The PNC Financial Services Group’s outlook for the November/December period was one of many that saw more favorable economic conditions ahead in 2014. While not predicting anything close to robust growth, PNC economists expect an improved start to 2014 because of higher consumer spending at the holidays and continued favorable borrowing conditions.
Downplaying consumer polls, PNC predicted an increase in holiday spending “because two million more people have jobs, stock prices are up nearly 25 percent, house prices are up by more than 10 percent, and gasoline prices are lower by 15 to 20 cents per gallon (saving consumers over $2.5 billion) during this upcoming holiday season compared to one year ago.”
Among other highlights in the Outlook, PNC forecasts unemployment to fall to 6.5 percent by the end of 2014, noting at the same time that they did not expect that to trigger an increase in interest rates until unemployment fell to 6.0 percent. In fact, the forecast for the bellwether ten-year Treasury is below 3.5 percent in 2014. PNC economists expect GDP to be more consistent but remain at 2.5 percent in 2014 and consumer inflation to be two percent. Their prediction of incoming Federal Reserve Chair Janet Yellen is for a gradual tapering of the $85 billion monthly bond purchase program that will end as 2014 closes.
A surprising number of analysts – and even a couple of Federal Reserve presidents – are pointing to more even robust growth in 2014 than the economists at PNC. While there is hardly unison on the reasons behind the more optimistic outlook, the improved pace of hiring, increased consumer spending on durable goods and the depletion of the housing inventory overhang are noted as signals of growth above three percent. Several are pointing to a stronger European market as well. Such improvement in the Eurozone would be welcome news in China and India, which in turn would benefit U. S. exports.
The recovery in Europe is hardly a sure thing, however. While austerity has worked to dial back the crises in the member nations with fiscal woes, like Italy, Greece and Spain, the health of the economies there is only marginally better. And although there seems to be better prospects for Germany and France businesses, the boogeyman in 2014 will be politics rather than sovereign debt.
Germany’s Angela Merkel was re-elected chancellor on December 17 but her victory required an uneasy coalition-building between her Christian Democrats and the Social Democratic party. The resulting government will likely focus more on issues like a national minimum wage and greater integration with the European Union and less on pro-business issues.
In May 2014, the European Parliament has its elections and the litany of Euro problems of the past three years – high unemployment, spiraling debt, austerity, German surpluses and the growing friction with America – has fueled the rise of alternative party candidates. Optimism about Europe’s recovery rests on the ability of the current leadership of the European Union to weather challenges from alternative politics and for the businesses and consumers in the more prosperous nations to begin to spend more. Any increased demand from the EU will make a small contribution to U. S. growth.
It has been politics in the U. S. that have added a level of unnecessary uncertainty to the economic outlook. Assuming that the deal down to end the government shutdown in October does not lead to another in the first quarter, the loss in fourth quarter gross domestic product – which economists expect to be about half percent – should be recaptured in the January-to-March 2014 period. With hiring continuing to improve at a rate that is faster than expected, a more robust beginning to 2014 would set the table for higher growth.
Real GDP increased a surprising 4.1 percent in the third quarter, up from 2.5 percent in the second quarter, the Bureau of Economic Analysis reported on December 20. Analysts cited a number of reasons for the higher growth but most pointed to unusual inventory building as the main driver, suggesting that without higher consumption, there will be an ‘echo’ decline in quarter four. While there is historical backup for that theory, it is also possible that observers are unwilling to concede a more robust economy at this point.
Private investment in nonresidential structures rose 12 percent for the quarter and 18 percent year-over-year. Residential investment increased 14 percent and 15 percent, respectively. Government investment in structures jumped 6.7 percent. Federal spending on structures fell in the third quarter but state and local government investment in structures rose 7.2 percent. While fourth quarter GDP is expected to decline due to the shutdown, growth over two percent would set the table for 2014.
