There is no question that the state of the economy is a mixed bag as 2020 winds down. This week will see the release of a number of key economic metrics, including the monthly jobs report on Friday morning. Thursday morning, the data on unemployment claims has good news, relatively speaking. During the week of Nov. 28, there were 712,000 new claims for unemployment insurance. That’s terribly high compared to anything like normal but it’s a 75,000 claim decline from the previous week, and a reversal of the recent trend of accelerating claims. There were 350,000 fewer persons receiving any form of unemployment insurance, another positive step. For perspective, however, it’s worth noting that the 20.16 million people on unemployment last week compares to 1.5 million one year earlier. Clearly lots of ground to make up.

The Institute for Supply Management (ISM) released two important purchasing manager indexes (PMI) this week. The November PMI fell slightly to 58 for manufacturing companies but remained well above the slow growth line. New orders index jumped to 65.1%, a very good forward-looking sign. The ISM Non-Manufacturing Services Index was also solid at 55.9%, down slightly from October but above 50 for the sixth consecutive month. Wednesday’s ADP Payrolls report was not as cheery. Private non-farm employers added 307,000 jobs in November. That’s a continuation of the slowdown in hiring since late summer. Economists expected a slightly higher figure but the data fits in with the overall trend that appears will be unchanged until evidence that the vaccine rollout is loosening up activity.

One other area of concern with respect to new hiring is the Federal Reserve Bank’s most recent Beige Book responses from employers regarding hiring. Businesses were overwhelmingly reporting improved conditions but a far smaller share were expecting to hire back to pre-pandemic levels once the COVID-19 threat recedes. The most common reply was that businesses have learned to do more with fewer people. Should that sentiment prevail once activity accelerates, the recovery will be slower.

Regional construction activity has picked up, although much of the progress is in anticipation of the pandemic receding in the spring, which means that construction is not likely to return to higher levels until the second quarter. ALCOSAN released its $110 million East Head Works project for bid, due Feb. 17. Permits were issued to Sota Construction for the $5 million Hazelwood Brewing Building renovation and to Mosites Construction for the $2.5 million Brashear Community Center renovation. Oxide Development/Schiff Capital presented its 114-unit, $20 million 32nd & Penn Apartments to the Pittsburgh Planning Commission. Rycon Construction is the CM. The planning commission also reviewed plans for the $2-3 million conversion of the Triangle Building into residential, which Franjo Construction will build. A. Martini & Co. was selected for the $6 million next phase of the Hunter Building restoration in Wilkinsburg. E. E. Austin was the successful bidder on PSU Behrend’s $5.5 million Federal House addition in Erie. Penn State also selected ZGF Architects for its $146 million new Physics Building and Osmond Building Renovation. Mele & Mele & Sons announced it was building a new 38,000 square foot headquarters and shop at the RIDC Duquesne site. ATI announced $85 million in cpaital improvements to its Vandergrift stainless mill.

If you’ve watched enough college football over the past five years or so, you have noticed a number of teams gathering at the end of the third quarter and holding four fingers up as they prepare to start the fourth quarter. It’s a rallying cry to finish the game strong, a recognition that how the team finishes the fourth quarter matters. That visual works for the U.S. economy right now. Congress should be holding up four fingers, especially as it appears likely that a couple of vaccines could begin rolling out by the end of 2020. The literal end of 2020, December 31 is looming as an economic cliff that could set recovery back even as the COVID-19 virus is contained. In most years, the period from now until New Years Day is particularly unproductive for Congress. In lame duck years, that’s more so; and in lame duck presidential years (like 2020), the tendency is for next to nothing to happen. With Republicans trying to use the lame duck to ram through last-minute appointments, the attention of Congress should be diverted long enough to address the looming expiration of key safety net measures. If a vaccine to end the pandemic is truly looming for 2021, the nascent economic recovery should be given as much fuel to grow as possible.

