The “real” (i.e. inflation-adjusted) gross domestic product (GDP) of the United States contracted by -0.9% in the second quarter of this year, following a decline of – 1.6% in the first quarter. (In contrast, Q4 2021 advanced by +6.9%).
Two quarters in the red is the textbook economics definition of a recession. But it’s not a recession until the National Bureau of Economic Research says so. The NBER is the arbiter of exactly when recessions begin and end; when cycles move from downbeat to downbeat and vice versa, and so on.
Second-quarter 2022 “advance estimate” GDP figures from the Bureau of Economic Analysis (BEA) indicate that private investment in non-residential structures is down for the fifth consecutive quarter. The latest t/t result was -11.7%.
Residential construction investment in Q2 2022 was also in the hole, -14.0% q/q, but the explanation is not as obvious as one might assume. There is quite a bit of esotericism buried in the GDP items. Understanding all the ins and outs of what constitutes GDP is a study in its own right. The decline in residential investment in the last quarter, according to the BEA, was mainly due to a drop in brokerage commissions.
In “current” (i.e. non-inflation-adjusted) dollar terms, the United States has become a $25 trillion economy. Personal consumption expenditure (PCE) as a share of the total in Q2 was 68%.
There are price deflators to convert “current” dollars into “constant” dollars for GDP items. The quarter-over-quarter change in “private” (as opposed to “government”) non-residential structures narrowed significantly. It remains high, but it goes from +24.4% in Q4 2021 to +18.2% in Q1 2022 and +15.8% in Q2 2022.
The residential investment price index is now +13.7% q/q, after being +18.2% in Q1 this year.
Personal savings as a percentage of personal disposable income (ie after tax) has returned to a more reasonable level of 5.2%. The figure peaked at 20.5% in the first quarter of 2021,
The fact that the savings rate has climbed so high, to annual levels of 16.6% and 12.3% in 2020 and 2021 respectively, explains much of our current inflationary difficulties. As everyone hunkered down at home at the start of the pandemic, they were hoarding heaps of cash. There was nowhere to fly and no place for entertainment.
The eventual release of these cash reserves created excess demand (see attached Chart 5) that overwhelmed supply chains and distribution systems, triggering the price increases that drove up the CPI- U at +9.1% year-on-year.
Tasked with controlling inflation, the Federal Reserve raised its federal funds rate (aka its key rate) to a range of 2.25% to 2.50. (Not so long ago it was zero percent.)
The most recent increase was +75 basis points (where 100 basis points = 1.00%). Another 75 basis point hike could come in September, but according to the Fed, it will be data-driven. In other words, it may be subject to adjustment depending on current inflation indicators and the performance of the labor market.
A big part of the Fed’s job is to talk tough, to convince everyone that runaway inflation will be brought under control; let it not take deep root and linger forever.
Given the latest quarterly GDP figures, the economy is clearly slowing down. This alone alleviates many supply shortage issues.
Inverted Yield Curve
In financial markets, you have to deal with the dreaded “inverted yield curve”. It’s just a fancy way of saying that short-term rates have exceeded long-term rates. Usually it’s the other way around, with people and companies getting an extra reward for being willing to tie up their money for a long time.
Many analysts interpret an inverted yield curve as a sure sign of an impending recession. History has shown, however, that there is no certainty in these areas. Moreover, today’s economic circumstances, stemming from a pandemic-induced vacuum, are unlike anything ever experienced before.
One thing to be aware of is that the “core” rate of inflation in the United States, which ignores many of the most violent price movements in food and energy, has been falling for three months. in a row and now stands at +5.9% y/y. .
Additionally, while initial jobless claims numbers have generally risen since the end of the first quarter of this year, the latest tally for the week ending July 23 marked a drop of -5,000. And the latest tally for people on unemployment insurance fell by -25,000.
CHIPS and Construction
In the construction sector, there is good news with the passage of the CHIPS law in the Senate. If ratified by the House, it will provide a series of incentives for companies engaged in semiconductor manufacturing. Intel said it was blocking the go-ahead for a giant factory in Ohio until it was sure CHIPS was a done deal.
As tensions rise between the United States and China, South Korean (SK Innovation) and Taiwanese (TSMC – Taiwan Semiconductor Manufacturing Co.) chipmakers are the main sources of the component that controls the operation of cars , household appliances, fighter jets, etc. , was considered deprecated. (A new strategic order takes into account the lesson learned from Germany’s dependence on Russian natural gas.)
To delay or not to delay
I’m often asked these days if the owners behind big capital spending initiatives had better put things on hold for a while; wait for material input costs, labor skill mismatches and interest rates to stabilize again.
I don’t have a definitive answer. I guess it depends on the risk tolerance of each decision maker.
But I do know that the more projects are delayed now, especially those that are crucial to a long-term vision, the more the potential for major business combinations in a year or two will increase tremendously and possibly/probably lead to a new headache set.
Finally, the stock markets may be struggling, but the big oil companies are doing very well, profit-wise. As my dear and sweet Aunt Edna would say: “There is always someone who does better than you. Do not be jealous. To live with.”
Alex Carrick is chief economist for ConstructConnect. He has given presentations throughout North America on construction prospects in the United States, Canada and around the world. Mr. Carrick has been with the company since 1985. Links to his many articles are posted on Twitter @ConstructConnxwhich has 50,000 subscribers.