The big picture

Construction activity should pick up somewhat in 2003, but only if corporations and the public do their bit

January 01, 2003 |

Make no mistake: The U.S. and global economies face continued challenges in the year ahead. On balance, however, it's reasonable to assume that if at least some things go right, overall economic growth rates during 2003 will be at least a bit stronger than during either 2001 or 2002.

Not that there isn't plenty that can still go wrong. Uncertainty stifles growth, and these are nothing if not uncertain times. Nonetheless, it is possible to make a reasonably well-informed guess about our economic fortunes between now and the end of 2003.

How well the building design and construction sector will fare during the next year is, as always, critically dependent upon the course and vigor of overall economic growth, which, in turn, is almost wholly dependent upon consumer and business confidence.

For 2003, everything has to be viewed against the backdrop of an economy still struggling to deal with the excesses that grew out of the so-called "bubble economy" of the late 1990s.

Consumer spending a vital cog

During the last three years, consumer spending was remarkably resilient. Growth slowed a bit from the late-1990s surge, but remained positive even during the darkest days of the 2001 recession. Americans continued to spend not because they were euphoric about the short-term prospects for the nation's economy, but simply because they still had the money to do so. Interest rates were at their lowest levels in almost 40 years, pushing up house prices and homeowner equity.

At the same time, wages continued to rise at a surprisingly healthy clip — for those who still had jobs — and inflation for most products and services was all but nonexistent. So the aggregate purchasing power of American consumers continued to expand during 2000-2002.

This proved to be something of a stabilizing force for the private sector and for the economy as a whole, because from mid-2000 until late 2002, capital spending directed toward new equipment and buildings fell during every single month.

Consequently, even a marginally positive outlook for economic growth during 2003 depends critically both upon consumers continuing to increase purchases of good and services and on businesses ratcheting up their spending on equipment, buildings, and people.

Business investment needs a boost

Without a significant rebound in business investment during 2003, there is simply no way that the U.S. economy can achieve anything near a 4% annual increase in the GDP.

But how do we get there, given the current state of anxiety about the future?

For almost the past three years, manufacturers and service-sector companies alike have shown reluctance to invest in their future. There's been a pervasive wait-and-see attitude that has made the private sector squeamish about investing in anything beyond absolutely critical immediate needs for keeping the doors open.

This pattern is quite different from that of past recessions. In a classic recession, higher interest rates combined with credit restrictions choke off business investment. That's not the case in the current capital-spending drought.

Instead, the stock market plunge and the related depressing impact on corporate profits have combined to give most businesses almost no cash with which to invest in new buildings, equipment, new employees, travel budgets, office systems, or anything else.

All this all comes at a time when, for most industrial sectors, there's a well-documented global surplus of most manufactured goods and even some service-sector products. This state of affairs won't last forever, but one of its inevitable effects will be a much less robust increase in capital spending during the early and middle stages of any economic recovery. The past economic recession was hardly a textbook case, and the recovery will be similarly unconventional.

The resulting high degree of risk aversion has virtually paralyzed investment and, by extension, economic growth. Cost-cutting through layoffs, tighter inventory control and travel cutbacks has kept most companies marginally profitable and lessened the anxiety of shareholders. But these actions have done nothing to enhance the future growth prospects.

Without forward-looking investment in skilled people and productivity-enhancing equipment, these companies will be hard-pressed to maintain even their current market share — much less grow — in a world economy that becomes more competitive each passing day.

The single most important question that the U.S. faces is our situation vis à vis Iraq. The immediate concern focuses on the impact that such a war would have on energy prices, inflation, and interest rates. Add to this the uneasiness related to possible further acts of domestic terrorism, and you have quite a mess.

In the year ahead, therefore, American businesses will have to summon up all the resources at their disposal to fight through the dark forces of uncertainty that could paralyze them. Moreover, this must be done at a time when positive action is most called for, to ensure their continued success and profitability.

Brighter days ahead for economy

1997 1998 1999 2000 2001 2002(f) 2003(f)
Annual percent change in several important measures of economic performance

Historical Data Source: U.S. Departments of Commerce and Labor, Federal Reserve Board
Gross Domestic Product 4.4 4.3 4.1 3.8 0.3 2.4 3.1
Business Investment 12.2 12.5 8.1 7.8 -5.2 -3.7 5.5
Industrial Production 6.4 4.2 4.1 5.6 -3.7 -0.9 3.6
Consumer Spending 3.6 4.8 4.9 4.4 2.5 3.1 3.2
Corporate Profits 10.6 -6.8 6.6 1.7 -9.9 -4.2 8.4
Producer Price Inflation 0.4 -0.8 1.8 3.7 2.0 -0.4 1.7
Unemployment Rate 5.0 4.5 4.2 4.0 4.8 5.8 5.6


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