INSIDE ECONOMICS

Mark Zandi:                     Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Cris deRitis and Marisa DiNatale. Hi guys.

Cris deRitis:                      Hi Mark.

Marisa DiNatale:            Hi Mark.

Mark Zandi:                     Have you noticed I've kind of gotten into a rhythm introducing this thing. I say this... I'm-

Cris deRitis:                      In your sleep.

Mark Zandi:                     Pardon me?

Cris deRitis:                      You can say it in your sleep, I think.

Mark Zandi:                     I can say it in my sleep now. But I'm wondering if that's just getting boring for people. Maybe I need to mix up the introduction somehow. I don't know.

Cris deRitis:                      You think we need some sound effects or something? Walk on music?

Mark Zandi:                     I'm looking for suggestions. I don't know.

                                           We've been at this for I think over two years now, or close to two years, I believe. Coming up on the second birthday. So hard to believe that, isn't it, that we've been doing this so long? Yeah.

                                           Hey, I was in Washington this week talking to lawmakers around the debt limit, and I'll have to say what struck me was how wide people's views are with regard to how this is going to play out. Some people-

Cris deRitis:                      Wait, wait, wait. So last podcast I think you were feeling optimistic. You had just been down there to talk to them.

Mark Zandi:                     Yeah.

Cris deRitis:                      Like something's going to happen. Now, that's changing?

Mark Zandi:                     No, I think I'm still optimistic. I mean, we're getting actually happy talk coming out of Washington more recently, right? So it feels like they're coming to a deal. But despite that, what struck me was just the wide variability among folks involved as to how they would handicap this playing out. I just found that striking. Which goes to say, I think, no one really knows how this thing's going to play out. But I found that very interesting.

                                           We've got a guest. We have a guest, Richard Branch from Dodge. Good to have you, Richard.

Richard Branch:              Thanks for having me, Mark. It's real fun to be here.

Mark Zandi:                     Yeah. Where are you hailing from? Where are you speaking to us from?

Richard Branch:              Yeah. I live in Goffstown, New Hampshire. Southern New Hampshire.

Mark Zandi:                     Oh, how'd you end up there? How'd you get up to there? Is that where you grew up?

Richard Branch:              Our forecasting and analytics offices are nominally based in Bedford, Massachusetts, so on the northern suburbs of Boston, and home prices, real estate valuation is much nicer over here in New Hampshire. No sales tax, no [inaudible 00:02:36] tax, so it's an attractive place to live.

Mark Zandi:                     Yeah. You're the chief economist of Dodge?

Richard Branch:              I am chief economist of Dodge Construction Network.

Mark Zandi:                     How long have you been chief economist?

Richard Branch:              Since 2019. So just before the pandemic. So I'm not sure if there's causation or correlation there, but I took over and then the world turned crazy.

Mark Zandi:                     Yeah, you were saying before we went on the previous chief economist, who was that? I can't remember who that was?

Richard Branch:              Bob Murray.

Mark Zandi:                     Oh yeah, sure, Bob Murray. He was out there all the time.

Richard Branch:              Absolutely.

Mark Zandi:                     He had a saying about forecasting. What was that again?

Richard Branch:              His saying about being an economist in general is it's not the knowledge necessarily that's important, it's the appearance of knowledge.

Mark Zandi:                     It's the appearance of knowledge.

Richard Branch:              Yeah.

Mark Zandi:                     Yeah, right. Yeah, definitely I'd say a lot of truth to that.

Richard Branch:              Absolutely.

Mark Zandi:                     But in all endeavors, I would say, not just for economists. When you're-

Richard Branch:              Parenting, everything, yeah.

Mark Zandi:                     Everything. It's just got to come across as being credible for sure. Tell us about, obviously, we're going to talk about the construction markets broadly, and you provide a really wonderful window into what's going on into that part of the economy, which is a big part of the economy. Do you want to just tell us a little bit about your work and what Dodge does?

Richard Branch:              Sure, yeah. So I've been with Dodge, I think I'm going on year number 14 now. So was here for a little while in the early thousands, left to try some different things, came back just before Bob retired.

                                           In general, what we do at Dodge Construction, it's such a fun story to tell. We've been around since the '20s, as in the 1920s, and what we do at the core of it is we're tracking construction information at the project level. So we have this great mix of longitudinal data. We're tracking individual construction projects from when they're essentially first showing up on an architect's desk, if not before. All the way through the planning lifecycle we're capturing geo data, what the project is, how big it is, square footage, dollar value, unit, story height. We're tracking who's working on it, what kind of products are being specified.

