Construction landscape looks strong, and the current mood of positive sentiment with respect to the rest of the economy will keep driving us forward.
Pessimism isn’t in my vocabulary, and so I really don’t like pessimists, those who run through the streets screaming doom and gloom, claiming the world is coming to an end.
This has been a hard few days in the stock market, but the causes of this pullback that has rattled many are very self-evident: the market was overbought, valuations have been on the high side, and we are FINALLY seeing fixed income yields rising, an absolute positive for those who are retired or are living on fixed incomes. This is a natural happening in the sawtooth movement of the stock market going back to the inception of indexes more than 100 years ago. This no doubt has a lingering effect on consumer confidence and overall sentiment, my all-time favorite indicator of whether the economy is still pointed uphill.
The momentum behind consumer confidence is so great right now, I predict the stock market rout of the last few days won’t even move the sentiment needle. Consumer confidence hit an 18-year high in September, a positive indicator for spending going into the holiday shopping season, as robust job growth and a strong economic outlook bolstered Americans’ expectations for the future.
The Conference Board, a private research group, recently reported its index of consumer confidence rose to 138.4, up from 134.7 in August, the highest level since September 2000, which represented the late stages of the 1990s technology boom. An index reading of 100 represents how households saw the economy in 1985. The report came on the heels of a separate University of Michigan survey that said sentiment jumped in early September to the second-highest level since 2004, behind only the reading in March of this year.
Economists have voiced concerns about trade and tariffs as risks to economic growth over the next 12 months. For consumers, however, the issue isn’t registering. Lofty consumer sentiment bodes well for economic growth in the third quarter, now behind us and just awaiting the results of the quarter’s economic activity. Economists are predicting that gross domestic product expanded at between a 3.3% and 4.4% annual pace in the third quarter. This comes on the heels of a robust 4.2% annual rate in the second quarter, largely because of the best consumer spending in nearly four years, according to a report released by the Commerce Department in late August.
Now back to the pessimists. Because housing looms so large in the overall construction sector, it appears the only soft spot in an otherwise robust economy is housing. Home price gains slowed in July, according to the S&P CoreLogic Case-Shiller National Home Price Index. This drives no less than a dozen headlines I have read that predict doom and gloom for construction, even though all other non-housing construction has been strong through the first three quarters of 2018.
The conference board asks households how they feel about the present situation and about their outlook for the future. In previous reports, present-situation readings had been strong, while future outlooks were lagging. Now expectations for the future are heading up, too. The index tracking expectations for the future rose to 115.3 this month from 109.3 last month. Most respondents, 42.5%, expect stock prices to continue rising over the next 12 months, while 35.1% expect them to hold steady and 22.4% expect a decline. To be sure, these figures predate the rout of the last few days, so it will be interesting to read next month’s numbers. And consumers are also relatively upbeat about their employment prospects; in September, 45.7% said jobs were plentiful, up from 42.3% in August.
I remain upbeat about housing’s prospect. Affordability, labor constraints, and land development are hurdles that need to be overcome, and I predict they will – the housing market has faced these challenges in the past, and managed to navigate through them successfully. In the meantime, the rest of the construction landscape looks strong, and the current mood of positive sentiment with respect to the rest of the economy will keep driving us forward.
About the Author
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.