Consumer Confidence, Spending, GDP

Consumer spending now driving construction recovery

Posted on Thursday, February 17, 2011

While the January confidence reading is the highest in thirty four months, it still remains in the recession range. The index averages 100 plus when economic growth has been better than average for more than a year and the unemployment rate has been below average for more than a year. The consumer confidence index soars to 130 plus at the end of a strong economic expansion.
Further sizable gains can be expected in the consumer confidence index in the coming months based on the revised data that shows the six-month ahead expectations component, which has a 50% weight in the index, has jumped very sharply since October.
The recent improvement in the consumer mood has already improved credit access for owners and developers of retail buildings. Except for apartments, retail has become the most attractive commercial real estate market. Initially, this means higher prices for existing buildings and renovation work on many purchased building. Very quickly, the new investor attitude will mean a rise in retail construction starts as chain retailers resume expansion plans suspended several years ago.
Higher consumer spending will also quickly boost hiring for distribution and service jobs. While these are typically not high wage jobs, the improvement in income and income security will spur household decoupling and hence apartment demand. This process has already begun with the recent surge in multi family housing starts.
The link from higher consumer confidence to single family housing demand is slower. It requires a surge of renters becoming homeowners. This has not happened yet but is likely a few months ahead. Rising prices for entry level homes and a shortening of the time it takes to sell them will induce more single family and condo housing starts. More importantly, it will set off a process in which home prices and the liquidity of housing assets improve for the least expensive homes and then gradually for more expensive homes as the move up housing market revives.
The housing market has been waiting a long time for an improvement in consumer confidence. Home affordability is at a record high level. The new home for sale inventory is at a multi-decade low. Homebuilders will respond quickly to improved demand although the huge surplus of vacant existing homes will dampen their response for several years.
The link from higher consumer confidence to the commercial buildings, except retail, is also very slow. Vacancy rates are now declining and space demand is increasing quickly but vacancy rates are high enough that new space demand will continue to be met largely from surplus inventory until economic growth absorbs a large share of the surplus. This will occur well into 2011.
Finally, higher consumer spending will have a positive impact this year on demand for institutional building space and on facility capacity (heavy construction) but this will be offset in 2011 by the ongoing decline in public construction funding. The president’s budget plan seeks to reverse this decline. If enacted, which is uncertain, more public construction funds will not appear until next year.


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