Bob Hughes, DesignIntelligence’s Vantage economics writer, provides our December 2017 global economics report and how it impacts the A/E/C industry:
Economic data over the past month continue to show accelerating momentum for many economies around the globe. In Europe, real GDP growth registered a 2.6% pace in the third quarter measured from a year ago, the fastest rate since 2010. Furthermore, the Markit Purchasing Managers Indexes for both manufacturing and services industries both came in ahead of expectations, and hit the highest levels since 2014. Overall eurozone employment rose 1.7% in the third quarter (the fastest pace since 2007), and unemployment dropped to 8.8% (the lowest since 2009). Europe is still burdened with uneven economic performances across its member countries, but the trends appear favorable for most.
In the U.K., conditions are a little more mixed. Political uncertainty combined with Brexit anxiety are weighing on activity. Third-quarter real GDP came in at just 1.5% from a year ago. GDP growth has been slowing since hitting a peak of 3.2% in the second quarter of 2014. Retail sales paint a similar weak picture, rising 1.5% from a year ago in November. On the positive side, manufacturing output in the U.K. has been picking up, increasing 3.9% over the latest 12 months (the second highest pace since 2013), and consumer prices measured from a year ago are up 3.1% (the fastest pace of increase since 2012).
In Japan, the influential TANKAN survey of large manufacturers hit the highest level since 2006, real GDP rose 0.6% in the third quarter—an annualized pace of about 2.5%—the seventh consecutive quarter of growth, and the unemployment rate held at 2.8%, the lowest since 1994 though still well above the rates that prevailed for most of the 1950s through 1970s. Industrial output is picking up as are exports, but the threat of deflation lingers.
Real GDP in China rose 1.7% in the third quarter or 6.8% from a year ago. The pace of growth appears to be stabilizing after decelerating from mid-teens growth in the mid-2000s. Similar decelerations are seen in retail sales and industrial output. The major concern for the Chinese economy is the financial system, specifically, loan growth and non-performing loans. Outstanding loan growth has slowed significantly but is still up 13.3% from a year ago. On the positive side, the CPI in China has been rising at a relatively steady 1.7% year-over-year over the past three years.
The common element for several of these economies is that their central banks have begun tightening monetary policy in response to signs of strengthening economic activity (see Figure 1). The U.S., the U.K., and Canada have already raised policy rates, and China has taken steps to boost rates outside of the main central bank rate. Discussions about possible next steps have begun at the European Central Bank and Bank of Japan. Continued improve-ment across many of the major economies is likely to support further tightening of monetary policy (i.e., rising interest rates) leading to some dampening of activity down the road. However, the slow pace of tightening suggests a lower risk of policy-induced recession or severe slowing.
The U.S economy is getting closer to firing on all cylinders. The vast majority of economic indicators ranging from measures of aggregate output to labor market conditions to consumer and business confidence to financial indicators show solid favorable trends. Real GDP has posted back-to-back quarters of growth above 3%, consumer spending is robust, inflation is hovering in the 1.5% to 2.0% range, household net worth is at a record high, and corporate profits are posting solid gains. Looking ahead, the favorable trends in a broad range of data have helped push the Leading Economic Index from The Conference Board to a 5.2% growth rate measured year-over-year, the highest pace since mid-2015 (see Figure 2).
Economic conditions have supported the fifth increase in the Fed funds target rate since December 2015, and the Fed has begun to slowly unwind its holdings of Treasury and mortgage-backed securities. Risks for the economy include changes in leadership at the Fed, the possibility of increased financial market turbulence, the on-going dysfunction in Washington, and of course, the always present risk of unforeseen shocks. Over the longer-term, the most significant risk by far is the deteriorating fiscal position of the federal government. The recently passed tax legislation is projected to add to the already precarious federal debt burden.
Despite the generally positive news for the broad economy, nonresidential construction activity continues to slow. Total nonresidential construction spending was flat over the 12 months through October as a 1.3% drop in private sector spending was off set by a 2.1% gain in public sector spending. The overall level of spending has been trending sideways since May 2015 (see Figure 3). For the 30 months from May 2015 through October 2017, every monthly total expenditure has been within 5% of the $700 billion mark.
From the commercial bank lending side, overall lending by commercial banks has been growing at a relatively slow and steady pace between 3% and 4% for past several months. Commercial real estate lending has been growing at a faster pace than overall bank lending, but that pace has been slowing (see Figure 4).
With slowing growth for both total bank credit and commercial real estate loans, commercial real estate loans as a share of bank lending portfolios has been holding around 22% of total bank loans and leases (see Figure 5).
Constrained bank lending and expenditures near peak levels may represent significant headwinds for future nonresidential construction projects.
DesignIntelligence will continue to keep you, our readers, informed about the state of global economics.
Bob Hughes is a senior design fellow with the American Institute of Economic Research, and a DesignIntelligence economics fellow and senior contributor.