US economy recovering from ‘sharpest recession in history’
By Jenny LescohierOctober 26, 2020
The US construction and industrial outlook is certainly challenged as a result of the global pandemic, but there are bright spots including residential construction, as well as a general expectation for some sectors to see improvement as soon as next year.
“This is the sharpest recession in history,” reports Scott Hazelton, director, construction at IHS Markit at the ALH Virtual Conference held online on 23 October. “Gross domestic product (GDP) saw a 40% loss in the second quarter, so the crawl back out of this is extensive.”
Specifically, total US construction is expected to decline 2% in 2020 and 3% in 2021 as uncertainty continues until the Covid-19 pandemic is brought under more control.
“The good news is that, despite high unemployment, residential construction has increased back to about where it was in 2019,” Hazelton states. “It’s likely to increase 4% this year, then increase 2% in 2021 before declining 1% in 2022.
“Tight housing and low interest rates are limiting declines,” he continues. “Affordability will improve as the job market and incomes increase.”
On a down note, US nonresidential construction is predicted to decrease 10% in 2020 and decline another 10% in 2021.
“Commercial projects, especially in retail and office structures, will be hit particularly hard as vacancies increase. Industrial building construction is expected to be weak as manufacturing sees a lag in the economic recovery,” Hazelton states, adding, “Despite the lack of an infrastructure bill, public spending is on track to actually increase 5% in 2020 and then decline 3% in 2021. Much will depend on road tax revenues and federal help for state and local projects.”
Hazelton reports the US housing market is storming back, following a historic collapse in April. New home and existing home sales and housing permits have risen to levels last seen in the mid 2000s.
“This is mainly because mortgage rates and inventories of homes for sale have sunk to record lows,” Hazelton says, noting the conventional 30-year mortgage rate should remain below 3.5% until 2025. “But these numbers are temporary, as housing starts will overshoot their long-run trend over the next three quarters and then settle.”
Meanwhile, Hazelton points out there is a glut of office and retail space.
“There’s too much space and it’s the wrong kind of space,” he says, noting changes will need to be made to accommodate social distancing requirements for employees and customers.
“There’ll be a lot of renovation to make these spaces fit the new normal. That could be bad news if you’re in concrete, steel or glass, but it’s good news if you’re an HVAC contractor or paint company. And it’s good if you’re in the access business; we have to get this stuff into the building.”
With major declines in consumer spending, manufacturing, agriculture, mineral resources, and international trade, Hazelton says to look for the transportation sector to decline 9% this year, but to then increase 4% in 2021 and 7% in 2022.
Air traffic should see the largest output decline in 2020 at 25%. Despite expectations for 9% growth in 2021 and an 18% increase in 2022, the air transportation industry should not see a return to pre-pandemic levels until 2023 at the earliest.
Healthy spending at big-box stores such as Walmart and Target as well as many supermarkets have helped support the trucking industry, Hazelton says, however, declines in manufacturing, trade, and other retail stores will still pressure trucking industry output by 4% this year.
“Look for a 2% recovery in trucking in 2021 and another 2% rise in output during 2022 as the retail sector, manufacturing, and trade all work to support it,” he says.
Among the many calamities characterising 2020, this year has seen a severe disruption in the oil and gas market.
“The pandemic came on very quickly, so we had no time to run down inventories,” Hazelton reports. “We had a sudden oversupply. Supply cuts have been made, but they’re not really sufficient in themselves to reduce the inventory. So we have oil at 44 bucks a barrel this year.”
Hazelton predicts prices will increase in 2021, but there are concerns over Saudi Arabia and Russia pressing more oil into the market.
Demand for oil has recovered somewhat, he says, but will likely plateau until the pandemic loosens its grip on tourism and business travel, putting more aircraft back in the sky and more cars back on the road.
“Currently we see a prolonged period of demand being barely above supply, creating a glut,” he says. “But prices will recover, that’s the good news, but they’ll recover only if we can get demand to increase and production cuts to stick.”
Hazelton notes that some theorise if Joe Biden is elected president, he will push to end plans for more drilling on federal lands, further disrupting the market.
“Let’s put some perspective on how much of our [drilling] industry is on federal lands, either onshore or offshore. I think it’s about 20%, so it certainly would move the dial, but it’s not going to be a catastrophic outcome.”