The economic recovery has been judged to be durable because of the relatively strong rebound during the third quarter and the (apparently) short runway to a viable vaccine to end the pandemic. The timing of this assessment is particularly worrisome, however, as we are entering a period of heightened risk, even as the delivery of a vaccine seems likely to be sooner than expected. Setting aside the unknown impact of the surge in COVID-19 infections as winter looms, there are known risks that could sabotage the economy just ahead of a recovery. More than 12 million unemployed persons will lose compensation on December 31 without an extension or passage of further assistance. On that date the moratoria on foreclosures, student loan payments, and evictions expire. Household savings will have been tapped for an additional three months since the rosy third quarter estimates.

Most of the aid or stimulus programs passed in 2020 were meant to be bridges to the vaccine. When the CARES Act was passed, there was no realistic estimate of how long that bridge needed to be. That fact made it difficult to gain agreement on subsequent aid legislation. As the holidays approach we have a pretty clear idea of the length of the bridge. Failing to extend the safety net for tens of millions may not prove to damage the recovery but, with the duration of another round of aid being 90 days or so, providing that safety net assures that there will be demand for a recovery that will be sorely needed. We don’t need another extended weak recovery a la 2010-2015.

JLL’s chief economist, Ryan Severino, discusses the case for more stimulus in his weely email  today. Former U.S. Treasury Dept. economist Ernie Tedeschi talks a lot on the subject on Twitter @ernietedeschi. The upshot of the current situation is that the spike in COVID-19 hospitalizations and deaths is driving economic activity lower just ahead of a time when the unemployed are going to become vulnerable (along with a lot of low wage earners in the hositality industry). Personal savings has soared since the pandemic started. The current savings rate remains at 14% (It was 1% ahead of the Great Recession by comparison). There is $6.5 trillion in money market accounts looking for a place to deploy. That capital will fuel the supply. The demand will come from consumers, who provide 70% of GDP. They, and the economy, are vulnerable as the year ends. The chart below shows just how much people have altered their behavior and spending as the COVID-19 cases spike again. Extending the safety net another 90 days could make a world of difference to an economy in the midst of a vaccine rollout on April 1.

One sector of the Pittsburgh construction market that has been surprisingly disrupted by the pandemic is multi-family. The economic disruptions caused by COVID-19 were expected to cause some pain for apartment owners but the case for apartment development should not have been dented. If anything, the economic case for renting instead of owning grows during recessions. It doesn’t appear that it has been the economic justification that has slowed multi-family construction, but rather the execution of plans to build. There is still a pipeline of several thousand units in development but roughly 1,200 to 1,500 units that were scheduled to start in 2020 aren’t going to get underway until next year. When Al. Neyer Construction starts site work on the 150-unit 5803 Centre Apartments in December, the project will bring the total for 2020 to about 950 units of new construction, about half what was forecasted. The good news is that the business case for the 1,200 or so units that were delayed has not eroded. Apartment construction in 2021 should return to the 2,000-plus unit pace again.

Neyer is currently taking bids on the 5803 Centre project. Elford Construction has been taking bids on the 370-unit Brewer’s Block Apartments in Bloomfield. Elford is bidding to partner with RDC Design + Build on that project. Massaro Corporation was selected as CM for Conemaugh Hospital’s $50 million Building D project.

The Commerce Department released its first estimate of gross domestic product growth for the third quarter. The good news: the 7.4% jump from quarter two was just as expected. The bad news: the 7.4% jump from quarter two was just as expected. In this rarest of times, there is a lot of economic news that is two things at the same time. To wit: the big rebound was inevitable and, at the same time, insufficient.

The 9% plunge in the second quarter set the table for a big rebound, even though the third quarter started with a second surge in virus infections happening. That surge seemed to cement mitigating behavior in the minds of most U.S. consumers. By wearing masks, maintaining safe distances, and doing things outside, more Americans were able to return to more normal behavior. That included shopping, dining, vacationing, and a host of activities that stopped from mid-March through May. Most economists saw data that predicted growth of more than 7% (that annualizes to 33%, although no quarterly growth remains the same for a year – also true when the second quarter fell 31% annualized). It was also apparent to observers that the stagnating hiring and increasing layoffs would cap the growth below 8%.

