The coronavirus outbreak has spurred mixed reactions from economists across the world, with some tying the pandemic to a likely recession. But the US had already been in the midst of decelerating economic growth even before the coronavirus caused global panic, said AllianceBernstein’s Travis Allen during the Associated General Contractors of America’s annual convention last week.
“There is no real historical precedent for COVID-19,” Allen said.
However, while the pandemic remains a massive wild card for the global economy, there are some well-established metrics that businesses and economists can monitor. The “real issue” is the correlation between weakening corporate confidence and CEOs pulling back on capital expenditures, Allen said. However, he believes the best indicator of a recession is an uptick in unemployment. He also noted that if the unemployment numbers are weak, there’s a chance consumer confidence could dip. In February, the unemployment rate was 3.5%, according to the Bureau of Labor Statistics.
“If six months from now we’re at 4.2% or 4.3% unemployment off a base of 3.5%, the odds are the economy’s started turning,” Allen said. “So it’s really important to pay attention to the direction of these numbers.”
Allen predicted Wednesday that the Federal Reserve would “throw all of its cards on the table” to limit economic damage from the coronavirus. The following day, the Federal Reserve pumped $1.5 trillion into short-term lending markets. On Sunday, the Fed announced it would cut interest rates to nearly 0%, but Allen maintains when interest rates are already very low, it’s hard for further cuts to provide a tangible boost to the economy.
“Apple’s not waiting around for lower interest rates to make investment decisions,” Allen said. “There’s only so much the Fed can do at this point to produce growth.”
Allen noted that China and Italy have already announced massive fiscal spending programs because they realize there’ll likely be a period of very little growth. He said the US is likely to follow a similar approach of combining fiscal and monetary stimulus to soften the impact of the slowdown in economic growth.
Another factor to consider is the role of the upcoming elections in November. Allen said that while economists have traditionally not seen a link between elections and the economy, the global populist uprisings on both sides of the political spectrum are likely due to insufficient growth.
“My big concern is that we’re going to end up going from guardrail to guardrail from a policy standpoint, and that’s detrimental to economic growth,” Allen said.
Looking ahead, Allen made five predictions for the decade:
- Returns will be lower than they were during the 2010s due to slower economic growth, profit margin contraction, limited valuation expansion and low interest rates
- Non-US equities will outperform US equities
- Real interest rates will remain at current levels, with mixed demographics leaving the supply and demand for capital largely unchanged
- Investors will increasingly prioritize responsible investing and alternatives
- Tax rates will be higher
Outlook for construction
The coronavirus outbreak has already begun disrupting global supply chains in every industry, but the economic outlook for construction is changing “day by day, not minute by minute,” said Ken Simonson, chief economist for the Associated General Contractors of America.
Simonson said that US construction companies can take solace in the fact that the coronavirus showed up right as China was already shutting down its economy for the lunar new year. He added that while it will take a bit of time for Chinese factories to start up again, inventories already in the US seem to be sufficient to keep some small projects going.
However, for big projects, coronavirus-related disruptions to material supplies have major implications, Simonson said. Stadium construction is one of the biggest markets that could see ripple effects.
“A bigger concern for that type of project is that teams may be allowed to play, but fans may not be able to come to the stadium,” Simonson said. “Lenders that were counting on revenue from the parking, admissions and concessions may not get paid on time. It certainly has implications for the next project down the line.”
At the job site level for other projects, Simonson suggested the coronavirus could cause a crane operator to self-quarantine or cause truck drivers for concrete companies to not show up with shipments.
“I’m not saying this is going to be a big shutdown for construction throughout the country, but we’ll hear more and more cases of that,” Simonson said.
Simonson believes the pandemic might cause short-term disruptions to job growth in the industry, but that the US economy should continue to add jobs this year. He is optimistic about the prospects for single-family homebuilding due to a consumer-friendly market benefiting from low interest rates, rising income and wealth. He also thinks construction in the power and energy sector will remain strong as demand increases for solar and wind projects.
Simonson said the market for highway and transportation projects should continue to flourish as state highway funds and toll projects increase. He also predicted a robust market for public-private partnerships.
“I know some contractors have been burned through those partnerships and have pulled back, but the overall market I think is still strong,” Simonson said. “With the reduction in municipal bond interest rates, more states are able to fund projects with that money.”
However, the construction markets for high-end retail, entertainment, lodging and light rail could take a hit due to the coronavirus, Simonson warned. While the hotel pipeline is still large, the sector is very sensitive to interest rates and travel disruptions caused by the pandemic, he said. While the data center construction market remains strong, Simonson thinks it is unjustifiably lumped in with office construction data. In retail construction, Simonson said, the problems extend beyond the pandemic. He noted the ongoing decline in standalone retail structures as well as the number of stores closing.
Simonson predicts there will be a 2%-6% increase in total construction spending this year due to an expected 5% to 9% increase in residential construction spending. He originally thought there would be a 3% to 4% increase in input prices for construction goods and services but said he may revise that projection. However, he is standing by his 3.5% to 4.5% projected increase in wages and salaries. That’s important because according AGC’s latest contractor survey, contractors remain more concerned about the ongoing labor shortage than they are about material costs.
According to the survey, 75% of firms expect to add positions, but 81% reported difficulty in hiring. However, 32% of firms are using labor-saving equipment such as drones and GPS-guided equipment and 28% used methods such as building information modeling, lean construction and offsite fabrication to reduce onsite work time.
The rate of population change is also a major factor in the outlook for construction labor, Simonson said, noting the US experienced just 0.48% population growth between July 2018 and July 2019, according to the US Census Bureau. During that time, 10 states experienced population declines, while 32 states and the District of Columbia saw lower than 1% growth.
Correction (3/16): An earlier version of this article included an erroneous statement about a baseball stadium project in Texas. The statement about the project has been removed. The article has also clarified Allen’s position on a potential financial stimulus package.