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THE ECONOMIC OUTLOOK FOR THE U.S.AND THE CONSTRUCTION INDUSTRY
by
William F. Ford, Ph.D.Weatherford Chair of Finance
Middle Tennessee State University
presented to
The Roofing Industry Alliance for Progressat
The Four Seasons Resort and Club at Las ColinasIrving, TX
April 24 th, 2009
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THE ECONOMIC OUTLOOK After growing for over 6 years (since 2001) the U.S. economy has
slowed sharply (since Dec.07) and is now in month 17 of the recession. A prolonged housing downturn, subprime mortgage problems, stressed
financial industries and declining retail and auto sales trends are major factors driving the recession.
The economy is steadily losing jobs and the unemployment rate hasreached 8.5% this spring.
Corporate profits are also shrinking causing investment spending toweaken.
Inflation has declined sharply and has temporarily become a secondarymonetary policy concern.
The Bush Fiscal Stimulus Program ballooned the Federal deficit to $455
billion in FY 2007-2008. The Obama administrations program mighttriple this in FY 2008-09. There are additional forecast risks. The Outlook for the construction industry is cloudy. Some of President Obamas initiatives will impact the construction
industry.3
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REAL GDP GROWTH(Year over Year changes)
-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.53.03.54.04.5
2003 2004 2005 2006 2007 2008 2009
P
e r c e n
t C h a n g e
*Source: W.F. Ford Associates; **BEA: 2007 current dollar GDP and real (chained 2000) dollars as of 11/25/08.
3.0%
3.5%
4.2%
2.9%
4
2008**
GDP: $14.26 Trillion
Real GDP: $11.65 Trillion
1.1%
-2.1%*
2.0%
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2005 2006 2007 2008* 2009*REAL GDP (YOY) 3.5 2.9 2.0 1.1 -2.1
Consumption 3.5 3.1 2.8 0.3 -1.3
Business Fixed Invest. 6.8 6.6 4.3 1.8 -4.5
Productivity Growth 2.3 1.0 1.4 2.8 1.6
Residential Investment 8.6 -4.6 -17.9 -20.8 -16.0
Government Purchases 0.9 1.8 2.1 2.9 3.8
Exports 6.8 8.4 8.4 6.5 -5.1Imports 6.1 5.9 2.2 -3.3 -3.4* * * * * * * * * * * * * * * * *Inventory Change ($billions) $19.6 $46.3 -$3.7 -$21.1 -$52.5
REAL GDP GROWTH RATES (%)
*Source: W.F. Ford Associates. 5
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0.5
1.0
1.5
2.0
2.5
1980 1984 1988 1992 1996 2000 2004 2008
Millions of Units
Housing Starts
RESIDENTIAL CONSTRUCTION
*Source: W.F. Ford Associates forecast 6
Forecast*:
2009: 0.63m
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Non-farm payrolls, YOY Change
PACE OF PAYROLL GAINS
* Sources: W.F. Ford Associates forecast and BLS data. 8
-4%
-2%
0%
2%
4%
6%
1980 1984 1988 1992 1996 2000 2004 2008
A n n u a l
A v e r a g e
P e r c e n
t C h a n g e
Forecast*:2008: -0.9%
2009: -2.1%
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U.S. UNEMPLOYMENT RATE
6.0%5.5% 5.1%
4.6% 4.6%
5.9%
9.0%
0%1%2%3%
4%5%6%7%8%9%
10%
2003 2004 2005 2006 2007 2008 2009
*Sources: W.F. Ford Associates forecast and BLS data.
U.S. Labor Force** (millions)
Employed Unemployed
2007 145.4 7.5
2008 145.3 8.9
2009 (Q1) 141.5 12.4
*
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*
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AFTER-TAX CORPORATE PROFITS
-4.0%
14.8% 11.8%
32.6%
13.9%
2.6%
-8.4% -10.2%-15%-10%
-5%0%5%
10%15%20%25%30%35%
2002 2003 2004 2005 2006 2007 2008 2009
P e r c e n
t C h a
n g e
Source: *W.F. Ford Associates forecast. 10
*
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FEDERAL DEFICIT(Fiscal Year deficits)
-$374 -$413-$319
-$248 -$163
-$455
-$1,250
-$1,500
-$1,300
-$1,100
-$900
-$700
-$500
-$300
-$100
$ B i l l i o n s
Source: *W.F. Ford Associates forecast; ++includes stimulus spending.
02/03 03/04 04/05 05/06 06/07 07/08 08/09 *
12
FY FY FY FY FY FY FY
++
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U.S. NET EXPORTS AND
MERCHANDISE TRADE BALANCE :
-$509
-$601
-$714-$759
-$710
-$388-$339
-$535
-$650
-$787-$838 -$809
-$677
-$510
-$900
-$800
-$700
-$600
-$500
-$400
-$300
-$200
-$100
$0
$ B i l l i o n s
Net Exports (including Services) Merchandise Trade Balance
*Sources: BEA and W.F. Ford Associates forecast.
2003 2004 2005 2006 2007 2008 2009*
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ENERGY OUTLOOK
*Source: U.S. Dept. of Energy, World Energy Outlook (All sources: Oil, Coal, Natural Gas, Nuclear)
0
20
40
60
80
100
120
140
160
1990 2000 2005 2010 2015 2020 2025
Q u a
d r i
l l i o n
B t u
Total Primary Energy Consumption*1990-2025 (Quadrillion BTUs)
U.S. Japa n China India Central/South America Europe
History Projection|
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2001 2002 2003 2004 2005 2006 2007 2008 2009
I n f l a t i o n R a t e ( % )
CPI (YOY) PCE LESS FOOD & ENERGY (YOY)
INFLATION OUTLOOK
*Sources: W.F. Ford Associates and BLS; **Not seasonally adjusted
3.2%
15
The Feds Comfort Zone 1.2%*
2.3%
0.9%*
Mar. 09 vs. Mar.08**
CPI (all items): -0.4%
CPI (core items): 1.8%
PPI (finished goods): 6.7%
3.8%
1.8%
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FED FUNDS TARGET RATE
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INTEREST RATE OUTLOOK
0.0
0.51.0
1.5
2.0
2.5
3.03.5
4.0
4.5
5.0
5.5
6.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
P e r c e n t
Effective Fed Funds Rate10 Yr T-Note
* Sources: Historical data from St. Louis Fed (FRED); Forecast from William F. Ford Associates.
