This piece was originally published in the November/December 2019 issue of electroindustry.
Fred Ashton, Economist, NEMA
Electrical construction is a primary end market for the electrical manufacturing industry. This market is prone to booms and busts as business cycles wax and wane. The Great Recession, which centered on overleveraged housing investments, ushered in an unprecedented era of stagnant household formation and tepid demand for housing. Households struggled to unwind big bets on home appreciation while the economy tanked.
After more than 10 years of economic expansion, annual housing starts remain nearly one-third below the pre-recession pace. The subdued housing demand is tied to several factors:
- Housing affordability is challenged by rapid home price appreciation, tight credit markets, and high debt loads by prime-age potential homeowners
- Construction costs have soared as construction labor supply diminished during the recession and failed to bound back. The prices for raw materials such as lumber and concrete as well as land close to booming job centers has jumped sharply as well
- Household formation has barely budged as young adults remain at home or room with other young adults struggling to save up for a down payment while paying down student debts. A slowing population growth rate is also weighing on household formation
Housing permit data suggest that demand for housing is recovering with permits averaging just over 1.3 million in 2019 compared to less than 1.2 million in 2015. Wage increases and declining mortgage interest rates will aid in the recovery.
Nonresidential construction is an even larger endmarket for electrical manufacturers. This market rebounded, buoyed by investment tax credits for energy investment and a surge in commercial real estate to sate the growing appetite for sizable investment returns with low interest rates. Nonresidential investment has since pulled back and is expected to remain flat through 2021 as markets absorb existing inventory. A manufacturing downturn is reducing factory capacity utilization and, therefore, demand for manufacturing structural investment. Hospital construction is one of the few positive markets as the nation’s population ages. ei