Economic Resilience Amidst High Fed Rates
Despite the Federal Reserve raising interest rates above 5%, the US economy remains resilient. Predictions of a recession following the inverted yield curve in 2022 and economic soft patches in 2023 have not materialized, even with challenges faced by regional banks.
Key Insights on Economic Stability:
Private Sector Debt Focus: High-interest rates impact private sector debt more than government debt. The Debt Service Coverage Ratios (DSCRs) are crucial, reflecting the proportion of disposable income used by non-financial corporations and households to service debt. The US economy has avoided major pitfalls due to:
- Lower private sector debt as a percentage of GDP compared to 2007.
- Prevalence of fixed-rate loans and mortgages, reducing exposure to immediate rate hikes.
- Gradual maturity walls for debt refinancing.
US Debt Service Ratios: The US DSCR is stable at 15%, aligning with the long-term average. Unlike countries such as Australia, Canada, Korea, and Sweden, the US has a lower and stable DSCR.
Post-2007 Economic Differences: Since the 2008 financial crisis, the US has de-leveraged, with the private sector showing restraint in credit usage and a shift towards significant government deficits.
While the US economy has not faltered under current high rates, emerging cracks suggest that prolonged high rates could lead to more permanent job losses and economic slowdown.
Construction Material Pricing in the First Half of 2024
The first half of 2024 has seen varied trends in construction material pricing, influenced by supply chain dynamics, demand fluctuations, and global economic factors. Here’s a snapshot:
Lumber – Prices have stabilized compared to pandemic spikes, thanks to improved supply chains and increased production. However, regional demand surges can still cause price hikes.
Steel – Prices remain high due to strong demand from the construction and automotive sectors, though some stabilization is occurring with adjusted supply chains and new production capacities.
Concrete and Cement – Steady price increases driven by robust construction activity and higher input costs, including energy and transportation.
Copper – Prices fluctuate due to varying demand in electrical and electronics sectors and supply uncertainties from major producers but remain elevated compared to pre-pandemic levels.
Glass and Insulation Materials – Moderate price increases influenced by energy costs and rising demand for energy-efficient building solutions.
Contributing Factors:
Supply Chain Improvements – Post-pandemic recovery has alleviated some bottlenecks, contributing to price stabilization for several materials.
Global Demand – Strong demand in construction and infrastructure projects worldwide keeps prices high for key materials like steel and cement.
Energy Costs – Fluctuations in energy prices significantly impact the production costs of materials like cement and glass, driving prices up.
Economic Policies – Government infrastructure spending and economic policies in major economies influence demand and pricing trends in the construction sector.
Long Lead Times for Electrical Gear and Panels
Extended lead times for electrical gear and panels in 2024 are due to:
Supply Chain Disruptions – Global semiconductor shortages and limited availability of raw materials like copper and steel.
High Demand – Increased construction projects and renewable energy installations.
Manufacturing Issues – Labor shortages and production bottlenecks.
Mitigation Strategies:
- Advanced planning and early ordering.
- Supplier diversification to reduce dependency.
- Improved forecasting using data analytics.
- Close collaboration with suppliers and logistics providers.
Outlook for the Second Half of 2024
The outlook for the second half of 2024 suggests cautious optimism. We expect price stabilization for some materials as supply chains continue to improve. However, persistent high demand and potential geopolitical disruptions could lead to further volatility. At McKinley, we will continue to monitor market trends and adjust our procurement strategies to manage costs effectively.
Source: The Macro Compass & FRED