Government data also showed a steeper decline in first time unemployment applications and a stronger hiring in November. The Labor Department reported 203,000 new jobs in November, the third month in the past four that exceeded the 200,000-job level. Unemployment also
dropped to seven percent. The lion’s share of the change in unemployment came from government workers returning to their jobs after the shutdown; however, the report also showed a surprising increase in the number of civilians working in November, with a 63 percent labor participation rate.
These data suggest that real economic recovery is underway. Some of the construction industry’s leading economists see signs of that recovery trickling down.
The chief economist of the American Institute of Architects sees the trend in billings in architects’ offices as a reinforcement of the improvement to come. Dr. Kermit Baker notes that although the November survey of architects showed a decline from October to 49.8, the Architectural Billings Index (ABI) has shown increased billings for an extended period.
“The [Architectural Billings Index] has been positive for twelve of the past thirteen months, which is very positive for 2014 and into 2015,” he explains. “All regions of the U. S. are also now seeing above 50.”
Baker predicts that construction growth in 2014 will be in the high single-digits. The AGC’s chief economist, Dr. Kenneth Simonson, is forecasting increases in construction of a similar magnitude for 2014 and the next few years. Simonson expects gains of six-to-ten percent to be driven by the effects of what he calls “shale gale” – the robust growth in shale gas exploration in multiple regions – and the “residential revival” underway. He sees single-family construction slowing but the demand for multi-family apartments continuing past 2014. Simonson sees potential drags on construction from the continued government budget issues, the rapid growth in online shopping to cool off retail and the decline in office space needed per employee.
Even with these potential limiting factors, the current construction activity reflects the continued recovery from the recession and the under-building that followed. Both office and retail vacancy rates continue to decline. The supply/demand dynamics for commercial real estate are still supportive for increased construction.
In the multi-family category it is unexpected demand that is pushing rents and new construction higher, even as single family prices rebound and the overhanging inventories shrink. During past housing cycles such a rebound in home values spurred more buying and new construction; however, the rate of household formations is currently working against the need for new home construction.
Growth of renters has outpaced that of buyers since the 2006-2007 housing market peaks. After reaching 1.5 million new homeowners during the 2004-2005 periods, the growth of home ownership declined precipitously, with home ownership actually declining since 2008. During that same period the number of renters spiked, adding more than half million new renters during the recession and then more than 750,000 new renting households annually since 2010. The number of new household formations – regardless of whether from renters or buyers – has remained below one million since the housing bubble burst, even though net population growth has averaged about three million people each of those years.
For these reasons, the consensus forecast for new residential construction remains below one million units for 2013 and only crosses the 1.5 million mark again in 2015; nearly a decade after that level was last seen during the housing boom.
One significant factor that had been holding back the housing market showed continued improvement in November. Zillow Inc. reported that the percentage of homes with mortgages that had negative equity dropped to 21 percent from 23.8 percent in the second quarter. The share of owners with at least 20 percent equity climbed to 60.8 percent from 58.1 percent, making it easier for them to list properties and buy a new place. Continued price appreciation should boost the numbers of ‘move up’ buyers, one of the key consumers of new construction.
Another potential source of demand for new homes that exists is the so-called ‘boomerang buyer.’ These buyers would be homeowners who went through foreclosure or sold to de-leverage after the housing crisis and are poised to return to the market. That cohort numbers in the millions of households, but what is unknown is the share that is both willing and qualified to finance a home again.
The nation’s homebuilders seem to be seeing improved conditions as well. The Housing Market Index compiled by the National Association of Home Builders (NAHB) was at 54 in November. This marked the sixth consecutive month that more home builders viewed market conditions as good rather than poor.
A surge in public construction spending in October pushed total construction higher than any month since May 2009. Public construction spending increased 3.9 percent for the month but year-to-date totals lagged 2012 by 2.8 percent. Within the total public outlay, heavy and highway construction increased 0.6 percent in October and 0.3 percent year-to-date. Educational projects jumped 8.5 percent for the month but were 8.5 percent lower than 2012 through the first ten months.
Total construction put in place in October totaled $908 billion, 0.8 percent higher than in September. The total for the first ten months of 2013 was five percent above the total for the same months in 2012.