Forecasting aggregate demand in the months, years ahead

The negative impact of the coronavirus is increasing.

Our view is that the second and third quarters of 2020 will be hit the hardest, and 2021 is mixed.

The assumptions drive the outlook, as with every forecast. We assume effective treatments will be widely available by late this summer. We also assume social distancing will be mostly effective in flattening the curve.

An effective vaccine is assumed to be widely available by mid-2021. We also take into account the $2 trillion rescue package and a new phase four of an additional $2 trillion (or close to it) being passed into law by this summer.

The U.S. economy is about $20 trillion per year, or $5 trillion per quarter. If GDP drops 50 percent in the second quarter, that is $2.5 trillion lost – pretty close to the $2 trillion rescue package. So, they got the size about right.

GDP and employment have dropped off a cliff. We don’t expect things to return to normal this year. The rescue packages and gains in the fight against the virus will help move us toward normal, but too much has changed for things to return to normal soon.

This means many current construction projects are now halted, and the demand for new projects will suffer. Many new residential and nonresidential projects will be delayed by six months to a year.

For now, most nonbuilding projects will continue because they are the least worker intensive (i.e., worker distancing).

Questions to consider

Here are some speculative changes we are looking at: Will there be a dispersal effect where demand for suburban homes (or even rural) replaces urban apartments? Is the change temporary and small, or longer lasting and fairly large? For now, we think it will be small and last for a few years.

Will remote working gain staying power or fade as the virus fades? We’ve had the technology for about one-third of our workforce to work remotely for at least the last five years, but only now is it being implemented widely. We think it will remain much larger going forward – even as things get back to normal. Maybe 15 to 20 percent will continue to work remotely.

Will roads gain favor over mass transit? None of these are all or nothing, but changes of 5 to 10 percent will make a big difference in the types of new construction projects we see.

Residential

The demand for new homes is plunging as declining consumer confidence and massive layoffs have disrupted the desire for a new home and reduced the number of new qualified buyers. Lower-priced homes and multi-family properties will be hit the hardest. The worst declines are during the rest of this year. Not until mid-2021 does demand for residential aggregate turn positive. By 2022, double-digit quarterly gains are expected.

Nonresidential

This segment will be hit the hardest and the longest. Shopping malls, restaurants and office buildings are going to be down by more than 20 percent on a year-over-year basis, with declines lasting into late 2021. Even after 2021, the increases will be smaller than before. The Amazon effect is now compounded by the “virus effect.”

Nonbuilding

What virus? There is little impact for this segment. A slowdown is the most noticeable impact. Further out (two-plus years) is where the impact will be felt in slightly slower gains than before due to lower tax receipts at all levels of government. While there may be a new infrastructure package, past experience shows that if it is $2 trillion, much less than 50 percent will go toward true infrastructure that boosts aggregate demand.

Also, no income and no profits means no tax revenue. The impact will hit infrastructure spending in 2021 and into 2023.

2019 to 2022 impact

When all of these factors are combined, it means a decline in 2020 of more than 7 percent. By mid-2021, some gains begin but the improvements are small through 2022.  This means there will be smaller aggregate price increases than normal.

David Chereb, Ph.D., is with S-C Market Analytics (SC-MA), which 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-mix concrete and cement. For more information, visit sc-marketanalytics.com.

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