Expect economic growth – not recession – in coming years

By |  August 19, 2019

Source: SC Market Analytics. Click to enlarge.

The economy is slowing – not by much, but it is slowing.

The biggest reason is a leveling off in capital investments. This is probably due to the China trade uncertainty and, to a lesser extent, the 2020 election, with businesses holding back a little as we all try to figure out what next year looks like.

It is remarkable that the economy continues to do so well after nine-plus years of growth.

The corporate tax cuts gave us a boost, and reasonable China and USMCA (United States-Mexico-Canada Agreement) trade deals will give us another boost. Because of these things, we do not see a recession in the next two years. We see more growth and higher profits.

For construction, little has changed in the outlook. The private segments of residential and nonresidential are roughly flat for the next few years, and nonbuilding continues to grow.

There are two important factors pulling residential in opposite directions: low mortgage rates and good wage growth. These are pulling housing upward and fighting against higher home prices.

The wave of rent control laws is, however, gaining speed in states such as California. This will dampen investor spending on new rental units.

As an economist, I’ve heard stories of rent control that go back hundreds of years, and they never lead to enough new units to make it easy to get rid of the controls. The dynamic law of supply and demand tells you it never leads to better outcomes over time.

For nonbuilding, the outlook is good but not great. State and locally-funded projects will grow as tax receipts grow in most areas. The stalemate in Washington, D.C., means no major new federal funding for highways.

Adding up the segments results in solid increases in aggregate demand for the next few years.

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