Associated Builders & Contractors economist: Challenges, some opportunities, lie ahead 

Builders and building owners face continued tough sledding, but some opportunities are emerging, Associated Builders & Contractors Inc. Chief Economist Anirban Basu told a gathering of southwest Idaho ABC members and guests Oct. 6 in Meridian.

Office, retail and lodging construction “will be weak for years to come,” he said in an interview following the event at the Courtyard by Marriott. Tight credit, regulatory restrictions on real estate lending, and persistent job losses that reduce demand for business space are among factors.

“During times when real estate is in duress, you want to be a buyer rather than a supplier,” Basu said. Some efforts are under way to purchase properties deemed under-valued – funding is through investor funds and real estate investment trusts rather than bank loans in many cases, he said.

Problems continue in the banking sector, including some closures of regional banks that the federal government does not consider “too big to fail,” he said. Some of the big banks are performing better, though they continue to face risk and stepped-up regulatory scrutiny.

Basu told the group that federal economic-stimulus spending is helping the economy, though he believes more should have been directed to infrastructure such as the electrical grid, energy production and the air-traffic control system. State and local fiscal relief, and tax relief, are taking sizable shares.

Intense federal spending is expected in the next six to 12 months, “then, things will get worse again, potentially,” he said. The private sector will have to drive growth, a tough prospect given tight financing conditions and demand that remains limited, he said.

An $8,000 federal tax credit for first-time homebuyers is boosting home sales, but the half of the market that does not involve first-time buyers continues to sag, said Basu, who is based in Baltimore. A search for value rather than luxury is seen in much of the housing market.

Median home prices in the most recent year-to-year period fell 16 percent in Boise-Nampa, 13.7 percent in Seattle-Tacoma and 9.6 percent in Spokane. That’s much better than the 25 percent to 35 percent drops seen in once-booming markets including Las Vegas, San Francisco, Miami, Phoenix and parts of southern California.

“This is a time to really participate in these markets,” Basu said, referring to the large, hard-hit metro areas. Despite big drops in home sales, construction starts and prices, they offer attractive demographics long term and will see activity from value-oriented buyers, he said.

“The housing market still has several quarters of rough stuff ahead,” he said. Mortgage delinquencies and job losses continue to pressure the market, though buyers can find some advantages in negotiations as many sellers can’t wait until the market officially hits bottom, he said.

Nonresidential construction is up in some sectors. From August 2008 to August 2009, spending on manufacturing-related construction increased by 30.4 percent – companies retooled or relocated to stay competitive, Basu said. Construction spending related to the power industry increased by 9.1 percent.

It was not the same story for commercial construction and office construction, which fell by 22 percent and 33 percent, respectively, as job losses mounted, he said. Lodging construction shrank further, by 36 percent.

“The employer remains on the defensive, for a whole host of reasons,” Basu said.

All job categories but education and health services are shedding jobs, he said. The government segment was adding jobs until budget crunches forced many state and local governments to cut positions, he said.

Manufacturing has cut the most jobs – positions that will be re-filled eventually, though not necessarily in the U.S., Basu said. Other hard-hit segments include construction, information, distribution, and jobs held by teenagers – unemployment in that category is up following an increase to the minimum wage, he said.

“Idaho was a late comer to the jobs recession but is fully participating,” he said. For example, professional and business services jobs are in decline.

Though Americans are paying the price for excess liquidity in the mid-2000s, predictions that the U.S. would suffer from its excesses as other countries’ economies pressed on fell by the wayside as the recession turned global, Basu said

“Things could have been much, much worse,” he said. “I know they don’t feel like it.”

Economic output in the past year shrank by less in the U.S. than it did in some locations, helped by U.S. government moves to spend money on economic stimulus and to keep interest rates low, Basu said. Output dropped by 2.7 percent in the U.S. compared to a 3.4 percent year-to-year decline for advanced economies overall, he said, adding that the U.S. produces one-fifth of global output “even in a bad year.”

Global economic output is expected to shrink by 1.1 percent this year, compared to increases of 5.2 percent in 2007 and 3 percent in 2008, he said. Next year also will be a sub-par year for the global economy despite U.S. stimulus spending and a projected 3.1 percent rise in world output, he said.

It’s too early to tell if inflation will show up as a problem in the economy, Basu said.

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