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Construction National Outlook – November 2015

Through three quarters of 2015, construction at the national level has grown robustly. Data from all sectors of the construction industry shows higher activity, dramatically higher in some sectors. Even those construction categories that reflect consumer confidence continue to show strong growth over 2014. If there are real threats to the U.S. construction economy the evidence is only manifest at the fringes of the market.

When allowed to operate free of stimulation or regulation, the construction market is an excellent barometer for the overall economy. Homebuilding reflects the confidence of the consumer in his or her job and the prospects for future financial security. Commercial construction expands when the number of workers increases or the demand for goods and services requires more shops or warehouses. Leisure and business travel increases in a healthy economic environment and more hotels and recreational facilities follow. Even public construction could be an indicator, as more and fatter paychecks mean higher tax revenues and more capital spending (alas, government has long ceased to operate with fiscal logic).

Taking all that into account, the year-over-year growth for construction should be seen as a referendum on the U.S. economy. Businesses and consumers are voting for growth with their wallets; yet, there are plenty of cautious signals about this point in the business cycle.

Perhaps the most-watched sign about the direction of the economy is the impending decision by the Federal Reserve Bank to raise interest rates. The rate increase itself is virtually inconsequential. No one expects any increase to be greater than 25 basis points and even that quarter of a percentage in borrowing costs is already baked into lending and investing. The significance of the rate increase is that it would mark the final milepost in the Fed’s belief in a full recovery from the Great Recession and should be the first step towards the normalization of rates.

Most economists were expecting that the Federal Open Markets Committee (FOMC) would have raised the money-trading rate by 25 points in summer 2015, likely in the August meeting. The correction in the stock markets and the further weakening of the global economy – notably in the Chinese economy – were enough for the rate doves to persuade the FOMC to stay the zero-interest course. After the August meeting, a survey of the 17 FOMC members revealed that a strong majority of 13 believed an increase should occur in 2015; however, only two more opportunities to do so exist. It will be until November 18 that the discussions and decisions made at the October 27-28 FOMC meetings become public.

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