Week of February 3
A Sticky Situation
If you’re like me you started the week with a certain degree of economic related anxiety. The tariffs on Canada, Mexico, and China that President Trump announced on February 1 would have had a negative impact on the North American economy, likely increasing inflation and dampening economic and construction related activity. A cautious sigh of relief just 48 hours later when he then delayed them for Canada and Mexico. The tariffs on China were left in place, but a few loopholes to those tariffs creeped in by the end of the week. The end game here is still somewhat uncertain. Was this week the opening salvo in a renegotiation of NAFTA? Were the border and drug announcements by the Canadian and Mexican governments enough to forestall tariffs entirely? Are tariffs inevitable under the national security and/or unfair trade practice provisions? Time will tell and it seems like we just kicked the economic anxiety can down the road.
The week ended with a jobs report that showed that while the labor market has moderated somewhat it’s still very healthy. Putting the bookends of the week together it translates into a Federal Reserve that has no reason to cut rates further. I’d offer that we’re unlikely to see the Fed move again until the second half the year. This coming week should provide us with some additional insight here with CPI and PPI data being released.
Those of you that know me will remember that I’m a really positive guy, but it’s getting easier and easier to get wound up and see the downside of the economy. Just trying to buy eggs is turning into a stressful endeavor and leading to crime. That being said, I need to remind myself of what I preach in my presentations. Ignore the day-to-day news and focus on the fundamentals. For me it goes back to the labor market and consumers. The labor market is still strong and consumers, while nervous, are in good shape. We have a long way to go before we start ringing the alarm bells … unless you’re craving an omelet.
Important Data Points From The Past Week
Construction Spending Put in Place
Construction spending rose 0.5% in December on a seasonally adjusted basis driven mostly by single family activity, commercial, and data centers. For the full year construction spending grew 6.5% over 2023. When you look at spending over the last year the main drivers of growth was manufacturing, education, power, new single family, and residential improvements.
Looking forward spending is likely to ease. Manufacturing starts tilted downward in 2024 and that will be reflected in spending in 2025 and that contribution is unlikely to be replaced by growth elsewhere in the nonresidential space. On the residential side, single family activity is likely to slow due to high mortgage rates. Remember that this spending data includes work currently underway – as opposed to the Dodge Construction starts data which feeds the nonresidential component of the Census data. So in that sense it is somewhat backward looking. When you look at the Dodge Momentum Index, which was also released this week the planning queue continues to fill….but labor constraints and high rates will result in projects moving at a snails pace.
Employment Report
Jobs report Friday is one of the key data reads in the month and the report showed that 143K jobs were added in January. This was lighter than expected, but still pretty decent considering the uncertainty floating around. The unemployment rate fell to an eight month low of 4.0%. You can interpret this data in two ways. First, the positive—the labor market is solid and showing no major signs of weakness. A solid job market means that consumers are in good shape, and happy consumers means a happy economy. Now the negative—for those of you hoping for lower rates you’ll need to be patient. The FOMC is likely to view this report as a sign that they can keep rates elevated in and effort to move inflation lower.
Construction added 4,200 jobs in January – well below the 12 month average of just under 15K per month. Another sign that construction has moderated. Interestingly nonresidential specialty trades and nonresidential building employment were decent despite the spending numbers, while residential building employment added 1,900 jobs. Civil and residential specialty both shed around 2,000 jobs in January. The question would be is this slowdown temporary. I think what we’re likely to see here over the next few months is a period of stasis. Starts have been moving sideways, and spending will slow. However, finding labor remains difficult and depending on how the immigration crackdown goes it could get even tighter. The result is likely slow, but steady hiring over the next 3-6 months.
What I’ll Be Watching This Week
This week is all about inflation with both CPI and PPI on the docket. While neither are the Fed’s preferred measures they will provide meaningful insight as to the overall inflationary trend. The PPI reading will be especially useful to the construction sector in terms of input prices. Also set for next week will be retail sales and industrial production.
What I Watched on TV Last Week
Speaking of food related crimes, this is a story based VERY loosely on the great Canadian maple syrup heist back in 2011 and 2012. It’s pretty quirky—at times funny—combined with a solid performance by Margo Martindale as the lead and a strong one episode performance by Jamie Lee Curtis.
What Can I Do To Help?
I’m taking on a limited number of clients to help with bespoke analysis of the economy and construction and what it means for your company. Additionally, I’m always game to be a speaker at an event you’re hosting or to come and talk to leadership groups on the state the intersection of the economy, demographics, real estate and construction.
If you want to discuss either option sign up for a spot on my calendar.