The following article is a synopsis of the January 16, 2013 PCA Market Intelligence Residential Construction Outlook. For a pdf of the full report, contact Ed Sauter (esauter@cfawalls.org) or Jim Baty (jbaty@cfawalls.org).

RESIDENTIAL CONSTRUCTION OUTLOOK

Conditioned pessimism. That is the term Ed Sullivan, chief economist for the Portland Cement Association, used to describe the attitude and outlook of citizens, businesses and the public in general regarding the economy. News channels, conservative and liberal, are constantly bombarding us with negative news and asking us to worry about impending or possible disasters. If we base our decisions on the concept that something bad is just around the corner we will never get out of our recession. Our decisions must be supported by the facts.

Mr. Sullivan has been an accurate forecaster of our economy, and the construction economy in particular, for the past decade or longer. He cites underlying information as the basis for his optimism for our economy. His outlook goes against the pessimism (conditioned or otherwise) expressed by some economists. His forecasts aren’t just wishful thinking, they are based on underlying conditions that have been building since the downturn began.

PCA economists expects housing starts to reach 954,000 units in 2013 with one million an outside possibility. The first half of 2013 will be mired with residual fallout of the fiscal cliff fiasco (and sequestration) but job creation and improved consumer sentiment should make for a strong the  second half of 2013. Even stronger growth in homebuilding is expected in 2014 with new starts topping 1.1 million units.

PCA Chief Economist, Ed Sullivan, speaks to a captivated crowd during the 2013 World of Concrete in Las Vegas.

GENERAL ECONOMIC CONDITIONS

Why the optimism. Three factors are cited. First, private debt has been declining as a share of disposable income since 2005. Consumers are paying down their bills and taking advantage of historically low interest rates refinancing everything from credit cards to homes. The net result is that the cost to service this debt has reached an 18-year low, which in effect, gives consumers more disposable income. This is a benefit to economic growth.

Second, private businesses (O.K. not your concrete construction company but bigger businesses) are flush with cash. Businesses exist to make a profit and the low interest rates earned on that cash are not conducive savings. This gives them the means and incentive to fuel recovery. Third, banks are healthy again. Depository institutions have raised hundreds of billions in new capital. Tighter underwriting since the recession has improved credit conditions and the number of one and two month delinquencies is at a record low.

The economy is positioned for strong growth but a trigger is needed to get businesses and consumers to spend again. Consumer and business attitudes appear to be focusing on positive economic fundamentals rather than the adverse political uncertainty. No one knows what that trigger is but the anticipated growth should materialize by the second half of 2013. Our economy can’t wait on a dysfunctional congress.

SINGLE FAMILY SALES OUTLOOK

The single family sales outlook is the sector that most of CFA contractors are dependent upon. PCA’s assessment of this sector is based on lending standards, home prices, and mortgage rates as well as income and job growth. Home sales increased by roughly 10% in 2012 and stood at 60% of pre-recession levels. During 2013, PCA expects home sales will increase nearly 18%.

PCA bases their outlook on at least 4 indicators. First, the combination of low mortgage interest rates and declining home prices has dramatically improved home affordability. Declining unemployment and gathering economic momentum will enable these factors to be realized later this year and into 2014.

Second, job growth is expected to continue. The U.S. added 1.835 million jobs in 2012, a slight increase over 2011 but looking ahead, PCA expects this figure to jump to 2.1 million jobs this year and roughly 2014 million jobs in 2014.

Third, lending standards, while still tight, should ease gradually when the perceived lending risks subside. They will likely tend toward the longterm standards that existing before the bubble.

Lastly, consumer attitudes are increasingly focusing on the positive economic fundamentals rather than adverse political uncertainty. In addition, rising home prices should entice people to act sooner rather than waiting.

There are other economic issues to be concerned about including the inventory of existing housing and regional growth but overall, the word is positive. PCA feels that while there is a tremendous pent-up demand that demand will be released gradually over the next 3-4 years. Our recommendation is stay-the-course. Better times await us and they will begin this year.