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Facts vs. Fiction

April 8, 2022

Between COVID-19, inflation, and the Russia and Ukraine conflict, it certainly has been an emotional start to the decade. Is a demand cliff next on the horizon, bringing the economy to a screeching halt? Tune into the newest episode of TrendsTalk with ITR Economics President Alan Beaulieu to hear what our forecast has to say.


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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi everyone. I'm Alan Beaulieu from ITR Economics with another episode of TrendsTalk. There is a lot going on, obviously in the world these days, probably the understatement of the decade, right? Between COVID and between supply chain, inflation, Russia, Ukraine, resignation surge, I mean just everything. It's like it never stops, but there is a way to get down to basics. There is a way to get through all this. And that's by looking at rate of change, that's about looking at the numbers and thinking unemotionally.

Now we get asked a lot if there is going to be a demand cliff. Don't think so. Don't believe so. And here's why. Nothing's going to get better or worse overnight. It's just going to slowly get better as the leading indicators are telling us, it's just rational. The supply chain problems will slowly ease, more computer chips will slowly start coming in. There's no reason to expect that there's been such a buildup in inventory, we don't see it in the numbers, that all of a sudden there's going to be a complete cessation of orders. That would only come if the person doing the ordering, all of a sudden had a cessation of their orders and the person before that. And none of that seems to be going on. Sure, there's some inventory buildup, but that gets slowly diminished as the demand pool slows. It's as normal as breathing.

So back to basics. It's kind of easy to fall into that whole mindset. For instance, during COVID, distributed workforce, office buildings were done. There was going to be no more office buildings and they're all going to become worth less and empty, and then a new dawn had broken. And yet, for some reason, when we look at what's going on in office building construction in the United States, private and total, we find that the rates of change are positive. The 3/12 rate of change for private non-res is at 4.7, which means the last quarter is 4.7% above the year ago quarter. The 12/12 has yet to break above the 100 line. That's at minus 3.2, but it is going up, it's in phase A.

And perhaps most interestingly, the dollar amount being spent on office building construction, this is new office building construction is rising. It's at 71.1 billion out of a total for all office buildings of merely 2.2. Clearly, most of it's private. And it's going up. The rates of change are signaling, yeah, it's going to keep going up. And that flies right in the face of conventional wisdom, even just maybe a year ago, maybe less where we weren't going to need office buildings. Guess what? We do.

And here's another thing. Renovation construction's doing very well. When we look at nonresidential construction, that broader measure, it's all kinds of construction under non-res, commercial buildings, industrial manufacturing, office buildings, power facilities, that sort of thing, automotive facilities, the 12/12 rate of change is rising. It is currently 1.4% above year-ago levels, and it's going to continue to rise. The dollar amount is rising and has risen to $475.76 billion off of a July '21 low. It's up almost $20 billion. The 3/12 is doing well. Construction's not out, construction's doing better. And as office building construction and non-res is doing better, it also means that renovation construction is doing better. The rates of change for all three move very, very similarly.

So we're going to find that renovations, non-res in general, office buildings in particular, are going to offer some good opportunities for contractors, for control system integrators, master system integrators, for people who finance it, people who install the paint and wallpaper, and people who sell the carpet and flooring and elevators. It's just going to keep going on and on and on and have a positive impact on many, many companies as we go forward. Despite what's going on with inflation, despite what's going on with the fears of the world, there are positive things going on when you get down to the numbers and look at the rates of change.

How long is it going to continue in non-res? Well, the dollar amount's going to go up through 2024. We're going to see more and more spending, but the rate of rise is going to ease when we get to the second quarter or so of 2023. We're going to see that just slow down and coast from a high of like 13.4% down to about 4% by the end of 2023. Still good growth. Still lots of opportunities. So if you can, try to tune out all the noise and the emotional impact and look at your rates of change, look at the rates of change for your industry. And if the rates of change are rising, that dollar trend's going to be going up and those dollars should find their way into your pocket too.

I'm Alan Beaulieu. Thank you for joining us for ITR's TrendsTalk. See you next time.


Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.