Reactions to the news ranged from relief to caution, except for Republican candidates for office. While there was almost no chance that GDP growth was going to be poor, it was still good to see expectations confirmed. At the same time, it’s obvious growth has slowed in September and October. It’s also true that the recovery in GDP is only two-thirds of the way back to where the U.S. economy was in the first quarter. At $18.5 trillion, GDP is almost exactly where it was in January 2018 and is 3.5% behind the third quarter of 2019. Moreover, the current level of GDP output is 7% behind where GDP would be if the 2.3% annual growth rate of the first quarter had continued. So there’s work to be done.

It’s important to have confirmed the expectations for a third quarter bounce back, if only to feel comfortable that there’s a foundation for 2021 recovery. With a vaccine seeming more likely to be first available in early 2021, more economists are forecasting improvement next year that will lead to full recovery in 2022. On Wednesday, Urban Land Institute released its ULI Real Estate Economic Forecast for 2021. The survey of 43 leading economists and analysts predicted above average GDP growth and job creation in 2021 and 2022. The summary paragraph is below:

The results of the survey, which is conducted semi-annually, expect GDP to decline 5% this year but increase again in 2021. Respondents forecast 3.6% GDP growth in 2021 and 3.2% GDP growth in 2022. The 2020 GDP loss is an improvement compared to the prior survey, which estimated a 6% fall in GDP this year. However, the previous survey was also more optimistic about GDP growth in 2021 and 2022, forecasting 3.9% and 3.6% respectively. Employment follows a similar trend. This year, the survey expects jobs loss to total 9 million, but—like GDP—job growth will begin in 2021 and 2022, growing by 3.5 million and 3 million jobs, according to the survey. By the end of 2022, unemployment could fall to 5.5%.

There are still a host of consumer activities that will remain depressed until the fear of COVID-19 recedes. And it’s important to remember that it’s the fear that is depressing the economy. It makes good political theater to blame lockdowns or rage on about not living in fear but, across the planet, at least a quarter of the people aren’t taking chances by going back to normal indoor socializing or gathering. Sweden is often pointed to as a model of allowing normal activity while protecting the vulnerable. That model produced one of the highest death rates per capita in the world, plus a decline in GDP of 8.3% during the second quarter. Sweden’s neighbors, Finland and Norway had shutdowns of public spaces (including businesses) and mandated masks. The death rate per capita was 10% of Sweden’s and their economies shrank by 4.5% and5.1% respectively. We’re seeing similar dynamics in places like Wisconsin and the Dakotas now, where surging infections are dampening commerce significantly.

That may sound depressingly like more bad economic news but, as we learn more about the pandemic and its outcomes (even if behaviors don’t change), the economic picture becomes clearer. That’s very important for the construction industry. Having some sense of predictability gives owners the confidence to build. If the expectation is that GDP will fall 5% or thereabouts in 2020 and recover by growing 3-4% in 2021, that’s a scenario that owners can plan to meet. Yesterday’s GDP numbers gave that forecast more validity. If behaviors change in the U.S. so that the spread of the infection slows or accelerates more slowly during regular flu season, then the forecast probably improves. Owners are like a pilot sitting at the end of a runway. COVID-19 has been a fog that obscured the runway. Pilots can adjust to the length of the runway if they can see it but few have seen where the runway begins or ends since mid-March. There’s little evidence that the economy will be soaring in 2021, even with a vaccine, but we can now see how it will get airborne again.

