The Coronavirus Economy in Transition: Outlook for 2021-22

Mid-year is approaching. Stimulus money is flowing. The share of the U.S. population receiving virus vaccinations is soaring, “Now Hiring” signs are dotting the landscape, and the Communicable Disease Center has partly relaxed its mask requirement. 

Flush with money and less fearful, the American consumer is shopping again.  Finally, it seems, the U.S. economy has turned a corner, and we see some blue sky.

Based on what we know now, what is the outlook for the rest of the year and 2022?  And what about the construction sector?

How’s the national economy doing?

On April 29, the Department of Commerce’s first estimate for 2021’s first quarter GDP growth came in with an exceptionally strong annual growth rate of 6.4 percent.  Remember, 3.0 percent growth is pretty good in normal times. The plus-6 growth followed 4Q2020’s 4.3 percent growth and the explosive 3Q2020 bounce of 33.4 percent.  But while 6.4 percent growth is strong the gap between the current GDP level and the pre-pandemic 4Q2019 level is still not closed, but should be by year-end.

Keep in mind we are dealing with a partial command economy that is making a transition to a more market-driven one.  There are some serious bumps in the economic turnpike to navigate.  For example, the unpredictable nature of the coronavirus and associated shutdowns has muffled price signals that normally guide private decisions makers, and this has led to interrupted supply chain flows.  Auto manufacturing is suffering from a shortage of semiconductors.  Even cat food is in short supply! Still, we are getting more positive than negative news.  The most recent Bureau of Labor Statistics report on job openings tells us that there are almost as many jobs open and looking for workers nationwide as there are unemployed people looking for work.  Of course, getting the right jobs in the right places is always the challenge.

Multiple forecasting groups, including Well Fargo, The Wall Street Journal’s panel of economists, and the International Monetary Fund are calling for more than 6.0 percent real GDP growth in 2021 and less than that, perhaps in the plus-4 percent range, in 2022.  The expected lower future growth rate is based on the phase out of massive stimulus effects now working their way through the economy.  Along with high GDP growth comes higher expected inflation, perhaps 3.5 percent for this year and next, and higher interest rates.  For example, the 10-year Treasury note is expected to add as much as a half percentage point to the current number. 

Looking briefly at our region and construction activity

While the national economy is showing strength, the Southeast region and the Carolinas are looking even better. Employment growth is higher in the Carolinas than for the nation.  And as might be expected, population is moving in the direction of prosperity.  With higher population growth in the region comes strong demand for housing and rising construction activity.  Housing permits issued in South Carolina accelerated in March, with particular strength shown in Charleston and Greenville.

Looking closer at national construction data in the nearby chart, which shows year-over-year cost increases for January 2019 through March 2021, we find intense cost pressures showing up for wood products and steel, with less pressure on aluminum.  So far, the average wage for construction works is not rising, but remember, that is the average!  When the earlier noted expected increase in interest rates is added to the picture, we can logically conclude that the level of construction can continue, but that the boom or acceleration will taper off.

Final thoughts

Barring yet another coronavirus surge and other unpredictable shocks, the U.S. economy is now in a high recovery phase.  The prospects for the next 18 months look good for the nation and especially good for the Southeast and the Carolinas.  Within all this, construction activity, which has led the recovery, is being hit with some serious rising costs, especially in wood products and steel.  I should also add copper to that list.  Labor costs are still stable.  But when rising interest rates are added to the other input price increases, we can expect a slowdown in the growth of construction activity, but not a downturn.

We must remember, though, that we are still trying to decipher the movements of a coronavirus command economy that has been subject to massive levels of government intervention.  That said, we best keep our seatbelts fastened.

Bruce Yandle is Dean Emeritus and Professor of Economics Emeritus, College of Business & Behavioral Science, Clemson University. His quarterly Economic Situation Report is posted on George Mason University’s web site, https://www.mercatus.org/scholars/bruce-yandle.