                                           Then once it breaks ground, which is what we call a start, then we create a time series out of it. My team, what we do, is we forecast that time series across 22 different major verticals within the construction sector, across residential, non-residential buildings, and then into infrastructure. The vast majority of our clients are in that construction space. So they are building products manufacturers. They are service providers into the construction sector. A growing share of the clients, though, into the consulting and the fire and the banking world as well.

                                           So it's a wide-ranging data set. We track I think every year about 400,000 new projects come into our planning database, and by new projects, new as in the first time it's being spec'd out, as opposed to new versus say a renovation. About 200,000 of those actually break ground every year.

                                           So in terms of the sandbox that we get to play in every day as a nerd, it's just an amazing tool, it's an amazing toy to play with.

Mark Zandi:                     So you count yourself as a nerd?

Richard Branch:              Oh, absolutely. 100%.

Mark Zandi:                     Yeah. You and Marissa are nerds, I'd say. I know about Cris.

Marisa DiNatale:            Proudly.

Mark Zandi:                     Cris is too urbane. He plays bocce.

Richard Branch:              Wow. Yeah. Oh wow.

Mark Zandi:                     He gets designer glasses.

Cris deRitis:                      You are boosting my ego today. Yeah.

Marisa DiNatale:            He's a niche kind of nerd.

Cris deRitis:                      Yeah.

Mark Zandi:                     Oh, I like that.

Marisa DiNatale:            Very specific, yeah.

Mark Zandi:                     He's a niche-y nerd.

Cris deRitis:                      A nuevo nerd.

Mark Zandi:                     Yeah, nuevo nerd. Nuevo nerd.

                                           Well, it's good to have you. Oh, sorry, go ahead.

Cris deRitis:                      I was going to ask, is this just commercial properties that you're tracking or is it residential single family residential as well?

Richard Branch:              Yeah, that's a great point of clarification, Cris, because we're tracking construction projects regardless of what kind of project it is, right? So single family, multifamily to be sure. But we're tracking office projects, whether they're on the speculative or the investor side, or whether they're corporate headquarters, campus, like that. Data centers, schools, healthcare, lab buildings, public buildings, airports, we're tracking it top to bottom, left to right..

Mark Zandi:                     So just big picture, and I'm sure you get this question all the time, and I get it and I'm not sure how to answer it, how important is construction to the broader economy? I mean, when you think about broadly speaking, however you want to define it, what share of the economy is it typically?

Richard Branch:              Yeah, it's a smaller share. I think it's probably around 10-15% of total GDP. I think about it in a more sociological standpoint. If you think about everything that we do every day, what you're sitting in now, the thing you drove on to get your Wawa coffee, wherever you do-

Mark Zandi:                     Oh, he's a listener. You're a listener.

Richard Branch:              I am. I am.

Mark Zandi:                     Oh, very good. Okay. A client and a listener and a nice guy and a nerd all wrapped up into one. Okay.

Richard Branch:              Yeah, but everything we touch is construction. Everything.

Mark Zandi:                     Yeah, that's true. Good point.

Richard Branch:              So while it may be a small share of the economy from a dollar standpoint or from an employment standpoint, it touches everything that we do.

Mark Zandi:                     Yeah. So I want to get down and dirty and talk about these verticals you talked about. Not all 20-plus verticals, but some of these verticals, because there's a lot of interesting things going on that provide perspective on what's going on in the economy and where the economy's headed. But what is the state of the union for the construction trades right now? I mean, would you say, because again maybe it's hard to say because it depends on which part of the elephant you're touching, but looking at the entire elephant, construction, where would you say it is in the cycle?

Richard Branch:              Good question. As we looked at the calendar flipping over from '22 to '23, there was an incredible amount of momentum building up in the sector. Mostly in the multifamily space, manufacturing, some of the more public building side of the markets, and of course infrastructure. That momentum hasn't gone away, other than maybe multifamily. Multifamily has certainly eroded. But that momentum is still there, that strength is still there, but it's being countered by weakness in a lot of the income property types, whether that's warehousing, retail, or hotel, have certainly weakened considerably as the year has gone on.

                                           Then we start thinking about that extra layer of banking and the stresses in the financial system, and we're starting to see, particularly on the income property types, the cracks in the foundation of the construction project.

Mark Zandi:                     So in aggregate you would say it's holding its own, but there's a lot of cross currents here.

