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Construction Gives Clear View of Economy's Health

By    |   Thursday, 10 Mar 2011 02:00 PM

I love construction. Always have. Always will. I grew up in Houston and that was Boomland for construction. It was great.

My kids are growing up in Northern Virginia, just outside D.C. It’s also a Boomland for construction, from office buildings to shopping malls to massive museums to metro rail to international airports to countless homes and condos. I take my kids to see all the construction around here.

So, I naturally like to watch construction. I took a trip a few days ago to Philadelphia to speak at a Wharton meets Wall Street conference. On the way, I noticed no construction in Baltimore, except for one lone crane at Johns Hopkins Medical Center (they always have money!), and none in Philly except for a new baseball park at the University of Pennsylvania, which they desperately need. But, it’s small-potatoes construction — a few million bucks.

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Needless to say, Washington, D.C., is doing better, but not much. Almost everything going up has some government component. It’s either financed by government or stimulated by government — new construction around military bases for office buildings to house the army of government contractors that work for the military. Finding new construction to take my kids to is tough. I’ve had to be pretty resourceful and willing to drive a lot.

With no new construction, people have said for quite a while that there is a huge, pent-up demand for new construction, but it’s not happening. One statistic tells a lot about why: Since 1990, the amount of retail space per person in the U.S. has doubled. Yet, earnings per person have hardly risen since 1990. Much of that retail spending is based on increased credit-card debt and home-equity debt. In "America’s Bubble Economy" and "Aftershock," I called that the consumer-spending bubble. The bottom line is that it’s not clear we even need all the retail space we have right now, much less need any more.

For office buildings, the same is true. Much of the office space we have is based on a financial sector that had to expand rapidly to keep up with the housing bubble and the consumer-spending bubble. As the private-credit (banking) bubble has burst, so has the demand for office space. There is no pent-up demand because the earlier demand was bubble-based. We really don’t even need all the office space we have already built in many cities now that the private-credit bubble has burst.

A good indicator for construction is the Dodge Construction Index, which is produced by McGraw-Hill. The index uses construction in the year 2000 as the baseline. That baseline is given an index of 100. Anything above 100 indicates growth from the year 2000 and anything less than 100 indicates a decline in construction from the year 2000.

This index includes all types of construction — housing, office, retail, roads, schools, power plants, pipelines, etc. The index was above 140 in 2007 and has fallen to around 90 in 2009 and 2010. In January 2011, it was 90. That’s why I don’t see much construction anymore.

The bottom line is that an economy doesn’t need construction to survive, but it does need construction to grow, not only for the construction-related jobs but for what it means about the economy. If there is no new construction, there probably isn’t much growth in the economy, especially in jobs.

You can read all the statistics you want about job growth, but just looking at new construction in your area will tell you a lot about the real shape your local economy is in, especially in terms of growth.

Job statistics can be created a lot of different ways and manipulated in many more. Construction cranes can’t be manipulated. It’s a really good measure that any non-economist can easily use to judge the health of the real economy.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $80 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.
 

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RobertWiedemer
I love construction.Always have. Always will.I grew up in Houston and that was Boomland for construction.It was great. My kids are growing up in Northern Virginia, just outside D.C.It s also a Boomland for construction, from office buildings to shopping malls to massive...
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Thursday, 10 Mar 2011 02:00 PM
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