Aggregate demand expectations for 2019

It feels like we have a new economy.

While the new policies are great, I didn’t think they would produce this much growth so soon. The good news is growth is likely to continue for a few more years.

Jobs are plentiful, wages are increasing again and corporate profits are increasing by double digits. The trade wars are beginning to turn into victories, and the United States is now the world’s largest producer of energy. We are even an exporter now.

I feel like ending the review of the U.S. economy right here. But we do have to mention some issues that may disturb all of this good news.

Some people are talking about 4-plus-percent GDP growth while others are increasing their probability of a recession in two years. The reason SC-Market Analytics (SC-MA) is still optimistic about the economy yet cognizant of a widening forecast track for GDP is due to several unknowns:

1. Will the Federal Reserve raise interest rates too far and choke off the expansion by 2020?

2. Will the trade issues with China worsen and spill over into a geopolitical conflict?

3. Will Iran and perhaps others become more belligerent and cause kinetic conflict?

4. Will a new Congress launch an endless series of investigations and impeachment proceedings?

5. Will a black swan event cause massive disruption?

6. Consider, too, that the debt bomb finally bites, as U.S. federal debt surpasses $21 trillion.

This list could be extended further, but these six are enough to cause wide divergent forecast paths. Considering these factors, SC-MA’s economic summary is as follows: GDP growth averages near 3 percent for three to four more years. That is, the economy will continue to do well. All of the potential problems are counterbalanced by strong fundamentals, as long as current policies continue.

Aggregate demand

U.S. aggregate demand is strong. Demand is not growing as fast as it was these past few years, but it is poised to move even higher.

Residential demand has increased 50 percent since 2011. Even though the economy remains strong, structural changes have dramatically changed basic housing demand.

First, high student debt levels and investing in life experiences (i.e., traveling) have replaced the desire and capability of many millennials to save for home down payments. Couple this with a declining birth rate and a preference to live near urban entertainment areas, and the result is lower demand for housing among a large cohort of potential first-time buyers.

Add to this high home prices and rising mortgage rates, and the result is flat demand for several more years.

Come 2022 and 2023, demand will pick up again as more people see rising home equity values as a way to build wealth. That is, the wheel comes full circle – back to saving for a home.

Nonresidential demand, meanwhile, has jumped 20 percent since its trough in 2013. Demand crashed less during the recession and grew slower as a result.

In addition, more structural changes have muted the demand. The retail ice age slowed new retail demand, and workplace space requirements per worker have decreased.

The bright spots have been new health care space and increased warehouse demand as everyone adjusts to the Amazon effect. Once again, near-term demand will be flat as all these factors retard any new boom in nonresidential space.

Looking a few years ahead, demand will increase strongly as new manufacturing and new retail ideas form and investors put new money into this segment.

Lastly, nonbuilding demand has increased 23 percent since its trough in 2010. This segment benefited the most from the 2009 stimulus bill, even though it ended up being a small amount of the total spent.

The backlog of infrastructure needs is enormous, even though the totals thrown about are unrealistic. With state and local government tax receipts at near-record levels for several years, the ability to fund some of the needs is strong.

Also, many states have increased their gas taxes to help restore their highway budgets.

Infrastructure will have to compete against higher pension and health care costs, but enough money will be left over to fund higher public works. Even without a massive new federal commitment to infrastructure, this segment will grow by more than 27 percent between 2017 and 2023.

Total demand is up 22 percent since its trough in 2009. Adding up the segments yields additional gains of 19 percent between 2017 and 2023. Based on the SC-MA outlook, aggregate demand will increase by about 429 million metric tons between 2017 and 2023. Nonbuilding will account for about 275 new million metric tons, or 64 percent of the total change.

By all accounts, the new higher demand and continued strong pricing power will result in several more years of strong sales growth.

Demand by region

We all know about the painful drop in demand during the last recession. The high fliers – Arizona, California, Florida, Nevada – suffered the most.

Conditions are good, though, and they’ll get better mainly due to higher state and local nonbuilding activity.

A surprise, however, is that the old Rust Belt will do well as U.S. manufacturing surges. New York and other high-tax states will not do well as business and workers seek a better living environment. Most of this will be caused by the tax law changes.

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David Chereb, Ph.D., SC-Market Analytics (SC-MA), produces customized market forecasts by major segments of construction, from the county level up. Clients use SC-MA market intelligence reports for business planning and acquisition analyses in aggregate, ready-mixed concrete and cement.