Richard Branch:              It's treading water, and the way I look at it, our forecast for the year, I don't want to get too far ahead of the game here, but if we look at all those verticals added together, total construction, we're looking at up 2% this year in nominal dollars. Constant dollars, it's down five, down six. But as I look-

Mark Zandi:                     Because there's a lot of inflation here, yeah.

Richard Branch:              Exactly.

Mark Zandi:                     Right.

Richard Branch:              But as I look across those verticals, there's not a lot that are within that plus two to minus four range. They're either very strong or they're very weak. I was saying this to a client the other day that as I look at the sector today, tomorrow, and even into say '24 and '25, I think this is potentially the most bifurcated market we've seen based around geography, demographics, and the types of projects that are going up.

Mark Zandi:                     Interesting. That's reflected in one of the key links from construction back into the broader economy, and that's construction employment. One of the conundrums, and I think even Powell may have mentioned this, another policymaker, that employment in the construction trades has not declined really. I mean, we've had a month or two where we've seen declines, but abstracting from the monthly vagaries of the data, we're not seeing the kind of declines in construction employment you would typically see after a period of a significant run-up in interest rates and a Fed that's working really hard to slow the economy down presumably through the most rate sensitive sectors of the economy, one of which is construction. So he's like, "What's going on?"

                                           Did I characterize that right?

Richard Branch:              You're absolutely right. What I find even more amazing than that is the fact that when you look at the largest single vertical in the construction space is single fam, and single fam is in cyclical decline. It is down and out. So the jobs are still holding up both from the employment numbers, you look at the Jolts numbers, in spite of the fact that single family is where it is is a testament, I think, to the strength in other sectors. Whether that's manufacturing or infrastructure, there is a lot of demand and an extreme shortage of construction workers.

Mark Zandi:                     Yeah. You see he is a little nerdy. See how he did that single fam, like I'm the cool kid.

Richard Branch:              That's right.

Mark Zandi:                     I don't say single family, I say single fam.

Richard Branch:              That's right, yeah.

Marisa DiNatale:            It saves time.

Mark Zandi:                     Yeah. Yeah, it saves time. Yeah. Well, I guess if you said it 80 times a day.

Richard Branch:              That's right.

Mark Zandi:                     You come up with a shorthand. I get it. Do you say multi-fam too?

Richard Branch:              I say multi-fam, yeah.

Mark Zandi:                     Multi-fam, okay. I'm going to learn this lingo. Yeah.

                                           So this goes to the fact the construction employment and the construction trades is basically flat, and this is testimonial to what you were saying, the strength in some parts of the construction trades, they're still adding to payrolls and offsetting the job loss that's occurring in single fam.

Richard Branch:              100%.

Mark Zandi:                     100%. Okay, very good.

Cris deRitis:                      Well, I guess a caveat there, I mean single fam certainly down in terms of permits and starts, but there's still quite a pipeline of homes that are under construction, right? So could there be just some lag effect here, we need to finish off some of the projects, and then you might see a wave of layoffs?

Richard Branch:              There is that, and what typically happens as well in this part of the business cycle is renovation picks up as well, right? So people are doing interior renos and that's adding to that demand for contractors and electricians and whatnot.

Mark Zandi:                     Yeah, very good.

                                           Again, this classifies as nerdy, but one of the questions that have been circulating in our nerdy world is around the productivity growth of the construction trades. I think it was Austan Goolsbee, who was a Chicago professor who just became president of the Chicago Fed, wrote a piece, a paper, with a colleague, I can't remember who that was. I should remember, but I don't. You may remember. Talking about the fact that productivity in the trades has been abysmal really. Very, very weak.

                                           First of all, I know there's a lot of measurement issues. Are they understating the productivity gains because of the measurement issues that plague measuring productivity in any sector, but particularly in the construction trades?

Richard Branch:              I read that paper. I read the New York Times article that I think came out the weekend.

Mark Zandi:                     Oh, I didn't see that. Okay.

Richard Branch:              Yeah. My honest reaction to that is I got really defensive trying to be a defender of [inaudible 00:15:24].

Mark Zandi:                     Right.

Richard Branch:              Then I think you had some folks on within the weeks after that talking about, I think somebody mentioned nail guns and things like that, and I got even more defensive. But then I went and said, "Whoa, whoa, whoa, whoa, let's go back and actually look at the data." The math, you mentioned a measurement error, the math isn't necessarily wrong, right? Output for worker has been declining. But when you look, I think there's a couple of different ways to look at this.

