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By Anirban Basu
November 27, 2017
According to the Bureau of Economic Analysis, the economy expanded by 3% during the third quarter of 2017 on an annualized basis. This follows a second quarter during which the economy grew 3.1% These two quarters represent the strongest six-month period of growth since 2014.
The 2.4% growth in consumer spending during the third quarter helped support growth. Growth in fixed investment also contributed, but this was primarily driven by investments in equipment and intellectual property as opposed to buildings and other physical facilities. Storms impacting Houston, Jacksonville, and other communities also helped boost these numbers by supporting inventory accumulation, which added 0.7 percentage points to overall growth.
Construction firms are among the major beneficiaries of the most recent GDP data. These data confirms that the U.S. economy is enjoying a level of momentum not observable for years. Given the rapid rise in asset values, including commercial real estate valuations, many economic actors have become wary that potentially inflated real estate values could stagnate or worse during the next several quarters. This would ultimately decrease demand for construction services. However, positive GDP numbers will help to suppress these concerns, helping to extend the private construction expansion cycle in the process.
Low unemployment rates, high numbers of unfilled job openings, increased consumer confidence, rising home prices, and availability of credit are all consistent with the notion that the ongoing consumer-led expansion is poised to persist. The fourth quarter of 2017 is shaping up to be yet another productive one from the perspective of output growth. The improving global economy will likely bolster the U.S. export growth. Business spending remains stable, held in abeyance in part by lingering uncertainty regarding the future of American taxation. Government spending contributions remain weak, partly because of the ongoing under-investment in infrastructure.
Construction industry leaders should not become complacent even in the face of the latest positive news on the economy. It is often the latter stages of a business cycle that feel best. During the late stages of a cycle, asset prices are high as is confidence, investment and economic activity. However, asset prices, including real estate prices, can swing sharply, perhaps because of rising inflation and interest rates. While many economic actors enjoyed years like 1999 and 2005 when various asset price bubbles were in the process of expanding, these years were quickly followed by periods of declining valuations and ultimately economic downturns that waylaid the U.S. construction industry.
Percent Change from Preceding Period, Seasonally Adjusted at Annual Rates
Low Inflation + Low Interest Rates + Steady Economic Growth = Surging Asset Prices
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