Strange days indeed

Back in 1977, John Lennon wrote that “nobody told me there’d be days like these”.

Having survived the planet-wide disruptions caused by Covid-19, the American economy is showing some confusing signs of both strength and weakness. In March, we had banks in the U.S. and Europe fail, and there was another interest rate hike by the Fed.

A note in the IWF bulletin by Warren Shoulberg on March 21st (iwfatlanta.com) said that anyone who needed proof that the home construction business has had a serious downturn should look no further than new Bureau of Labor Statistics data which showed a 50 percent drop in open construction jobs in January (the most recent numbers available).

“It’s no secret that the housing market has slowed considerably but new data from the Bureau of Labor Statistics offers hard proof that the downturn is impactful,” noted Shoulberg.

“Even with some backlogs in the non-residential sector of the construction industry, continued Federal Reserve policies that are driving up mortgage rates and slowing housing starts are likely to slow construction jobs as 2023 progresses. The subsequent slowdown in building materials, including wood, will no doubt correspond accordingly.”

But prices for raw wood and sheet goods have not yet responded as dramatically as one might have hoped. In a webinar in early March that was hosted by Farm Credit East, lumber analyst Paul Jannke gave his prediction on that:

“In 2023, we’re looking at a 7 percent decline in lumber consumption in North America, which equates to about 4 billion board feet. The bottom line is we do expect consumption to fall, but don’t expect it to be very sharp.” If demand stays that strong, prices may inch down but they won’t tumble.

The bank collapses and emergency rescues are a little unnerving because they may lead to more regulation in the industry and greater caution in lending, especially among regional banks. That can have an adverse impact on homebuilding, and indeed on economic growth across most sectors. The Federal Funds Effective Rate rose from 0.2 percent in March 2022 to 4.57 percent in February 2023, and the Reserve raised rates for the ninth consecutive time in late March to just under 5 percent.

But there was good news for consumers as inflation in February dropped to an annual rate of 6 percent, which is down by one third from a high of over 9 percent last summer. And the Federal Reserve expects the economy to grow by 0.4 percent this year, which is hardly impressive but still avoids a recession. However, they also expect unemployment to rise to 4.5 percent from its 3.6 percent level in February.

The Census Bureau reported that housing permits for privately-owned units were down 17.9 percent in February from a year ago, and housing starts dropped 18.4 percent. Completions, however, were up 12.8 percent, which indicates that construction is catching up with demand.

As Lennon might say, “Most peculiar, Mama…”  

This article was originally published in the May 2023 issue.