No Recession, But Construction Activity Will Slow
Leading economist Raymond G. Torto told construction executives at the CMD/CSI CEO Breakfast in Dallas that a strong consumer sector in the U.S. economy will keep the nation from slipping into recession. But he warned that the construction industry should prepare for a significant slowdown as commercial occupancy rates tumble and the business sector continues to soften.
Torto, who is principal and managing director of Torto Wheaton Research, said the heady days of the late 1990's and the year 2000 experienced "tremendous" growth of about 5 percent per year in the nation's Gross Domestic Product, a key barometer of economic health with direct correlation to the strength of the real estate industry. The traditional 25-year average GDP growth rate is about 3 percent annually. Few can accurately predict what the GDP growth rate will be in the future, he said, advising his audience to "buckle down, keep your business in line with reality and your expectations in line with reality."
Torto continued, "What we are telling our clients is that we don't think there will be a recession, and there will be a soft landing. That's because we rate the economy in two sectors, the business sector and the consumer sector, and the business sector is weak and will continue to have very low profit reports through the end of this year. The consumer sector, though, will keep us alive and out of a recession."
A consumer sector strengthened by low interest rates and the Bush administration's income tax cut and summer rebate will save the economy from recession as more and more people create discretionary income by lowering their mortgage rates through refinancing. "That has a dramatic effect on the economy," Torto declared.
As long as interest rates are favorable, the multi-family and single-family construction sectors will remain strong, Torto said. Government spending is another bright spot on the horizon for the construction industry, Torto said. "There is a lot of good public construction money out there, and that side of the economy I do not see being adversely affected at all," he observed. "In fact, you could hold out quite well if you can shift your business into the public sector arena for the next year to 18 months, and then move it back into the private sector.”
"My analysis of where reality is going is a severe slowdown in the construction business over the next 12 months," he said. "But if your business plan provides for your expectations and reality to come together, you will have a good year."