Diane Swonk, Chief Economist
September 1, 2010 – 9:25 a.m. CT
Construction Plummets, Manufacturing Better
Construction activity plummeted 1% between June and July, well below consensus estimates, and off more than 10% from a year ago. Losses were heaviest in residential construction, which have taken a nose dive now that tax credits have expired. Commercial construction is also weak, as much of what was in the pipeline has been built and credit for new projects has been almost nonexistent since the first rumblings of the crisis in August, 2009. There are some signs, however, that rents are beginning to rise in some of the worst-affected housing markets as homeowners abandon their homes for apartments, which means that the fundamentals of some new commercial projects are shifting. Indeed, real estate investment trusts and insurance companies are beginning to dip their toes back into the commercial market, which could help construction activity down the road. The lead times are so long on big projects, however, it could be two-to-three years before we actually see those gain - far too long a period for builders holding on by their fingernails today.
Even public sector construction fell, as much of the earlier stimulus worked its way out of the system. Also, Illinois, which was a large recipient of public highway funds lost a tremendous amount of activity to a strike by construction workers who were seeking better healthcare benefits. They have now returned to work, which is evident anywhere one drives in the Chicago area.
On the brighter side, the ISM index of manufacturing activity regained momentum in August, suggesting that exports remain a driver of economic gains. Growth abroad is now critical to keeping our moribund domestic economy going.
The Bottom Line: Stimulus played a key role in supporting the recovery, and we are struggling to keep things going now that earlier interventions and fiscal stimulus are playing out. The Fed will likely move to do what they can at their next meeting on September 21. Our options, however, are limited and we are likely to have to live with very weak growth and a way too high unemployment rate for some time to come. I really want to be wrong on this.
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