Weekly Industry Crib Sheet: Industrial Building Construction Set for Tepid Growth
November 11, 2013
Industrial building construction will continue to experience grow over the next five years, despite declines in revenue, according to a report from IBISWorld. This will be driven by upticks in numerous domestic manufacturing sectors and favorable lending rates.
The industrial building construction industry is responsible for constructing factories, assembly plants and mineral processing mills. Its growth is naturally dependent on the health of the U.S. manufacturing sector, as most industry projects are related to buildings used to produce and distribute goods. Interest rates, property values, and lending standards also have strong influence.
Industry revenue has fallen an average annual 1.2 percent to $45.6 billion in the five years to 2013. During this period, the industry experienced significant revenue volatility. Government spending at the federal and local levels protected the industry between 2008 and 2009 by channeling investments into manufacturing facilities and the automotive sector.
However, cutbacks in government spending, coupled with overdevelopment and slow economic growth, caused industry revenue to drop 18.2 percent in 2010. The industry returned to positive growth in 2012, when industries like the semiconductor machinery manufacturing industry expanded production, thus, increasing demand.
Growth is expected to continue over the next five years as operators benefit from an improved economy and the reinvestment of corporate profit into new manufacturing and distribution structures. Foreign demand for U.S. goods is also expected to boost industry growth. Additionally, foreign companies have expanded their manufacturing operations in the United States to be closer to their end-consumers. As a result, demand for new or remodeled industrial space is set to rise as manufacturers and industrial companies look to expand production, lifting industry revenue up by anticipated 2.3 percent in 2013.
While lending standards will likely loosen over the next five years, interest rates are also expected to rise, thereby increasing the cost of new industrial development. Additionally, more rapid growth will be stifled by the outsourcing of basic manufacturing to countries with lower labor costs.
Analysts expressed surprise that the U.S. economy grew to a 2.8 percent annual rate from July to September, yet cautioned that much of the expansion is tied to a buildup of company inventories.
The growth rate tops the 2.5 percent rate for the second quarter of the year and is nearly a full percentage point higher than the forecast of many economists.
Some of the data released by the U.S. Department of Commerce, however, paints a less rosy picture. Business and consumer spending, critical measures of economic health, slowed during the third quarter. Furthermore, the growth of inventories -- goods sitting in warehouses and store shelves -- suggests that businesses were too optimistic about consumer demand.
“In other words, the economy remains stuck in the mud,” wrote Bank of America economists in a research note.
Consumer spending, which excludes manufactured goods, dipped to a 1.5 percent annual rate from 1.8 percent the previous quarter, the Commerce Department reported. Flat spending on services accounted for much of the decrease. By contrast, consumer spending on durable goods increased at a 4.3 percent rate, boosted by a 7.8 percent annual growth in spending on autos and other manufactured goods.
Business spending on computers, technology, and other equipment fell at a 2.1 percent annual rate, only the second quarterly decline since the recovery began in mid-2009. Economists have predicted that businesses would take a cautious approach toward expansion and investment in light of the political conflict in Washington over the federal budget.
Corporate reluctance to invest will likely have an adverse effect on the job market, said Sung Won Sohn, an economist at California State University, Channel Islands. “Because business confidence has diminished, they’re not buying equipment and they’ll slow hiring as well,” he told the Los Angeles Times.
The 16-day government shutdown apparently had no effect on third-quarter growth, but economists estimated that it cost the U.S. economy $24 billion last month.
Many economists agree that the latest data indicate that the Federal Reserve Board is likely to maintain its strategy of purchasing $85 billion a month in bonds through March. The purchases are intended to keep long-term interest rates low and encourage more borrowing and spending.
“The economy is not growing at a strong enough rate for the Fed to think that cutting back on its support makes sense,” economist Joel Naroff told The Associated Press.
Economic indicators rose in September signifying positive market conditions before the government shutdown, according to a report released by The Conference Board.
The Conference Board index showed that leading indicators rose 0.7 percent in September, following a 0.7 percent gain in August and a 0.4 percent gain in July. It was the fifth such gain in six months. The Conference Board index comprises 10 different economic indicators, including average weekly hours for manufacturing workers, the ISM index of New Orders, manufacturers’ new orders for nondefense capital goods excluding aircraft orders, and others. Economists, who had been predicting an increase from 0.2 percent to 0.8 percent, look to the index as a predictor for market conditions in the following three to six months.
Action Economics economist Michael R. Englund told the New York Times the index was not an appropriate indicator to change his view that overall economic growth would remain at 2 percent for 2013.
However, Conference Board economist Ken Goldstein said the indicators showed modest growth that could gain momentum prior to the government shutdown.
“Beyond the immediate fallout of the shutdown, the biggest challenge is whether relatively weak consumer demand, pinned down by weak wage growth and low levels of confidence, will recover during the final stretch of 2013 and into 2014,” he said.
While personal income rose 0.5 percent in September ahead of economist predictions, consumer spending is at a lull as more Americans put their earnings into savings, according to the U.S. Commerce Department.
A rise in government wages following the shutdown contributed to the surge in personal income, 0.2 percent higher than economist predictions. But more consumers opted to add to their savings in September, which rose to 4.9 percent, 0.2 percent higher than the previous month.
Although job gains soared to 204,000 jobs added last month -- ahead of economist predictions -- the unemployment rate rose to 7.3 percent surging past the five-year low of 7.2 percent reported in September.
A Thomson-Reuters and University of Michigan consumer sentiment index fell from 73.2 in October to 72, a two-year low, in November. Consumer confidence and lack of spending have been swayed by more than two weeks of a government shutdown and rising mortgage rates, and could be a precursor to holiday season spending.
“The holiday retail sales season is looking relatively modest,” said IHS Global Insight economist Chris Christopher, as reported by NASDAQ.
Initial jobless claims dropped by 9,000 to 336,000 in the week ending Nov. 2, according to the U.S. Labor Department. But a slight uptick in the unemployment number and pending expiration of millions of jobless benefits portend a dismal economic outlook.
The less-volatile four-week average fell to 348,250, down 9,250 from the previous week. In a separate report on Friday, the Labor Department announced that employers added 204,000 jobs – well above the projections of 120,000. September’s figure was revised up by 15,000 to 163,000, and August’s figure was revised to show 238,000 new jobs, rather than the initially reported 193,000.
Manufacturers added 19,000 jobs last month. The manufacturing sector has added 55,000 workers, on a year-over-year basis.
Unfortunately, all that good news was not reflected in the unemployment figure, which ticked up to 7.3 percent. Unemployment had fallen steadily all year, though largely due to people dropping out of the workforce.
Even worse, The Washington Post reports that 2.1 million workers are poised to lose their unemployment benefits on Dec. 31. The Emergency Unemployment Compensation program that has extended unemployment benefits well past the 26 weeks that are typical for most states. Michael Feroli, the chief economist of JP Morgan, estimates that the expiration of benefits will shave about 0.4 percentage points from first-quarter economic growth next year, the Post reports.