In a past articles, I highlighted a slowing manufacturing sector of the US economy and the disadvantage it was to act as a reserve currency during a series of devaluations. While the outlook for global manufacturing is rather depressing, domestic growth elsewhere is leading to investor optimism.
A global slowdown which first affected Europe and is now affecting Asia, has a disastrous effect for currencies relative to the US dollar (hereafter "USD"). Has the strong USD been a primary cause for the steep and recent decline in demand or is it the other way around? As we look for an answer to that question, another truth must be faced: relative currencies are not the only ones that are getting hurt from an incredibly strong USD. Economic theory states that when currency valuation is high, exports (and manufacturing) drop and imports rise:
And this has been exactly the case. Dominance, it seems, has a price that comes with it. Is strength, however, determined by currency value? Regardless, if economics hold true then the demand should be shifting elsewhere. However, despite the slowdown, construction for manufacturing is still rather strong:
Private construction, fueled by low oil has caused construction to increase immensely - even surpassing numbers only reached prior to the Great Recession. For those who now assume that there is a bubble, this chart will put you at ease - at least temporarily:
It seems that defined benchmark of $57 billion dollars of spending in the office asset class is the sign of bubble. The US economy has not yet reached that number, and thus it seems that the construction sector has a little more gas in its tank.
And while construction doesn't currently represent a very large percentage of GDP:
The bullish housing market that construction is feeding is increasing inflation and represents a much larger portion of GDP growth. The housing market is featuring incredibly strong growth. Incredibly strong growth, however, that is unsustainable.
As the markets have learned over time, real estate is and will continue to be a cyclical market. Thus, its effect on US GDP and Core CPI must be viewed in cyclical nature as well.
And as we saw above, as office space construction reaches new highs, the market can start to get a grasp of when the cyclicality is coming to an end. The problem however, is that housing is practically holding up Core CPI on its back:
Without housing the gradual decline in spending growth since 2012 is much more apparent - falling almost another 100 basis points.
And if you were wondering how much consumption growth is as a percentage of GDP growth, take a look at this chart featuring Q2 2015 GDP:
Because housing represents so much of the growth seen in consumption, any sign of a decline in the housing market will take a large chunk out of the 'Consumption' contribution to US GDP. Rising rates only increase this risk. With consumption making up over 75% of GDP growth, raising rates with the intention to help the health of the economy can actually do the opposite.
Until then, we at CIR expect continued strong growth in the construction sector, and will closely be monitoring signals of increased office construction domestically.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.