Wells Fargo Construction Insights for 2020

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The year in review and what’s ahead in 2020

It’s hard to believe we are nearing the end of 2019 and as usual, it was an interesting and challenging year in the construction business. For the most part, it was another good year for the industry due to the continued favorable economic environment. Whether you are a contractor, dealer, distributor, or service provider to the construction industry, the prolonged economic expansion has had an impact on your business. This expansion however presented many businesses with opportunities as well as challenges.

The strong economy has resulted in the shortage of skilled labor presenting challenges to all businesses. This topic was covered by Peter Gregory in the Q2 issue of Construction Quarterly. Please take a look at the insight he provided, if you haven’t already.

The US economy has grown for 125 consecutive months following the Great Recession which ended in June of 2009. This marks the longest economic expansion in US History. Despite this, the current economic expansion has been slower than previous periods of economic growth. Through this expansionary period, the economy has grown at an average rate of 2.3% per year, dating back to 2009. In comparison, the economy grew at an average rate of 3.6% per year during the 1990s. Some economists believe that the lower productivity growth rates in the US are partially the result of a combination of a lack of skilled workers (due to the low unemployment rate) and an aging population. The lower growth rate has sparked discussions of whether slower economic growth may be the new normal. This may also be part of the reason for the length of the economic expansion.

Despite expansion continuing late into 2019, the growth rate is slowing and there are signs the expansion could be coming to an end.

Following are some items causing concern or pointing to a recession:

  • Global economic uncertainty caused in part by the US/China trade war.
  • International growth rates in major developing economies are slowing (i.e., China)
  • A slowdown in manufacturing output and a downturn in business confidence as noted in Caterpillar’s recent press release dated 10/23/2019.
  • The inverted yield curve (short-term rates being as high, or higher, than long-term rates)
  • Fear or worry that a recession is near because history suggests we might be due for one.

There are also several signs pointing to a continued expansion:

  • American households are still spending, and have healthy balance sheets (i.e. spending not funded through increased borrowing).
  • The labor market is strong, with low layoffs and stronger wage growth fueling household income.
  • The Fed has been easing its monetary policy (The US Central Bank cut interest rates this past Wednesday, October 30th, the third straight rate cut – despite the Stock Market (S&P 500 and DOW) at all-time highs.
  • The global economy should rebound if trade tensions ease.

Economists often say that recessions aren’t caused by old age. They are caused by policy mistakes. Both domestic and global economic developments play an important role in driving activity and financial markets in the US. US multinationals account for a large share of US output and labor productivity growth, and their presence in financial markets is large. Also, in an indirect manner, even smaller domestic businesses positively affected by strong economic conditions throughout the world.

Because of its size and interconnectedness, developments in the US economy have the most significant effect on US based businesses and those around the world. The US has the world’s single largest economy, accounting for 20+% of global GDP (at market exchange rates), and more than a third of the stock market capitalization. The US is the most important export destination for one-fifth of countries around the world. The US dollar is the most widely used currency in global trade and financial transactions, and changes in US monetary policy and investor sentiment play a major role in driving global financing conditions (Source: World Bank 2016).

At the same time, the global economy is important for the US as well. Affiliates of US multinationals operating abroad, and affiliates of foreign companies located in the US account for a large share of US output, employment, cross-border trade and financial flows, and stock market capitalization.

The following table provides detail on the top 10 world economies and their GDP growth.

None of us know exactly what to expect of the economy in 2020 and beyond but my belief is that we should be prepared for continued minimal or declining growth rates and possibly an economic contraction/recession in late 2020. Either way it is a given that the global and domestic economic conditions will continue to have an impact on your business in the future.

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