the precedent set in the Great Recession where it took nearly two years after the GDP bottomed out for publicly funded projects to go into the a recession, where they stayed for a while. That market will face issues in 2021 and perhaps even into 2022 and 2023. “We think that’ll dry up to a relative extend next year as states have severely mangled budgets,” Lokar says.

Macro Trends to Watch

Lokar acknowledged that though most are “COVID’ed out at this point,” it remains a chief driver among economic uncertainty right now and can’t be ignored. “The dust hasn’t even begun to settle,” he says, when assessing the true damage of COVID-related economic affects. 

ITR Economics is closely monitoring what governors are doing. “The recession isn’t a direct byproduct of the pathogen itself,” explains Lokar. “It is more of an outcome of the shutdown measures that were ultimately taken to flatten the curve.” State reopening status is what matters right now, economically speaking. Lokar shared a map from the New York Times indicating approximately 10 states are reversing their reopening measures but that the majority are in “reopened” and “reopening” statuses.

Leading indicators ITR Economics follows all indicate the economy is set to rise, which is “why we’re so confident in a great 2021,” says Lokar. One of its own charts that tracks week-over-week economic trends shows a positive trend, but Lokar notes it is still off almost 4 percent compared to one year ago.

Nearly two-thirds of the U.S. economy is rooted in personal consumption. “The ability to go out and spend drives the economy,” Lokar says, which is why the shutdowns were so damaging. People resuming their retail spending habits is crucial to macroeconomic recovery and will stabilize the GDP, thereby stabilizing the economy so construction can confidently move forward.

The Stimulus Affect

The stimulus measures Congress passed earlier this year were “incredible in scope and dollars” and what Lokar described as “gargantuan” in comparison to the stimulus packages passed in 2008 and 2009. The Fed “emptied the kitchen sink, came out, fired both barrels and was on the scene very quickly,” Lokar said. “They threw everything they had to this.”

Although the money was supportive to the business cycle in the here and now, Lokar says the stimulus is akin to “pouring water on today’s fire and dumping gasoline on tomorrow’s fire.” He anticipates serious long-term debt issues. The government didn’t have that sum of money to spend so it will need to tax it back; print it, thereby causing inflation; or just continue borrowing. Millennials, Gen Xers and perhaps even some Gen Zers will assume most of that tax burden, says Lokar. 

The CARES Act didn’t prevent a recession, but he said the second quarter numbers “almost certainly” would have been worse in the absence of the act. The downfall was quick – a 9.5 percent decrease quarter over quarter – and Lokar predicts it will take until mid-2022 for the economic pie to become as big as it was at the end of 2019. “This was a mega downturn that will take a long time to get out of,” he says. 

The stimulus yielded some unintended consequences, too. “Every government decision is a trade off,” Lokar explains. “It always has outcomes and unintended consequences, and unintended consequences often exceed the intended consequences they’re trying to generate.” One such example is uncertainty with businesses that qualified for PPP loans and today’s lack of clarity around loan forgiveness. Another is labor market distortion from the juiced up unemployment benefits that, while vital to many recipients, are now hurting businesses looking for hourly wage workers as would-be candidates would actually take a pay cut to re-enter the workforce. 

Strength in Housing

Lokar says housing was set to have “a killer 2020 before it stumbled in March and April.” Nevertheless, the market is still a very positive signal with what he calls impressive single-family housing numbers and mortgage rates that are supportive of growth in single-family housing starts. He anticipates housing starts to continue their upward trajectory and encouraged suppliers to prepare for higher demand throughout the next year. 

Despite his bullishness on single-family homes, Lokar is rather bearish on multifamily housing, anticipating a decline of 7 to 8 percent in the next year as more people work from home and move away from urban cores.