The booming U.S. housing market will start to slow a bit in 2005 as interest rates move upward.
That's the analysis from several officials who gave their forecasts at Reed Construction Data's annual North American Construction Forecast Conference, held Oct. 13 at the National Press Club in Washington.
As of Oct. 1, total construction expenditures in the United States are now in excess of $1 trillion, according to James Smith, senior fellow and director of the Center for Business Forecasting at the Kenan Institute of Private Enterprise at the University of North Carolina, Chapel Hill.
``Let me put those numbers in perspective for you. Construction in the United States in 2004 will be bigger than the entire Chinese economy,'' he said.
According to Smith, the world economy should post decent economic growth in 2005 and beyond. The U.S. economy should average 4.2 percent real gross domestic product growth over the 2004-08 period. If that happens, that will be the best five-year growth period since 1962-66.
If the U.S. economy does well, so will Canada and Mexico. Canada has the long-run problem of having productivity levels much lower than the United States, but it has room to work on improving its tax structure to offset some of this.
``The U.S. is the world's largest consumer. China is the world's largest producer. We need each other badly. The U.S. may well turn out yet this year to have the strongest growth in 20 years. If not, it will be the second strongest,'' he said. ``I don't know where all these pessimists come from. They don't look at the data; they don't look at the facts. The entire world needs China and the USA to maintain strong economic growth.''
Smith said China itself is getting prepared for two significant events: the 2008 Olympics and the global Expo in Shanghai in 2010, for which the Chinese government wants to have construction completed.
``All forecasters hope the Euro Zone will pick up to at least 2.5 percent growth in 2005,'' Smith wrote in his report. ``However, it's very hard to develop a plausible scenario for this to happen, so you should probably plan on another sub-par year, around 1 percent or so.''
According to Glenn Mueller, a real-estate investment strategist at Legg Mason Inc. of Baltimore, globalization has created a much more stable U.S. economy and the debate about whether or not the recession actually happened is ongoing.
In 2005, the United States will start to see positive growth for industrial space. By this time next year, retail will be back in a growth phase, Mueller said in his presentation. In multifamily housing, the long-term average is a 6.2 percent vacancy rate across the country. That rose to 7.5 percent in 2003, and the United States probably will be back down to 6.2 percent by 2006 and U.S. markets will experience positive rental growth again.
Separately, the key decision for the U.S. economy is not necessarily who will be elected president. The key decision is who will replace Federal Reserve Chairman Alan Greenspan.
``We've been seeing very low interest rates, particularly in the first half of this year, and even right now,'' said David Seiders, chief economist with the National Association of Home Builders, based in Washington. ``I think overall market conditions will be quite positive. We're looking for improving job market, strengthening household income growth, connected with the upward movement in the interest rate structure, all of it quite nice, but probably looking at a flat market, maybe off a couple percentage points.''
According to NAHB's forecast, total housing starts will reach 1.85 million in 2005, easing from 2004's rate of 1.9 million. But the trump card is the oil market, which could change the composition of factors for housing.
``I do assume in my forecast that there's some come-off in current oil prices,'' said Seiders, who predicts per-barrel oil prices at around $40 in 2005. But if oil prices continue an upward climb, things could change.
``One of the things that will change will be the Fed,'' Seiders said. ``The Fed will know that that's damaging the economy and they will be less inclined to go ahead with short-term interest rate increases. If oil prices behave, there will be an inevitable move-up in rates.''
According to one presenter, the economic record of the Bush administration has been disappointing and change is required.
``It is true that inflation is low and productivity is high, and we do have the highest growth rates compared to the nations of the European Union and Japan,'' said Stuart Eizenstat. Eizenstat recently was named co-chairman of the European-American Business Council and has served as deputy secretary of the U.S. Department of the Treasury and undersecretary of state for economic, business and agricultural affairs.
``But we have to do better,'' he said in his presentation. ``A strong U.S. economy helps, frankly, the world economy. President Bush will become, it appears, the first president in 72 years since Herbert Hoover and the Great Depression to have no net job creation over a four-year period. Yes, over the last year, the economy has added 1.7 million jobs, but that's less than the number we need just to keep up with population growth. If anything, as shown by the addition of less than 100,000 jobs in September, the economy seems to be slowing down a bit and adding jobs at the lowest rate of any comparable recovery in over 50 years.''