                                           First of all, and I think this was mentioned in a construction email list. I think you guys, you're on that. We talked about coding, right? Different building codes have changed significantly, whether they're seismic codes on the West Coast, storm flood related codes down in the southeastern part of the United States that has made a construction job more difficult. Zoning issues. But I think overall, two more things, that construction has just become more complicated. The buildings have become more complicated.

                                           So if we go back to 2000, the average square footage for a non-residential building was around 50,000. 50,000 square feet for a new non-residential building. The average rate now is well over a hundred thousand square feet.

Mark Zandi:                     It's office, warehouse, that's combining everything?

Richard Branch:              Yeah, it's office, convention centers, manufacturing, everything.

Mark Zandi:                     Okay. Okay. Yep. Yep.

Richard Branch:              If you think about the kinds of projects that were at the top of the list back in 2020 that broke ground, or sorry, 2000, that broke ground, they were big hotel and convention centers, airport terminals, and then you compare that to the kinds of projects that are breaking ground now. The largest project that broke ground last year was a 9 million square foot manufacturing facility. I have spatial issues in terms of trying to picture a 9 million square foot facility, so I always put it back to how many Walmarts would fit inside it. So an average Walmart's around 180,000 square feet, and if I did my math right, that's about 50 Walmart Supercenters in that manufacturing facility.

Cris deRitis:                      How many Wawas is that?

Marisa DiNatale:            Mark?

Mark Zandi:                     I'll work on that. Yeah, that's a good one. I'll chat GPT that.

Richard Branch:              Okay. Yeah. But we're doing those more complicated projects, those chip factories, those EV battery plants, with essentially the same level of workforce that hasn't really changed from 2000 to 2006 to now. There's been cyclical issues, of course. So that's perhaps a counterpoint that we're doing these much more complicated projects with the same amount of workers.

Mark Zandi:                     Well, it sounds like a measurement issue. Right? I mean, because presumably with all that complexity you're getting something out of that, right? I mean, there's benefits to whatever that complexity is.

Richard Branch:              I think that the easy math, right?

Mark Zandi:                     No, Cris? You kind of shook your head. I saw the-

Cris deRitis:                      No. No, I agree with that.

Mark Zandi:                     Okay.

Cris deRitis:                      I definitely think there's measurement, but my other question would be, and I don't know the answer to this, I don't know, Marissa or Richard, if you know, well, what about worker safety? If we're getting-

Richard Branch:              Safety is a big issue.

Cris deRitis:                      ... less productive, but the workers, their health is reserved. I don't think that's factored in that study.

Mark Zandi:                     No. Right. Right. So your sense is then, what you just described, it's like measuring productivity in the vehicle industry, you've got to account for the quality of the vehicle that's being produced. Certainly the vehicles that are being produced today are more complex and provide much greater service to us than the ones that were produced five years ago, 10 years, and 50. If you don't account for that, then your measurement of productivity will be biased lower. So your defensiveness was appropriate, right, to something?

Richard Branch:              I think so, yeah.

Mark Zandi:                     Okay. Okay. Very good. Okay.

Richard Branch:              I think there's a separate issue too, right? That just from a data perspective, when you do the productivity math, you're talking about construction starts or construction put in place as in the work is actually underway at this moment. But I think we need to remember a construction project doesn't start when the shovel hits the ground. These projects are in the planning cycle for as much as a year to two years before they even break ground, and that's where we've seen some productivity improvements in terms of design, 3D design, less on paper more on virtual, product procurement, supply chain. That's where we've started to see more investment. That's where we've started to see more productivity improvements to get that job to groundbreaking sooner.

Mark Zandi:                     Yeah, I can speak to that personally. My son has a BIM company, building information management company, and they digitize everything.

Richard Branch:              Exactly right.

Mark Zandi:                     And then they make sure that everything works digitally before the physical actual construction of the building and it significantly reduces the error rate, the mistakes. Because there's a lot of mistakes being made that cost a lot of money, a lot of time, and the digitization really improves that process.

                                           So when I see that I go, well, maybe that's still small potatoes in the grand scheme of things, because it feels like that hasn't really been adopted broadly through the construction trades yet. But that feels like that's coming pretty quickly.

Richard Branch:              Absolutely, it is coming very quickly. I would add to that what I see anecdotally is there's a lot of interest from outside of the construction industry to get into that, whether it's BIM or digitization of information. So you're seeing bigger technology firms coming into the sector, you're seeing a lot of venture capital come into the sector to exactly address that issue.

Mark Zandi:                     Yeah, interesting.

