A couple of months ago, I wrote that I was tapping the brakes on my expectations for the construction economy based on some unexpected changes in circumstances: interest rates are not falling as quickly as had been predicted in the face of stubborn inflation, coupled with consumer sentiment that is on a wholly unexpected slide despite the fact that the American electorate voted for Donald Trump, yet they now express concern over the uncertainty of his policies. With that uneasiness mounting, now another shoe drops: U.S. consumer borrowing surges by $40.8 billion, the most on record—ever. And that metric is further compounded by recent monthly data from the University of Michigan announcing that consumer sentiment in the United States has dropped to a seven-month low, primarily driven by growing concerns regarding inflation, particularly linked to fears about potential tariff increases impacting purchasing power.
So U.S. consumer debt outstanding unexpectedly surged by the most on record in December, reflecting massive increases in credit-card balances and non-revolving credit. Total credit jumped $40.8 billion after a revised $5.4 billion decrease a month earlier, according to Federal Reserve data. The figure, which isn’t adjusted for inflation, topped all estimates in a widely respected survey of economists. Outstanding credit-card and other revolving debt increased $22.9 billion in December, more than reversing the prior month’s decline. Non-revolving credit, such as loans for vehicle purchases and school tuition, climbed $18 billion, the most in two years. Auto sales at the close of last year climbed to the fastest pace since May 2021. The thinking is consumers, who are the backbone of the economy and play a major role in the health of the construction economy, are trying to get out ahead of the looming tariffs.
And the jobs data is softening. Job growth moderated in January as nonfarm payrolls increased by 143,000 after a revised 307,000 gain in December, according to the Bureau of Labor Statistics (BLS) reporting, with the unemployment rate coming in at 4.0 percent. Annual revisions show job growth averaged 166,000 a month last year, a slowdown from the initially reported 186,000 pace. Hiring was driven by health care, retail trade and government; noticeably for our industry, employment fell in mining and quarrying, as well as and oil and gas extraction, temporary help services, and auto manufacturing.
Also released was an annual update to the employer survey, which showed job growth was 589,000 lower in the 12 months through March 2024 than initially reported. That compared to the BLS’s preliminary estimate of a markdown of 818,000, which would have been the most since 2009.
Taking into account the policy moves under President Trump, some economists are predicting that there might be a bit of an offset in terms of the unemployment rate. While tariffs may slow growth, hurting employer demand for workers, that should push up the unemployment rate. But the curtailing of immigration means that the supply of workers is also going to be hit. So the jobless rate may stay unchanged, taking the two factors together.
So here are some key points about the decline in consumer sentiment: the preliminary February consumer sentiment index fell to 67.8, marking a significant drop from the previous month. The primary factor behind the decrease is heightened anxiety about inflation, with consumers worried about the potential impact of tariffs on prices. Lower consumer sentiment could potentially lead to reduced consumer spending, impacting economic growth.
So what am I reading here in all this data? Consumers are loading up their credit cards to get out ahead of tariffs that will have an unknown impact on our economy, and the labor figures express caution. Having said that, there is still a strong argument for the Fed cutting interest rates by 75-basis-point this calendar year, which can’t help but spur housing and other forms of commercial construction, which should soften the blow of tariffs.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at pvillere@allenvillere.com. Follow him on Twitter – @allenvillere.