Economy hits its stride

Market sprints into 2004

By Sean Ryan

There are a lot of images that describe today’s economy.

It's a bubble ready to burst and a dam ready to break. It's a snowball teetering on the brink of the slope and a train picking up steam.

All the metaphors signify that more and more people think they can see a light at the end of the tunnel.

In the third quarter of 2003, America's gross domestic product clocked in with an 8.2 percent growth rate, more than doubling the second quarter's 3.3 percent increase, which more than doubled the first quarter's 1.4 percent jump. The reports show a year of climbing rates after 2001's tumbling and 2002's fluctuating pace.

It was good news, and it injected optimism into a depressed economy. But it wasn't enough to turn hope into confidence.

The coming year's construction outlook depends on whether the growth will last long enough and stay steady enough for businesses to venture out of their shells and start throwing money around on projects.

Once private-sector businesses start to invest in expanding their companies, the competition will notice and think about doing the same. It won't take long for everybody to jump on the bandwagon for fear of getting left in the economic rebound's dust, said Terry Ludeman, chief of the Wisconsin Department of Workforce Development Office of Economic Advisors.

"Economic activity is the best predictor of economic activity," he said. "Investors invest because they're afraid that by not investing they're going to get left behind somewhere. Businesses respond to what they see in terms of the businesses around them."

The early consensus is that the 8.2 percent increase is not a fluke, and 2004 will continue where 2003 left off. Most of the recent economic numbers are pointing up. If what they prophesize is true, America's already budding construction spending will soon flower.

The U.S. Census Bureau's construction spending data shows that there was a lot more building going on nationwide in 2003 than 2002. Most of the growth came out of the private sector, bolstered by the reliable residential and health-care sectors.

The Census Bureau in December 2003 reported that by October 2003 the nation's construction spending was $26 billion higher — a 3.7 percent increase — than in the first 10 months of 2002. America, in 2003, was on pace to trounce the 1 percent construction spending increase between 2001 and 2002.

Private-sector construction spending in the first 10 months of 2002 decreased $3 billion from that period in 2001. But by October 2003, private construction was $20 billion higher — a 3.8 percent increase — than it was in 2002.

In other words, the economy train left the station in 2003. But it needs more oomph before it really starts chugging in 2004, and a rise in employment is the most likely key to turning hope into confidence and drawing more money into the engine.

"Eventually, what we're going to see is an economy that continues to gain steam and continues to gain momentum," said Bruce Bittles, chief investment strategist for Robert W. Baird and Co. in Milwaukee. "What you are going to see is employment begin to gain steam, and that's going to give the whole economy a new outlook."

The nation's high unemployment still casts a gloomy shadow over its recent sunny outlook. The nation's unemployment rate in November hit its lowest level in eight months, but new job creation wilted at 57,000, a far cry from the 200,000 per month Bittles said America would need to fix the labor market.

The number of jobs in Wisconsin was flat for the most part in 2003, which was an improvement over the more erratic ups and downs of the two previous years, said DWD Labor Market Economist Eric Grosso.

"Now we are seeing a kind of slowing down because we are seeing the end of the large-scale softening of the market," he said.

By October 2003, Wisconsin had created 3,500 more jobs than it had lost since October 2002. While the state's goods-producing jobs dropped in 2003, its service jobs increased enough to offset the loss. The state lost 13,100 jobs between 2001 and October 2002, and lost another 43,300 jobs in 2000.

The tea leaves say there's a good chance unemployment will decrease in 2004. Bittles predicted the nation would hit the magic 200,000 jobs-created number in the last half of this year.

If that rosy scenario becomes reality — GDP trends continue, employment increases and businesses regain the confidence lost during the 2001 recession — companies will explore more construction projects. With a banking industry itching to put its money on the market combined with historically low interest rates, the financing will be there for builders and owners.

"I think there's a lot of people out there who are ready to finance projects that make sense," said Ken Heiser, president of the First National Bank of Hudson. "I think if you're in the Midwest, we'll go through the holidays and the winter and in the spring, you'll see projects coming out of the ground."

According to Wisconsin Bankers Association data, state bank holdings grew from $99 billion in March 2001 to $105 billion in March 2003. During that same period, the percentage of that money the banks have loaned out has decreased. In March 2003, about $32.7 billion of banks' assets were wallowing in vaults.

There's money in the banks, and the banks want to loan it out and make some profit off their dollars.

"When you talk about pent-up demand, the banks probably have the most pent-up demand," Ludeman said. "The players are out there. They haven't done anything, so the banks are anxious to get their money out there."

The downside to banks financing more projects is that America's recent record-low 1 percent short-term interest rates on federal funds will disappear. The resulting economic fretfulness over an impending rate hike could advance some private projects, but a rate hike itself will also put out the fire in the residential market.

Once everyone stops assuming the Federal Reserve Board will hold the 1 percent rate during every meeting, businesses with projects on the drawing board will start to sweat. They're going to want to secure financing for their construction before the moment of opportunity passes, and some will probably advance their project schedules, said Ludeman and Bittles.

Heiser said he was less sure the specter of higher rates would be enough to push projects forward because predicting rate changes has historically been a loser's gamble.

"One thing I heard a long time ago is never, ever bet on interest rates," he said. "It's impossible."

Regardless of any anticipatory impact the Fed may have on construction, the effect of a hike on the housing market will be instant and severe, Bittles said. He didn't anticipate a rate hike until mid-2004 at the earliest.

"I would think it would be almost spontaneous," Bittles said. "(Low rates) are still acting as a tremendous force."

Although the construction industry may lose its booming residential market, there is no sign that Wisconsin's health-care sector will lose its lust for building. And although manufacturing demand is likely to improve as the rest of the economy expands, it isn't likely to create a need for new facilities either locally or nationally next year.

Bittles said manufacturers nationally are operating at 75 percent capacity and are likely to update their equipment before their buildings. Ludeman said Wisconsin's manufacturers are also operating under capacity.

Heiser wondered if, considering the amount of manufacturing leaving America, it would ever return as a significant construction market.

"We're becoming more and more efficient at manufacturing our products, and so much is being outsourced to China and India," he said. "I don't know if it'll ever happen."

But change is happening. The bubble is inflating. The dam is cracking. The snowball is ready to roll downhill and pick up weight along the way. The word on the street and told in the numbers is that we're reaching a breaking point.

"Most of the indicators show the economy almost on a miniboom," Bittles said. "That certainly is the way an economy bursts out of a rut."