                                           Okay, well let's talk about those verticals. I'm not sure how I want to do this, but maybe we start with the biggest, single family. Single fam, I should say. Single fam. I guess the question from a macroeconomic perspective is are we at bottom, right? Because single family starts, and you know the data better than I, I'm speaking from memory now, hopefully I'm not taking anyone's statistic, but before interest rates took off a little over a year ago, mortgage rates were at record lows, we had seen single family construction pick up, get back to something that would be more consistent with historical norms. I think we were running what, 1.2 million, 1.25 million per annum? Something like that. Now we're down to 850K per annum, I believe, if I've got the numbers right.

                                           That's impressive, right, Marissa, that I just was able to rattle? This goes back to your quote, you act with certainty. What was it? It's all a matter of appearance. I have no idea if those numbers are right.

Marisa DiNatale:            Fake it till you make it.

Mark Zandi:                     I sound like I know what I'm talking about. I think I got it roughly right. Cris will correct me, but-

Cris deRitis:                      846,000, I believe.

Mark Zandi:                     Okay. 846,000. Yeah, there you go. Are we at bottom do you think in terms of starts in the single fam market?

Richard Branch:              I think we are. When I look at our starts data, and again, we capture our own single family data separate from census, construction starts and seasonal adjusted annualized rates have been up for the past four months. They're still down double digits from where they were in early 2022, but I think that inflection point is here.

                                           You start looking at other data, the home builder confidence is starting to rise, I think we're at the bottom. Do we go anywhere from here? Probably not, at least I don't think that happens much this year. I've been likening it to you throw a flat stone across a pond and it just kind of skims there for a while. That's how I view the single family market now and over the next several quarters.

Mark Zandi:                     Okay. Okay. The 850K, where do you think...

                                           Oh, and I should say, I meant to say, you must be assuming a lot of things, but just to call out a couple things. One is mortgage rates aren't going any higher. I assume you're assuming that.

Richard Branch:              Correct.

Mark Zandi:                     Okay. So we're at a 6.5% 30-year fixed, roughly speaking, that's kind of sort of where we'll be. Yeah, okay, and the second thing, no recession?

Richard Branch:              Absolutely no recession.

Mark Zandi:                     Absolutely no. Oh?

Richard Branch:              Yeah.

Mark Zandi:                     He said that with-

Cris deRitis:                      Now he said that with-

Mark Zandi:                     Well, that's the assumption. He says that's the assumption, right?

Richard Branch:              That's the assumption, right.

Cris deRitis:                      Oh, okay.

Richard Branch:              We built some softness into our macro side, and this goes back to that we just skid along the bottom here before we start to see real organic growth later in the year.

Mark Zandi:                     Got it. The other question that Cris and I are always debating is long run, I mean, you can define it whatever that means, long run, but it's through the business cycle, what is the quote, I'm using air quotes here, on the appropriate level of starts? Because here now it's about demographics. How many households are forming? Are they going to more likely rent or are they going to be single family homeowners? You've got to make those kinds of forecasts. But is 850K below that long run through the cycle level of construction, or is it meaningfully higher than that? Do you have a view on that?

Richard Branch:              Yeah.

Mark Zandi:                     You might be able to settle a dollar bet that Cris and I have.

Richard Branch:              Oh boy.

Cris deRitis:                      You lost that bet a long time ago.

Mark Zandi:                     I know I did. But I can always win again depending on what Richard has to say.

Cris deRitis:                      Yeah, okay. All right.

Richard Branch:              Well, I am not overtly positive on the long-term prospect for single family construction. Not because of the demand side, but just the inability to build. Whether that's because of construction workers, whether that's because of Nimbyism and the inability to build large tract affordable single family housing. So in my view, and I think, Mark, we mentioned this before the podcast, I'm going to answer a question, not necessarily the question, but we've-

Mark Zandi:                     You didn't have to tell me that. The other trick to doing that is not tell anyone.

Richard Branch:              Yeah, right.

Mark Zandi:                     The fact that you told me that, now everyone knows you're making stuff up. But go ahead. Go ahead.

Richard Branch:              So we view single family underperforming here over the next several years.

Mark Zandi:                     Okay. Okay. Very good. Cris, can I ask you that question? I've lost track of where your mind is. What do you think the long, through the business cycle, let's call it, here's now a little nerdy-jargony equilibrium level of single family construction? Single family starts to be more precise.

