ITR Says No Recession for the U.S.

Written by Sandy Williams

Each quarter ITR Economics and HARDI offer a forecast on the construction industry. Steel Market Update provides a summary of that forecast on a national and regional basis. This week we are going to change our format slightly and provide the national forecast summary based on ITR’s Interactive Regional Economic Forecast Webinar. We will provide regional data in a later issue.

According to ITR, the U.S. is performing well. GDP is up 4.7 percent and U.S. industrial production is on the rise. The economy continues to expand but at a slower pace. No recession is in sight, says Alan Beaulieu, economist with ITR, just an economy that is going to “cool itself” in response to Europe and Asia.

Beaulieu says there is a phenomenon of a “recession hangover” that is still in the U.S. psyche. “It is not going to happen,”says Beaulieu.

Industrial production is growing, but slower in 2015, with a pick-up in activity forecast for 2015. The economy is in a positive environment, including the stock market, says Beaulieu. The rate of growth in the market is starting to “bleed off” and that is another sign of a slower growth.

Of concern to steel producers and distributors is galvanized steel prices. ITR says galvanized prices will continue to soften throughout 2015.

Oil is the big topic of the day and the low prices are affecting other commodities. The Cusing Hub Inventories, with a 16-month lead time, is a good indicator of future oil pricing, says ITR, and indications are oil prices will remain low.

Beaulieu says that ITR would not have predicted such low oil prices two months ago. The current low prices have more to do with politics then economics, he says. The U.S. has become a major oil producer adding significantly to the supply. Saudi Arabia and Russian production continues to be high as well. “The question is who will back down first” says Beaulieu, and cut back supply. “No one,” he answered. ITR expects that prices will start to pull back up slightly late in 2016 as the Chinese economy picks up and the economic conditions in Europe improve. From a political perspective, the low oil prices are hurting Russia, Iran, Venezuela and Nigeria a lot.

“Both sides of this equation, the Saudis and the U.S., can be quite happy with the pain being caused in these other nations. These other nations are not about to cut back on production until they have to. Their economies will be suffering tougher times ahead because of these low prices, which may be the political goal in the end,” said Beaulieu.” “It does work out to both governments best interest for this to happen,” he added, such as punishing Russia.

ITR sees oil prices staying soft in 2015 with upside pressure in 2016.

The Consumer Price Index has been staying down, with low interest rates that are good for home purchasing and the housing industry. Mortgage rates are expected to see some upside pressure late in the year. ITR forecasts 30 year rates of 7.25 percent in the longer run, but not until 2018.

Another sign of a softening economy is retail sales. There was record high spending in December but the November to December increase was a bit milder than the 10 year average. When you take out automobiles the rate of decline is more noticeable. The auto increase wasn’t as good as the media reported. The November to December rise of 15.77 was less than the increase in Dec 2008, well below the 10 year average of 23.48 percent. “So it wasn’t a particularly a good month,” said Beauliu, “the newspapers got it wrong—try not to be shocked. And, we have a sign here things are perhaps beginning to cool off in a very important industry as we go forth.”

Multifamily housing starts continue to outperform single family starts. Multifamily is growing at a 14.6 percent annual rate while single family’s growing at 4.8 percent, compared to 2013. Part of this trend is due to demographic changes, said Danielle Marceau, economist at ITR Economics. Current statistics show that women marry at 27 and men at 28, thus extending the time before marriage when home buying usually occurs. Also, says Marceau, the millennial generation is migrating to major cities to experience urban city life, resulting in more apartment demand.

ITR forecasts total new construction will slow slightly to 6 percent year over year growth.

Commercial building construction is expected to decelerate in 2015 and continue into 2016. Although businesses have money and banks are lending, corporate profits, which are a long lead-time indicator for commercial construction, are falling off.

Office vacancy is up but, contrary to conventional wisdom, office construction spending is increasing. The acceleration is due to customized office space and data center buildings.

Retail and hospital building construction are both down. Hospital building contracted 9.1 percent year over year. Concern over the Affordable Care Act and insurance receipts, along with overbuilding in 2008 and 2009, are adding to the weakness in the first half of 2015. ITR says there may be some improvement in the last half of 2015 continuing into 2016.

State, local and federal receipts are accelerating and as the economy continues to improve over the next three years, government construction spending should accelerate as well.

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