Aggregate demand expected to grow through 2017

Construction materials demand continues to increase for most areas of the country.

The first quarter of 2017 is slightly lower than in 2016, probably due to the unusually good weather in 2016. The last three quarters of 2017 should do better than 2016 in all segments. Surprisingly, construction contracts for shopping centers is up for 2017 despite the turmoil in the retail sector (“the retail ice age”). We do not expect this to last, as it will take a few years for mall designers to create new profitable uses for the space.

Another surprise is the weakness in new home construction. Given all of the good news about housing demand and low mortgage rates, in normal times housing starts would be 25 to 50 percent higher. The months of supply on the market remains low, so it is not lack of sales, rather we think it is structural changes in this segment.

The first structural impediment is the shift to a “gig economy.” That is, fewer 20-year employees with the same company and a lot more with five years or less seniority with a company. Being less certain of their work location five years from now, they keep renting. Part of this is the increasingly disruptive impact of technology and international competition and part of this is employees who do not want to be tied too closely with one company in one location.

Couple that with the rental prices being much higher now than six years ago, and we have a lack of enough buyers with the down payment needed to qualify for new housing.

The nonbuilding segment has the best near-term outlook (next three years), as more federal support and higher gas taxes at the state level are boosting road and bridge work. The increases will be good but not great as many areas are struggling to find new money for higher pension and healthcare costs. This trade-off struggle is intensifying as stock returns are lower than planned and pension costs are higher. Illinois is a dramatic example of this conflict.

Regionally, the map shows the five-year total percent change in aggregate demand by state. It can be seen that most of the country has fully recovered from the recession. If it were not for the volumes during unsustainable bubble years of 2005-2007, we would be nearing a new record high for aggregate demand this year.

We are still calling for a mild downturn in 2018, led by housing.