Week of February 10

Stop! Stop!
I’m Sorry Ladies and Gentlemen…

Those were the words yelled by Elvis Costello at the beginning of his 1977 appearance on Saturday Night Live as he abruptly stopped playing the song he was supposed to sing (Less Than Zero) and instead thrust headlong into Radio Radio, a strong condemnation of British radio. I can almost picture Chairman Powell saying the same thing to the data feeds coming his way. 

Monday brought with it additional tariffs on steel and aluminum to take effect on March 12. These will ripple through to building construction. The “Buy American” provisions on many federal contracts mean that infrastructure projects are already widely using domestic steel and shouldn’t see too much negative impact. Unlike the broader tariffs I think the end game is a little clearer here—domestic producers have been complaining for years about subsidies on Chinese production, and like the tariffs imposed in 2018 by Trump (which Biden continued) they are meant to try and level the playing field. Granted, there may still be a negative inflationary impact here. More tariffs are likely to come on Canada and/or Mexico in addition to reciprocal tariffs across many more countries.

Like SNL this is all happening in real time, making any forward-looking analysis extremely difficult. In my last client presentation at Dodge I said that macro volatility is going to continue. Boy was I right…

Important Data Points From The Past Week

Canadian Building Permits

Canadian building permits grew 11% from November to December driven entirely by residential (multifamily to be precise), while nonresidential building permits fell. Most of the gains were in Ontario and British Columbia.

For the full year total building permits rose 7.8% over 2023, with again the bulk of the strength seen in residential activity. I think it’s doubtful that the Canadian economy can sustain similar growth in 2025 as U.S. tariffs could push the economy into a mild recession. The Bank of Canada has been much more aggressive in lowering rates than the Fed, but they should still have some dry powder to cut further should the economy crack. Still, the result will be a construction sector that will be under significant pressure over the year.

Consumer Price Index

The first inflation read of the year was hotter than expected and certainly not great news for those hoping that the Fed will cut rates anytime soon. Headline inflation accelerated and now stands 3.0% over a year ago, core inflation (less food and energy) inched higher to 3.3% on a year-over-year basis, while supercore inflation (less food, energy, and shelter) is now at 2.3% Y/Y. None of this should be surprising – inflation has been sticky and widespread. While this isn’t the FOMC’s preferred reading it’s another data point that supports the thesis that they won’t be cutting rates soon. Looking forward, this reading will be the benchmark when comparing how tariffs may impact consumer prices.

The really great thing about the CPI data set is that there is so much underlying detail in the tables and here I’ve added some building product related data that I thought was interesting. If I’m being honest I was surprised to see the disinflation in some of these products. It’s hard to know exactly why this is happening, but it’s likely a combination of retail discounts and perhaps nervous consumers pulling back on discretionary spending on home improvements. Again, it will be interesting to see the tariff impacts here – especially on the appliances.

Producer Price Index

Another inflation read this week – albeit a minor one – showed that wholesale inflation is showing the same sticky trends that we saw in the consumer data. On the upside, the year-over-year change in final demand goods decelerated slightly to 2.0%, while final demand goods accelerated. Of course indicating that energy prices were the culprit.

Like the Consumer Price Index, this data is a veritable treasure trove of detail -especially construction related prices. Inflationary trends in input prices have been relatively tame – especially on the nonresidential side of the market. Of course this is another sign that construction activity (in general) is moving sideways. The strongest reads are in single family, where at least we’ve seen strength over the last year. The drawback to the PPI data is that it excludes imported goods, so this data won’t be much help in analyzing any tariff impacts, unless domestic producers raise prices in order to increase margins as the prices of imported goods move higher OR (and I think this is already happening) that firms start ordering products in advance of demand out of fear that prices will rise after tariffs take hold.

Retail Sales

Consumers started the year on a skittish note with retail sales falling 0.9% from an upwardly revised December – the largest decline in around two years. While auto sales were responsible for the bulk the decline, weakness was widespread. I think the easy analysis would be that consumers are tightening their belts because they are nervous about the state of the economy, but large storms across much of the country in January may have helped dampen sales.

Sales at building material stores have now declined for four straight months, and like the CPI data above suggests that consumers may be eschewing discretionary work on their homes. Furniture sales have actually been decent but fell in January for the first time in four months, with a similar trend for electronic and appliance stores. All three of these retail sectors may see sales decline further if more tariffs are enacted and prices rise.

What I’ll Be Watching This Week

It’s a light data week, but in center stage will be housing data for both Canada and the U.S. as well as a read on Canadian inflation. Of particular interest will be the FOMC meeting minutes and any comments on tariffs or future expectations on rates.

SNL and their sketches have been iconic for much of my life, but often overlooked has been the importance of music in the show’s evolution. This three-hour documentary traces the evolution from Billy Preston on the very first show to the present. Any music lover will love this.

How Can I 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.

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