Cris deRitis:                      So over the next five, 10 years, I think it's a bit higher. I think there's still pent up demand out there. The supply definitely is an issue though, so I don't see this taking off anytime soon. But if you told me it's closer to 900,000-

Mark Zandi:                     Oh, just marginally higher, not-

Cris deRitis:                      Marginally higher, 900, 950, something like that, a little less than a million, I'd probably accept that. But after that, I think the demand picture looks very different. The demographics really start to kick in. Unless there's a wave of immigration that trend is going to be downward for the foreseeable future.

Mark Zandi:                     Yeah, that's a great point. Oh, sorry, Richard, you wanted to say something?

Richard Branch:              Yeah, I was going to say, so we track single family, we define it a little differently. For us, single family is just detached, so we put town housing and two fam into our multi-family sector. So as I look at our longer term single family units, again, take out that two fam attached building, we're looking at mid-eights through the bulk of our forecast here.

Mark Zandi:                     Okay.

Richard Branch:              So underperforming.

Mark Zandi:                     Okay. Okay, very interesting. Does that go lower home ownership and just increased demand for rental, going back to your point about finding land to build on, that kind of thing, in affordability?

Richard Branch:              I think it boils down to that affordability. Will we actually see measurable improvements in affordability short-term, medium term, long-term? Certainly not short and medium, in my opinion.

Mark Zandi:                     Yeah, okay.

Richard Branch:              The right mix of supply isn't there.

Mark Zandi:                     Okay. So you're saying single family starts have bottomed, but they're not going anywhere fast, and in the long run I don't see them rising to any meaningful degree? In longer, longer run, given demographics, to Cris's point, they'll start declining, right, because household formation? Unless we change immigration policy pretty significantly. Okay.

                                           Yeah, okay. Well let's turn to multifamily then.

Richard Branch:              Multi-fam. Yeah.

Mark Zandi:                     Pardon me?

Richard Branch:              Multi-fam, if we're-

Mark Zandi:                     Oh, multi-fam. I was getting there. Multi-fam. Yeah, I was getting there.

                                           Just for the listeners so they can see multi-

                                           See how I do this?

Richard Branch:              Yep, you're fine.

Mark Zandi:                     Multifamily and then I say multi-fam so that everyone's on board.

                                           On the multi-fam side, I think we've been around here 500 to 600,000 units per annum. That was the case before the run-up in interest rates and that's the case now, still roughly the same. That goes to, obviously, the run up in rates has crushed single family housing affordability. People can't afford a single family home, therefore more likely to stay in a multifamily unit. There is shortage-

Richard Branch:              What's bad for single fam is good for multi.

Mark Zandi:                     Yeah. Coming into all of this mess, the pandemic, we already had an affordable housing shortage. The vacancy rates were, if not at record low, pretty close to record low. So what's your prospects for multifamily starts? Do you think they start to come in here or where are they headed?

Richard Branch:              Yeah, just to put it in our perspective, in terms of our data, 2022, 823,000 units of multi-fam. So that's apartments plus those two fam attached houses. Best year for multifamily construction starts going back to the mid-eighties. So it was that hot of a market. We see a decline here coming up, but still, you'd have to go back to the eighties from a level perspective to get where we are.

                                           I'm a little concerned on the downside, though, on multifamily because I think the mix has gotten scattered. I think what's going on right now is a lot of high-end construction in dense urban areas and not necessarily what the market needs. So I think there could be a comeuppance maybe more than we're expecting in 2023, particularly in larger metropolitan areas like New York, Miami, Dallas, where we've seen a lot of this high end high-rise construction go up.

Mark Zandi:                     Yeah. I think this might go to the banking situation too, right? Because I think a lot of multifamily developers rely on banks, small, mid-size banks in particular, to finance the right construction and ultimately provide mortgage loans to those properties. Presumably, we can see that banks have tightened down their underwriting aggressively. They were doing that even before the banking crisis and post-crisis they obviously continue to do that. Do you sense that that's really starting to bite into multifamily starts?

Richard Branch:              We're seeing starts decline. Starts have declined in the past three months. But I think more importantly from a pipeline perspective, if we look at those projects coming into the earliest stages of planning, so we call them in nerd world version one reports, it means it's basically it's brand new and it's got an architect and a GC attached to it. Projects in that space are down about 15% from where they were at the end of 2022. So definitely not just the start side, but the planning side of the equation is falling as well.

Mark Zandi:                     Okay. So dead ahead, not immediately, because there's a record number of multi-fam units in the pipeline going to completion that got bottled up during the pandemic as the supply chain and labor market issues that are now going to completion. But on the other side of that, which is probably as we end the year moving into next, starts will start to come in, activity will start to come in.

Richard Branch:              Yeah, we're looking at around a 12 to 13% decline in the end.

