Economists Lynn Reaser and Ken Simonson presented a partly sunny forecast at the Aon Economic Issues luncheon on Thursday, March 24. But the scene they painted had plenty of clouds, as well.
Reaser, the chief economist of the Fermanian Business and Economic Institute at Point Loma Nazarene University and former Chief Economist for the Bank of America Investment Strategies Group, gave a quick overview of global influences on the U.S. economy. She portrayed the world economy as being very uneven, with rapid growth in developing countries but sluggish growth at best in mature economies. This combination produces a risk of commodity price inflation but weak demand for U.S. exports from developed nations. Adding to global economic uncertainty are the fast-changing situations in Japan and the Middle East and North Africa.
Reaser characterized the U.S. economy as gaining in momentum. She predicted that long-term interest rates would rise above 2008 levels later this year but that banks would make more credit available. She recommended that businesses adjust to uncertainty; think globally; examine pricing; lock in long-term rates; and diversify into niche markets.
Simonson called this a time of change in construction “for better and for worse.” On the positive side, he said activity has begun to improve for warehouse, hospital and apartment construction, with a pickup likely later in 2011 for manufacturing and hotel modernization, expansion and some new projects. But many government contractors have benefited from federal spending on stimulus, military base realignment and Gulf Coast hurricane restoration projects that are slated to end later this year. With the House of Representatives pressing for spending cuts and continuing downturns in state and local budgets, the outlook is quite negative for public construction.
The AGC chief economist also pointed out that construction materials costs have been rising much faster than either consumer prices or finished building prices. That means that owners who hear about inflation in terms of consumer prices are not aware of the cost pressure on contractors, while flat bid prices show that contractors are not willing or able to pass through higher expenses—a vise that could squeeze some firms out of business. Nevertheless, Simonson said he expects the industry to end 2011 with a 3-7 percent increase in construction spending compared with 2010, a 3-8 percent range of materials price increases, and labor cost increases of less than 2.5 percent.
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