The State of Our Economy
The question on the mind of most plumbing contractors I talked to is what affect this will have on new construction and remodeling activity.
It is a safe bet that interest rates will climb more over the next 12 months, as the federal deficit grows and the fear of inflation start to take hold in the market.
Although it’s true that lower interest rates have played a very significant roll in keeping the construction industry out of the recession, I do not think that rising interest rates will lead to a dramatic slow-down in construction activity for several reasons.
First of all, interest rates for a 30-year mortgage are still at historical lows. For the week ending September 5th, 30-year mortgage rates were at 6.44 percent. That is 1.2 percent higher than the 5.24 percent rate quoted on June 27th, but still below the 6.75 percent average for 2002. Rates are also well below the 8.5 percent rates we had in 2000, and there is no reason to think rates are going to go above 8 percent in the next year.
Secondly, even if the Federal Reserve does start to raise short-term interest rates in an attempt to control inflation, the higher economic growth rates and the rising consumer confidence we are experiencing will probably make many potential home-buyers and remodeling candidates more comfortable with their decision to go forward with a purchase or remodel. In fact, some people who have been sitting on the sideline may decide to jump into the market before rates rise to a point where they are shut out of the market.
Thirdly, while unemployment continues to grow, the rate at which people are losing their jobs is slowing down, and net hiring should start to take place by the second quarter of 2004. Since the recession started in March of 2001, 3.3 million workers have lost their jobs, yet the housing market stayed strong despite the uncertainty caused by the continual layoffs. I think this is evidence of the fact that those that have jobs knew they were safe from layoffs.
I should also point out that while unemployment is currently at 6.1 percent, this is a far cry from the 9 percent numbers registered in the early 1980s and the 8 percent rate in the early 1990s. The 93.8 percent of workers who still have jobs are working more efficiently than ever, and the majority of them can probably look around and feel secure in their current job. American businesses and their workers have shown remarkable productivity increases. In fact, the preliminary numbers for the second quarter showed a red-hot productivity growth of 5.7 percent, and they were revised to an almost unbelievable 6.8 percent increase.
This means that both total income and corporate profits have grown at a truly remarkable rate. In addition, according to the Commerce Department, the income of self-employed individuals is growing at the fastest rate since 1999.
Productivity growth is important for two reasons: Besides helping to raise income levels, it also allows our economy to grow without inflation, which will help keep interest rates low.
Lastly, I would add that there is no doubt that economic growth is picking up and that the momentum is coming from a broad sector of the economy. Over the past 6 quarters economic growth averaged a paltry 2.7 percent, which is well below what would normally be expected from an economic recovery. However, economic growth rates are starting to accelerate as well. The second quarter growth rate came in at 3.1 percent, and there is widespread consensus from economists that the third quarter of 2003 will see growth of at least 4 to 5 percent, and that the fourth quarter will see growth of at least 4 percent.
Even more importantly, consumers are spending on a wide variety of services and goods, both durable and non-durable, and businesses are finally upping their budgets on capital and technology spending. It is probable that as the economy continues to grow, job growth will have to follow, which will help support construction demand, in spite of the higher interest rates.
Even Japan which has been mired in a decade-long recession is starting to see real economic growth, which should come as good news to American businesses who sell products overseas.
It’s true that our economy is not out of the woods yet, but the current Administration is doing everything in their power to prime the fiscal pump. The $450 billion deficit is the result of increased government spending and the recent tax cuts. While I am no fan of large deficits, they are appropriate when economic growth slows. President Bush and his economic advisors know that they cannot afford to have 3.3 million laid-off workers voting for a Democrat next fall, and I believe they will continue to urge policies that help businesses create new jobs.
In closing I would like to remind you that a slow down in construction is inevitable, and I think you need to be prepared for that eventuality. However, I am optimistic that 2004 will be another good year for your industry and I hope for your company.