The Economic Fun Is Here – Will Delta Derail It?

Various reports from our industry press mark a jump in ready mixed concrete production in April, which is just a thumbnail indicator of the health of the overall economy. Production was estimated at 35.6 million cubic yards, an astonishing 20 percent higher than in April 2020. Moreover, the estimated production nationally through April is 114.3 million cubic yards, approximately 6.8 percent higher than that during the same period in 2020. This is one of the single biggest percentage increases in concrete production ever measured.

And in the bigger picture, positive economic news abounds. At press time, it looks like we are ever closer to the major infrastructure bill we have been promised for years now, an estimated $1 trillion shot-in-the-arm that will stimulate our construction economy to a level not seen since the 1950s. And Gross Domestic Product (GDP) expanded at a blistering 6.5 percent annualized rate in the second quarter, a spurt of growth not seen in almost 40 years, exceeding the level of economic activity of the pre-Covid pandemic. The strong spring growth was fueled by trillions of dollars in fiscal stimulus and consumer spending that jumped at an 11.8 percent annual rate as more people received vaccinations and businesses reopened. U.S. payrolls continued to grow during the quarter, expanding the labor market by an average of nearly 600,000 a month. More recently, initial jobless claims have resumed their decline. 

Other positive economic news included the report that residential fixed investment, or home building and remodeling, marked three strong quarters of growth, including a 59.9 percent growth rate during the third quarter of 2020. Of course, the housing market is now catching its breath against the backdrop of building materials supply issues, along with labor shortages. It settled down with a decline at a 9.8 percent annualized rate last quarter, not unexpected after witnessing a torrid pace of growth over the last year. During the second quarter of 2021, housing’s share of GDP stood at 16.9 percent, demonstrating the overall impact that housing has on our total economy.

According to the National Association of Home Builders, which offers some of the best economic modeling and tracking to the construction industry, housing-related activities contribute to GDP in two basic ways. The first is through residential fixed investment, or RFI, which is effectively the measure of the home building, multifamily development, and remodeling contributions to GDP. It includes construction of new single-family and multifamily structures, residential remodeling, production of manufactured homes and brokers’ fees. For the second quarter, RFI was 4.7 percent of the economy, recording a $1.07 trillion seasonally adjusted annual pace.

The second impact of housing on GDP is the measure of housing services, which includes gross rents (including utilities) paid by renters, and owners’ imputed rent, or an estimate of how much it would cost to rent owner-occupied units, and utility payments. The inclusion of owners’ imputed rent is necessary from a national income accounting approach, because without this measure, increases in homeownership would result in declines for GDP. For the second quarter, housing services represented 12.1 percent of the economy or $2.8 trillion on seasonally adjusted annual basis.

Historically, RFI has averaged roughly 5 percent of GDP while housing services have averaged between 12-13 percent, for a combined 17-18 percent of GDP. These shares tend to vary over the business cycle. However, the housing share of GDP lagged during the post-Great Recession period due to underbuilding, particularly for the single-family sector. It is important to note the recent expansion in home building activity has not been an outlier, but rather has simply increased these shares to near historic norms.

So now we face a challenge to our robust recovery: the Delta variant. The resurgence of the newest form of Covid has us resuming the wearing of masks, even mandated by some municipalities and states. But this surge will not have the same effect as the prior, pre-vaccine surges had, as over 165 million people have been fully vaccinated, and the anti-vaxxer movement is slowly accepting the need for the shots as they see friends and relatives affected by Delta. I am convinced this wave will pass in the months ahead, and will have little impact on the economy as a whole, and on construction in particular. Watch as the economy holds its GDP performance in the third and fourth quarters, which will continue to drive our industry forward.

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 [email protected]. Follow him on Twitter – @allenvillere.