Construction Economic News
A Splash of Cooler Water ConstructConnect announced today that May 2023’s volume of construction starts, excluding residential work, was $49.2 billion, an increase of +4.3% versus April 2023’s figure of $47.1 billion (originally reported as $47.0 billion).
After surging to notable peaks of $1,400 per contract in May 2021 and a similarly impressive $1,300 in February 2022, the continuous contract prices for Random Length Lumber are currently in search of a market floor. As of May 15, 2023, prices had plummeted to $344, marking a three-year low that was only slightly surpassed by the knee-jerk collapse in prices during the initial weeks of the COVID-19 pandemic. Prior to the disruption caused by the pandemic, lumber prices had traded within a narrow range of $390 to $440 per contract.
It’s as if they knew. The Bank of Canada just raised its key policy-setting interest rate, the ‘overnight rate’, by 25 basis points (where 100 bps = 1.00%) to 4.75%. This was in the belief that the Canadian economy is continuing to run too hot. 2023’s Q1 real (inflation-adjusted) gross domestic product growth annualized was +3.1%, an above-average result. (The annual change in Canada’s GDP over the first 22 years of this century has been +2.1%.)
Neither the U.S. nor Canadian economies have slowed enough to fully satisfy the central bankers in either country. Also, inflation rates in both nations might be half what they were at their peaks, but they are still viewed as being too rapid, and, therefore, some further interest rate hikes can’t be ruled out.
What’s not to like about May’s upbeat Employment Situation Report from the Bureau of Labor Statistics? No doubt, it depends upon one’s point of view, with the Federal Reserve probably not comfortable with the results at all, but more on that in a moment.
An expected, fallout from higher interest rates is a decline in housing starts. In both the United States and Canada, that proposition is being partly realized, but not to a full degree. The story is best told in graphs, and the bullet points below cover the highlights.
When it comes to determining the interest rate that a company must pay to borrow capital, everything is relative. The interest rate that the safest, or least risky, borrowers are charged to borrow is often called the risk-free rate.
Among the real estate firms listed on the Standard and Poor’s 500 Index, earnings per share in Q4 2022 stood at $1.21, reflecting a significant decline of 46% and 49% compared to the levels recorded one quarter and one year ago, respectively. Certainly, 2022’s rising interest rate environment was a significant headwind as the sector is highly dependent on floating interest rates which during the past year rose at their fast rate in history.
Clichés are often true and it is the case that a picture can be worth a thousand words.