Mark Zandi:                     Okay.

Richard Branch:              Again, I feel that there's probably more downside potential in that market.

Mark Zandi:                     Yeah. So overall residential construction activities is going to weaken. It's not going to get any better here anytime soon, it is going to likely continue to weaken over the course of the next, I don't know, 12, 18, 24 months, something like that.

Richard Branch:              Yeah, I do think just tonality wise, I'm going to go with the glass is half full. Because I do think the inflection point in single is here as opposed to say an inflection point in multifamily. We won't see that turn to the positive in multifamily probably to early 2024.

Mark Zandi:                     Okay.

Richard Branch:              So there's some positivity.

Mark Zandi:                     Because the single family market, too, I worry a little bit about that in the context of the banking crisis. Because a lot of home builders, not the big publicly traded builders that have access to capital markets to fund their building, but the smaller mom and pop builders, which by the way is about half, I believe it's still about half of all construction, typically, single family construction, they're likely under a lot of pressure because of the tightening down and underwriting by the small to mid-size banks. I just wonder if we're not going to see a further weakening in single fam because of the lack of credit.

Richard Branch:              I think you're spot on there, but I would even also add to that the labor issue.

Mark Zandi:                     The labor issue.

Richard Branch:              Right? The small and medium-sized builders, they're finding it more difficult to access labor, particularly as construction labor gets pushed towards the bigger projects, whether those are bigger multi-fam, manufacturing, those types of projects. They can't lift their wages the same as a big builder would do. They can't offer the kind of money that say an Intel is going to offer to build their plant. So they are, I think, doubly hit here in 2023.

Mark Zandi:                     Okay. So we covered residential, let's cover non-residential, and then we'll do the game, and then we'll come back and do public construction. Also, you've done some work around the debt limit and what potential scenarios might mean for the construction trades and we can maybe end there.

                                           So on the non-res side, there's a lot of obviously verticals there, as you say. Maybe we can do the conversation this way, which vertical are you most nervous about in terms of construction activity going forward here in the near term?

Richard Branch:              Traditional offices.

Mark Zandi:                     Offices, yeah. Okay.

Richard Branch:              No question about it.

Mark Zandi:                     Yeah, right. It's the obvious.

Richard Branch:              Yeah. It is the push towards hybrid remote work.

Mark Zandi:                     Yeah, and the increase in vacancy that's resulting in bigger urban centers.

Richard Branch:              Absolutely.

Mark Zandi:                     Yeah. How big a deal do you think that is from a macroeconomic perspective? I mean is it a big deal or is it on the margin?

Richard Branch:              Office construction?

Mark Zandi:                     Yeah.

Richard Branch:              In terms of our data, it's one of the medium-sized sectors. It's certainly not the largest by any stretch of the imagination, it's not the smallest, it's stuck in the middle.

Mark Zandi:                     Yeah. Have you looked into the one potential saving grace might be the conversion of office into residential? Again, going back to we do have an affordable housing shortage and maybe these office towers can be converted in some of these big urban cores where the shortage is most severe and help alleviate that shortage. Have you looked into that dynamic at all?

Richard Branch:              We've been paying attention to the data as it comes in. It is hard to track whether this is a conversion project or a new project. We haven't seen any significant trend in the data that points to this is happening. Certainly a lot of anecdotal, a project here or a project there, but no ground swell in the data that says this is going to be the next thing.

Mark Zandi:                     This is a big deal. Yeah. Cris, have you seen anything in this area?

Cris deRitis:                      No. I have a question though.

Mark Zandi:                     Yeah.

Cris deRitis:                      Do you see any differentiation between the urban core and suburban offices? Because of the hybrid work, are you seeing any pickup in suburban office demand for-

Richard Branch:              Yeah. I'm going to be very careful here because I don't want to burn my stat.

Mark Zandi:                     Oh, okay.

Marisa DiNatale:            Oh, okay.

Mark Zandi:                     We can hold off. All our ears pick just picked up when you said that.

Richard Branch:              Yeah. So as we track the office sector, it really goes into three different buckets. There's that office construction project that is what we'll call the income property type. That's about two thirds of all office construction is that more spec side of the market, whether it's suburban or urban. About 25% of the market actually leave 25% to the end. Around 8 to 9% is dedicated corporate headquarters. Those kinds of projects are still moving forward, and I think those are the projects, whether they be in suburban locations, it's fueled by that push towards more hybrid work that you have a central locus or a node where you can bring workers to whether that's once a month, once a quarter. So those kinds of projects seem to be moving forward.

