Chris Kuehl
Managing Director • Armada
There is always something happening in the economy guaranteed to make a fool of economists. After all, the only function of economic forecasting is to make astrology look respectable. Most of last year the predictions were some version of gloom and doom and every quarter there was further evidence of growth (5.2% in Q3 and around 2.4% for Q4). Now there is debate over what to expect in 2024. There are those that are calling for a shallow recession in the first half of the year (-0.9% in Q1 and -0.7% in Q2). On the other hand, there are those that see decent growth in the first half of the year but a slower end to 2024. The Armada models seem to be favoring that latter interpretation.
There have been four drivers of growth over the last few quarters. These have been responsible for the performance in Q3 and Q4 of last year and seem to be factors now as well. The fear is that two of the four are already showing signs of retreat and the other two will be facing some challenges as well. These are also significant as drivers for the construction business. The first is consumer spending, it has been performing well above the twenty-year trend line despite the fact consumer debt is sitting at record levels ($7 trillion in credit card debt and $20 trillion in overall debt). The latest retail numbers were far better than expected with a reading of .63 compared to .15 in November. At the moment the bottom third of income earners are living paycheck to paycheck and the middle third is starting to feel the pinch as well with 55% living paycheck to paycheck but the upper third is still spending aggressively. The crucial factor for consumer spending is employment. As long as people feel secure in their employment they will continue to spend and access credit. With the jobless rate still at 3.7% there is not a lot of employment angst.
The second driver has been non-residential construction. It has been growing for several years now but the industry is starting to worry about the pipeline in 2024. Many of the large projects that drove growth have been completed and there have been few new ones undertaken. There is one major factor on the horizon and it relates to the third driver for the economy – government spending. The money that flowed out of the government to cope with the pandemic has been dispersed but two years ago there was a surge in allocating money for infrastructure with the CHIPS act, Inflation Reduction Act and others. This money is now starting to flow as the states and communities have been kicking in their share. This will be a major motivator for non-residential as long as these projects are linked to infrastructure. There is still not much movement in office development or retail but medical development is making a comeback and the logistics business remains strong. There is also significant growth in the manufacturing sector as there is still interest in reshoring with further investment in robotics and technology.
The final piece of the growth equation is the one that has been fading fast. The supply chain chaos of the last few years convinced many that the JIT system was broken and that inventory hold was necessary. There has been a dramatic increase in inventory accumulation as businesses no longer trusted the ability to get product when they needed it. That inventory build drove Q3 expansion. Now these inventories are flushed out and the re-order cycle has been thrown off. Business will be seeking to reduce the inventory build and may not need much replenishing until later in the year.
The fact is that factors such as a reduction in interest rates by mid-summer can alter these assessments. There can also be negative factors playing a role – surge in joblessness, higher priced commodities, further trade tensions and maybe even a reaction to the political situation in the US.