Little construction news but Mucci Construction was the low general contractor bidder on the $65 million Canonsburg Elementary School yesterday. The Digital Foundry in New Kensington held a virtual groundbreaking this week. Mosites Construction should start work on the $5 million, 15,000 square foot building in December. forge 39 Construction Management will be building the 100,000 square foot 250 Crown Court at Imperial Business Park in Findlay. Al. Neyer is building a 30,000 square foot addition to the Pella Showroom & Warehouse in Thorn Hill, Cranberry Township.

 

 

This isn’t a great chart, at least not if you’re hoping for an economic recovery to go into high gear. This chart was floating around the internet this week, highlighted by former U.S. Treasury Dept, economist Ernie Tedeschi (@ernietedschi). Stu Hoffman (@StuHoffmanPNC) from PNC commented on it. He’s been unfailingly upbeat about the recovery but noted that the loss of $600 and slow walked unemployment compensation payments will drag August’s consumer income and spending. Consumers have been fueling the recovery since April ended. This chart also explains why Congress needs to act so that consumers and businesses have some certainty about what to expect.

Housing starts jumped 23.4% from July 2019 to July 2020. That’s a very hopeful sign. Much of the demand is being driven by record low mortgage rates but data from the sales suggests that the pent-up home ownership share of Millennials is finally adding to demand. Prices of homes, whether existing or new construction, are up 8% year-over-year. The sustained demand is helping but the short supply of homes for sale is really creating upward pressure. At the end of July, the inventory of homes for sale was 35 days worth. That’s one-third what is necessary for a smoothly functioning housing market.

One harbinger of construction recovery that is languishing still is the AIA’s Architectural Billings Index (ABI). The AIA surveys its member firms each month and the ABI tracks whether billings, design contracts, and inquiries are higher or lower than the previous month. The July ABI was at 40 (same as June). That means only four out of ten firms saw higher billings. Inquiries were at 49.1. Half the firms saw declining inquiries. With design leading construction by 9-12 months, the results from the ABI survey foretell a slow winter.

Construction bidding in Western PA remains slow. Competition is driving bids much lower than a year ago. Recent contract awards include Kokosing Construction landing the $14.16 million general contract on ALCOSAN’s $19.1 Return Activated Sludge Piping and Pump Replacement project. DiMarco Construction started work on the $3.3 million NorthStar Chevrolet service center.  Oxford Development selected Rycon Construction as CM for its $3.5 million adaptive re-use of the Achieva Building in the Strip District. Rycon is also the CM for a $2.2 million renovation to medical device manufacturing and office space for Phillips in Murrysville. Dick Building Co. is fitting out the new offices for Pittsburgh Downtown Partnership in the Bank Tower.

Thursday morning’s report on first-time unemployment claims brought (relatively) good news on the state of the economy. First-time claims for unemployment fell by 228,000 to 963,000. That marked the first week in which claims were below one million since March. The relief felt by the decline in unemployment claims is tempered by the fact that the 963,000 claims is the highest in U.S. history prior to the pandemic. Some 28.3 million American are receiving unemployment compensation of some sort as of July 31.

The drop in unemployment claims is the second bit of improvement news issued during the past week. The Census Bureau announced last week that durable goods orders jumped for the second straight month, climbing to $207 billion in July (see chart below). Durable goods shipments declined from nearly $250 billion in February to $168 billion in May. The increase in purchases of durable goods suggests that consumers are more willing to spend on bigger ticket items than they were during the shutdown.

Other reports on economic activity during the second quarter were not so upbeat. As expected, the first reading on GDP in the second quarter showed a 9.5% decline from March to June. That’s a 32% drop on an annualized basis. The shutdown in economic activity from mid-March through May made such a decline inevitable. Economists expect that the increase in activity will be strong, although the renewed outbreak of COVID-19 in most of the U.S. since mid-June is going to slow the pace of growth. Job creation slowed in July after two months of robust hiring. Employers added 1.7 million jobs in July. That level of hiring was not enough to offset the cumulative number of first-time unemployment claims during the month. Unemployment continued to fall in July, to 10.2 percent.

