Recent reports on sales of existing homes and new construction show that buyers are motivated by the lower long term interest rates that inspired the two Fed Funds cuts this summer. August’s construction numbers were strong for multi-family and single-family construction. The rate environment seems unlikely to have made such a difference. Rates were already historically low. However, one of the major home buying demographic groups – Millennials – has proven to be very skeptical about home ownership; therefore, even small drops in the 30-year mortgage rate seem to be having the emotional impact that pushes shoppers to become buyers.

Wells Fargo Economics has a great short commentary on residential construction. An excerpt is below:

Higher builder confidence and an improving trend in single-family permits
indicate that new home construction is finally beginning to catch up to the higher pace seen in new home sales. Total housing starts jumped 12.3% to a 1.36 million-unit pace, the highest since June 2007. The headline number surpassed all expectations, but was driven to a large extent by a 32.8% surge in multifamily starts. New apartment construction, which is notoriously volatile on a month-to-monthbasis, had briefly dipped below trend the past two months, so a catchup in August is not surprising.
Still, single-family starts were quite solid, rising 4.4% to a 919,000-unit pace,
the highest since January 2019. Only three times in this long and gradual
housing recovery have we seen single-family construction at a higher pace
than in August. Single-family starts rose 3.6% and 5.3%, respectively, in the
South and West, the two largest regions for residential construction. They
were up 8.7% in the Midwest and down 1.7% in the Northeast. Nationwide,
year-to-date single-family starts are down 2.7% over the same period last
year.

This morning’s Employment Situation Summary for August showed that U.S. employers had added 130,000 workers to payrolls during the month, about what was expected. Unemployment remained at 3.7%. Observers are making headlines about the slowdown in hiring but it’s worth pointing out that a) the economists’ estimates of job growth are highly speculative and missing by 13% on a highly speculative estimate is hardly missing; and b) job growth that is still keeping pace with population growth at this stage of the economic cycle is solid growth.

Backing that last point up is the fact that the workforce is continuing to expand, even as unemployment remains unchanged. The number of workers grew by 30,000 in August, a sign that unemployed persons are continuing to come off the sidelines and find work. Also encouraging was the continued growth in wages, which topped $28/hour again for the second straight month.

The August report isn’t all sunshine, of course. The hiring paled in comparison to one year earlier, when 282,000 jobs were added. The lower number was also consistent with the 2019 trend, which is seeing an average of 158,000 jobs added monthly, compared to 170,000 in 2018 (and that after a 500,000 job downward revision to 2018). Moreover, the trend for the past six months is even slower, falling below 135,000 new jobs.

After the last two recessions, which were precipitated by catastrophic events, the U.S. economy seems to be on a course to slow down, rather than hit a wall. The current economic expansion started in March 2009. That’s a long time without a downturn. Trade wars are hurting U.S. corporations and farmers. Most of the rest of the G-20 nations are seeing flat economies, or even recessions, at the moment. It’s more likely than not that some of the jobs reports during the next six months will be even weaker than August’s. But maintaining the highest level of economic output in U.S. history isn’t the worst place to get stuck.

A look at the Builders Exchange his past week or so reveals that the bidding market is slowing but local project news reflects the healthy local economy. Franjo Construction started work on a $3-4 million expansion/renovation project at Innovative Carbide in North Huntingdon Township. Franjo also pulled a permit for a $3 million dispensary buildout for Solevo Wellness at the Streets at the Meadowlands in North Strabane. Massaro Corp. was awarded the $1.2 million WVUM Ruby Hospital radiology reading renovation. Waller Corp. started work on $5 million The Eagle Food & Beer Hall for Thunderdome Restaurant Group. Pitt is conducting final CM interviews with Massaro, Turner and Whiting-Turner for its $200 million central plant/Human Performance Center project. And the $200 million-plus, 600,000 square foot office tower proposed by JMC Holdings has gone back out for CM proposals. Last time, JMC worked with Turner, PJ Dick, Mascaro, and others, hiring Turner for preconstruction services.

This is more than a bit wonky. As the U.S. economy hits a new record for economic expansion, the age of the business cycle is making people worry about the next recession. That’s not a bad thing. The longer expansion continues, the closer we are to the next recession. One of the indicators that is getting more airplay these days is the inverted yield curve. I don’t blame you if you can’t get too motivated to get to know this indicator but here’s the thing: an inverted yield curve has preceded the last three recessions and seven of the last eight.

We’re going to devote an article to the yield curve in the July/August BreakingGround but here’s the short-hand version until then.

The yield curve describes the difference between the interest rate on short-term and long-term government loans (or bonds). The long-term bonds should have higher rates because there’s a greater risk of something (like inflation) eating at the money you get repaid as time goes on. When the long-term rates are lower than short-term rates, the yield curve is negative or inverted. There’s a whole technical explanation in BreakingGround (and on the Internet) but the short version is that the yield curve inverts when lots of people are nervous about the economy and invest in long-term bonds with lower rates. The longer this situation lasts (see the red line below the white one below), the more likely that a recession will occur within 6 months to 2 years. It also makes it more likely that the Federal Reserve Bank will cut rates in July. That will make the economy happy, at least for a while.

PBX reports that March Westin has early bid packages out to bid on the $60 million Hodges Hall renovation at WVU.  The PBX also reports that Al. Neyer will start construction late summer on the $39 million first phase of its new office building at 21st & Smallman.Dick Building Co. was awarded the contract for the $2.7 million TI for Industrious at Liberty Centre. A. Martini & Co. will be doing $1.8 million renovations to PPG Wintergarden’s event space for Bottle Management (the company that developed City Works restaurant). Jendoco Construction has started on the new $5 million exhibit and office for Contemporary Craft in Lawrenceville. Shannon Construction was awarded the contract for the shell and core renovations at Station Square.

This may be looking for the dark cloud in the silver lining, but there’s an interesting economic indicator that appears to be a warning about the economy. It’s called the “output gap” and it’s an indicator of how close the economy is to the full potential GDP output. In other words, how close are we to having no more capacity to grow, either because there are no more workers or no more capacity to make things. That’s a pretty accurate description of today’s conditions. The thing that makes this measure worth noting is that a recession has followed the peak of the output gap every business cycle for almost 50 years. The question is: how close are we to peak?

There is no reason that the economy has to go backwards just because it has when conditions were similar in the past. The most practical and urgent conclusion to draw from the current output gap is that the shortage of skilled workers and capacity could limit the ability of businesses to expand, even if their sales are growing. Adding a new plant or new equipment won’t help you grow if there is no one to occupy or operate it.

A few of the projects that have been in the news lately are either bidding or getting ready to bid. Packages are bidding and have been let by Forest City Enterprises for the $20 million conversion of the Freight House Shops to the UPMC training center. The $45 million Produce Terminal/1600 Smallman Street mixed-use development, being built by PJ Dick, is getting close to construction. Al. Neyer Inc. is preparing to start work on two new buildings, totaling 267,000 square feet at the Clinton Commerce Park in Findlay. There is a $6 million UPMC/Indiana Hospital joint venture cancer center out to bid to AIM, Landau, Massaro, MBM, Mosites, Shannon and Volpatt. New-Belle Construction has started work on a 67,000 square foot warehouse/office in the Technology Drive industrial park in New Stanton.