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Forecast*
2005 2006 2007 2008
0.5 %
17
2009
1.1%
2.2%2.5%
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GDP FORECAST RISKS
Expanded Financial, Stock Market, Auto & Other Industrial Crises?
A Prolonged Housing/Subprime Mortgage andConstruction Loan Markets Meltdown?
Sharper Increases in Auto, Credit Card and HomeEquity Line Delinquencies?
Renewed U.S. Dollar Weakness?
Stronger Negative GDP Trends in 2009? Resurgence of Oil Prices and Energy Costs?
International Instability/Terror Risks?18
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2009 FIRST HALF AIA CONSENSUSCONSTRUCTION FORECAST PANEL
19
McGraw-HillConstruction
Global InsightMoody's
Economy.comFMI
Reed BusinessInformation
Forecast(% change)
Forecast(% change)
Forecast(% change)
Forecast(% change)
Forecast(% change)
Forecast(% change)
Forecast(% change)
2009 2009 2009 2009 2009 2009 2010
NONRESIDENTIAL TOTAL -16.6 -15.8 -7.5 -14.2 -1.9 -11.2 -5.0
Commercial Total -22.7 -15.2 -24.0 -23.3 -3.2 -17.7 -8.8
Office -18.6 -12.6 -32.9 -23.3 0.0 -17.5 -11.1Retail/Other Commercial -23.7 -18.3 -20.1 -22.8 -11.2 -19.2 -6.6
Hotel -28.0 -15.9 -25.4 -31.9 0.1 -20.2 -12.2
Industrial Total -30.2 -10.9 -23.9 3.5 5.5 -11.2 -8.4
Institutional Total -9.6 N/A 0.2 -10.0 -1.1 -5.1 -1.9
Health -10.4 -0.1 1.6 -7.8 -1.2 -3.6 -0.9Education -13.5 -11.5 0.2 -10.3 -1.8 -7.4 -1.9
Religious -8.8 -1.7 N/A -17.1 -10.2 -9.4 1.4Public Saftey -4.5 N/A 0.9 -6.2 -4.1 -3.5 -1.9
Amusement/Recreation -1.8 -2.8 N/A -12.6 -6.3 -5.9 1.0
Consensus
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THE CONSTRUCTION INDUSTRYOUTLOOK
If this recession plays out like previous ones, there still aresignificant declines ahead. In the early 1980s recession,nonresidential construction activity fell by almost 28 percent beforegrowth resumed, a figure exceeded in the early 1990s recession (31
percent) and almost matched in the early 2000s downturn (25 percent).Kermit Baker, Chief Economist, AIA Consensus Construction Forecast. 1/16/09.
Particularly hard hit will be the commercial and industrial categories.With many businesses seeing falling profits and difficulties inobtaining credit, expansion plans have been put on hold until theeconomic outlook improves. Institutional construction should farebetter than its commercial/industrial counterpart as the health-care and education sectors are expected to continue to expandthrough much of this downturn . Kermit Baker, Chief Economist, AIA ConsensusConstruction Forecast. 1/16/09.
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THE CONSTRUCTION INDUSTRYOUTLOOK
Last quarter we described the outlook for construction as the good, the bad and the ugly. Now that 2008 is past, the outlook is just plain ugly . Nonresidential construction will plummet and begin at least three years of contraction. The bottom in terms of both dollar volume and percentdecline will not be until 2010 . Residential construction is not expected torecover until 2011. FMIs Construction Outlook: First Quarter 2009 Report. 3/10/09.
2009 is going to be a tough year for the North American constructionindustry. While no one has perfect knowledge about the future andthere are certainly serious economic issues yet to be faced, some
indicators hint that our survey may have been taken at or near aneconomic low point. Its possible that a slow recovery is underway oris about to begin . Lets hope so. A government stimulus package thatincludes an infrastructure revitalization component could go a longway to helping this industry . Ron Riecks, General Manager, Wells FargoConstruction. 1/15/09
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WILLIAM F. FORD, P H .D.*
Professor William F. Ford holds the Weatherford Chair of Finance in theCollege of Business at Middle Tennessee State University. He formerly served asDean of the Business School at the University of Denver; President and CEO of the Federal Reserve Bank of Atlanta; President of First Nationwide Bank; Senior Vice President of Wells Fargo Bank; and as Executive Director and Chief Economist of the American Bankers Association. Dr. Ford often appears on
nationwide and regional TV and radio business news shows as an economic policyexpert and served as TeleChecks Senior Economic Advisor from 1990 2001.He has also authored or coauthored about 100 articles in business and academic
journals, has served on the boards of six corporations, the U.S. Chamber of Commerce and NABE, the National Association for Business Economics.
A veteran of the U.S. Navy Submarine Service, Dr. Ford earned his B.A. in
economics (summa cum laude), from the University of Texas; his M.A. and Ph.D.degrees from the University of Michigan and is a graduate of the Senior ExecutiveProgram at Stanford Universitys Business School. He is an elected Fellow of
both the Phi Beta Kappa Society and NABE.
*Contact information: < wfford@mtsu.edu > or (615) 898-2889
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