While the shelter-at-home orders stopped economic activity cold in the spring, a look at indicators of consumer behavior since the outbreak hit the U.S. reveals the difficulty policy makers faced. Those who viewed the shutdown of businesses as a cure worse than the disease overlook the reality that people were going to alter their behavior because of the pandemic, whether the government mandated it or not. The chart below reflects insights on three metrics of consumer behavior. The number of dinner reservations and travel trips plummeted from March to April, and have remained at depressed levels through July. In response to the plunge in mortgage rates, home buyers have bucked the otherwise negative trends to purchase houses in much greater than normal volumes. The housing industry in general has been one of the few bright spots in the economy.

Construction news is limited in mid-2020. Bidding has slowed precipitously. Construction has proceeded on a few projects that were in the pipeline for 2020. Rycon Construction started work on the $38 million Fifth & Clyde Student Residence for Carnegie Mellon. PJ Dick started work on the $55 million Pennley Place mixed-use development in East Liberty. Seneca Valley School District awarded contracts for its $48.8 million Evans City Elementary School. Rycon Construction is the general contractor. Franjo Construction was awarded the contract for the $5.5 million new Munhall Borough Building. Franjo also started construction on two condos in Lawrenceville, the 24-unit Lawrenceville Lofts and the 21-unit Penn 23 condo. Turner Construction is the contractor for Perkins Eastman’s fit-out of 15,000 square feet in 525 William Penn Place. Dancing Gnome selected A. Martini & Co. for its $1.6 million expansion in Sharpsburg. TBI Contracting was selected for the $1.5 million new Derry Township VFD.

The sharp slowdown in construction globally drove declines in many materials and building products in the second quarter. And competitive reactions to slower future markets pushed contractor prices lower. These were the observations of Turner Construction Vice President Attilio Rivetti, who compiled the Turner Building Construction Index (BCI) for the period. The BCI for the second quarter slipped lower to 1177. The decline was the first since 2010. Rivetti remarked that the third quarter should “more clearly define the fluctuation of escalation of cost in the construction industry.” You can download the report here.

One week ago, the Bureau of Labor Statistics released its report on May’s inflation, including producer price indexes (PPI) for construction. The report showed costs for construction put in place were still up year-over-year, but that PPI inflation for all types of construction was roughly half what it was in January and February. For the first time in memory, inputs to construction across all types and trades were negative compared to May 2019. Across the board construction input deflation did not even occur during the Great Recession’s trough. You can read the tables prepared by the Associated General Contractors here.

Some random takes on the unemployment picture over the past week: Since the details on the Payroll Protection Program were revealed we’ve learned that firms employing a total of 51 million people received PPP loans. Since it’s estimated that roughly one-third of the people laid off during the April/May shutdown of the economy have returned to work, the number of people recalled by employers seeking to avoid repayment of the loans could be a drag on employment gains after PPP expires. If workers recalled by firms with PPP loans can’t be supported by revenues after the program expires, it’s likely more will fall back into unemployment. Wells Fargo Economics is forecasting that unemployment will stay above 8% in 2020 and remain above 6% through 2021.

One interesting economic data point to bear in mind during the debate over returning to schools is the fact that 23% of workers are the parent of a child under the age of 13.

Franjo Cosntruction has started work on the $7 million new Bowser Hyundai dealership in Chippewa Township, Beaver Co. Franjo is also the contractor for the new $10 million, 51-unit condo being developed by Solara Ventures at 26th & Penn. TEDCO Construction was awarded the general construction contract from DGS for the $3 million Ground Floor Renovation at the Cathedral of Learning. Mele & Mele & Sons was awarded the general contract for the Breakneck Creek Wastewater Treatment Plant Expansion in Adams Township, Butler County. Ferri Contracting was awarded the $6.3 million Kiski Pump Stations replacement in Leechburg. Derek Engineering was the successful contractor on the new Taco Bell in Chippewa Township.