A 2019 Outlook
As of July 2019, the United States economy has experienced its longest economic expansion in its history. Although there is no reason to believe that a downturn is imminent, there are many economic factors that could indicate a slow down, maybe as soon as late 2020. Economists point to several leading indicators that typically precede a downturn, but they are tempered with positive indicators as well. Market volatility, unemployment dipping below the natural unemployment rate, a softening global economy, new tariffs and increased interest rates are counterbalanced by business and consumer confidence, expectations of interest rate cuts, a decline in construction material prices and tax reform incentives.
Labor Opportunities in the Construction Industry
The U.S. economy is experiencing a dramatic labor shortage. Unemployment is so low it is causing labor constraints on the economy. While it has been extremely hard for contractors to cope with the lack of skilled labor, there is a bright spot in that, over the past 12 months, the construction industry has added more than 250,000 net new jobs.
Material Cost Changes
For the last half of 2018 through June 2019, the U.S. experienced 12 consecutive months of increased material costs. Leading the list was prepared asphalt and roofing/siding materials with a 7.5 percent increase year-over-year. Also on the list were steel mill products, plumbing materials and fabricated structural metal products. With the softening global economy, construction prices have started to level off with the exception of plumbing material prices.
International trade issues are still in question. How will steel tariffs affect pricing of materials from suppliers and subcontractors? Potential trade deals with China and Mexico could influence material expenses as well. All these factors weigh on consumer confidence. The Construction Financial Management Association (CFMA) CONFINDEX™ Quarterly Reading reported the lowest level of confidence by construction company CFOs since 2010.
Lower Interest Rates
There has been a lot of upward movement over the past three years in the prime interest rate to its highest level of 5.5 percent. In response to negative economic pressures and to help hold off a recession, the Federal Reserve recently lowered interest rates for the first time in the past decade to 5.25 percent. It is expected that the Federal Reserve may lower interest rates at least one more time in 2019. This is bright news for stockholders, small business owners and investors in the commercial real estate market.
Growth in the Midwest
As reported by the U.S. Bureau of Labor Statistics, Current Employment Statistics Survey April 2019, the top 25 largest metro employment growth communities include Chicago/Naperville, St. Louis, Minneapolis and Detroit. This is great news for the Midwest; however, the Midwest is also home to the rust belt and will likely feel the effects of new steel tariffs.
A 2019 Outlook
While the 2019 outlook remains bright for the construction sector, companies should consider developing an economic downturn plan. Bolstering your balance sheet strength, restructuring debt and controlling overhead costs are ways to help recession-proof your construction company. “There is always some chance of recession in any year. But the evidence suggests that expansions just don’t die of old age.” – Janet Yellen, former Federal Reserve Chair.