                                           The last part of our office data, which is a little different to think about, is we put data centers in our office sector. So it's data. If you look at our overall office market for 2023, it's only down 5% in terms of dollar value, but that's because data centers are boosting it up. There's a huge demand for data centers.

                                           So to go back to your suburban versus urban question, you're right, the urban market is in trouble. But that suburban market, because of those more build the suit corporate headquarter campuses, is actually doing reasonably well, it's just a small part of the market.

Cris deRitis:                      Okay, and not enough to offset the downdraft.

Richard Branch:              Not enough, not at all.

Cris deRitis:                      Yeah.

Mark Zandi:                     So office is at the bottom of the distribution of construction activity.

Richard Branch:              Yes. Yeah.

Mark Zandi:                     What else is down there with office? Maybe not as bad, but-

Richard Branch:              Warehouse.

Mark Zandi:                     Oh, warehouse. Okay.

Richard Branch:              Warehouse, yeah. I would view that though as more of a structural issue rather than an economic issue. So a warehouse project for us is whether it's a build the suit or a spec space, right? In terms of our time series, which goes back to '67, starting in 2018 or 2019, we've set construction records for a warehouse every single year, and it's fueled by one person. Amazon.

Mark Zandi:                     Amazon. Oh, that would've been a great stat that I would've gotten.

Richard Branch:              Yeah, that's why I didn't. So in terms of warehouse construction, Amazon's about 16% of the space.

Mark Zandi:                     Wow.

Richard Branch:              We know that Amazon said we're done, we're stepping out of this market, and so they're seeing that structural shift down.

                                           There's still a lot of demand, particularly for high-end, whether it's robotic or heavily conditioned warehouse space. So even out through 2027, as this market shrinks, it's still going to be about where it was in 2018 or 2019 when it set records. It's just one big player stepped out of the market. So not economic per se, it's structural, I would say.

Mark Zandi:                     Yeah. Although I would've thought there too, the shift from goods to services in terms of consumer preferences might be playing a role too, right? Because it's reduced global trade and transportation demand and needs and therefore the need for warehouse space. In fact, I think inventories of warehouses that I looked is still pretty inflated and they're trying to work down those inventories.

Richard Branch:              I would potentially offer a cross or a different way to think about that is you think about it from that last mile perspective, that it's not just construction workers that are short, it's not just manufacturing workers, it's truck drivers. So there's probably an incentive for warehousing and logistic companies to build more units, more space that are closer together. So more spoke and hub rather than a big five or six million square foot facility because you just don't necessarily have the drivers to fill in all the local spaces, you need more small local distribution facilities. So that might be a counter to that, I would think.

Mark Zandi:                     Yeah, very interesting. Would there be a boost from onshoring or nearshoring?

Richard Branch:              Absolutely.

Mark Zandi:                     Maybe shoring-

Richard Branch:              Yeah, good point.

Mark Zandi:                     [inaudible 00:40:56] manufacturing. Yeah.

Richard Branch:              Absolutely. Yeah,

Mark Zandi:                     It's just amazing the cross currents in everything.

Richard Branch:              Yeah, exactly.

Mark Zandi:                     Yeah, there's so many cross currents. Okay, so let's look at the other side of the distribution, what's booming. You mentioned data centers, that seems pretty clear given the cloud and maybe Bitcoin, I don't know.

Richard Branch:              We do have Bitcoin mining facilities included as data centers, and we're seeing a few of those come up for sure.

Mark Zandi:                     Yeah, yeah, yeah. So what else is at the top of the list of sectors that are doing really well?

Richard Branch:              Yeah, I would put three in here. Manufacturing.

Mark Zandi:                     Manufacturing.

Richard Branch:              Absolutely.

Mark Zandi:                     There's your onshoring.

Richard Branch:              There's your onshoring, yep. Healthcare.

Mark Zandi:                     Okay.

Richard Branch:              Whether it's hospitals, whether it's clinics, the doc in the boxes or the urgent care centers, as well as laboratories and life science buildings.

Mark Zandi:                     Yep. Philly's booming, right?

Richard Branch:              Yep, absolutely. Those counter some of those weaknesses that we're seeing in the office, retail, warehouse space.

Mark Zandi:                     Right. Right. Manufacturing, industrial, that is manufacturers bringing back production in part because of the supply chain issues related to the pandemic, in part because of perhaps relationships with China and bringing in those supply chains, and of course, policy. We've got policy that's helping here too. The Ships Act would be example, I guess.

Richard Branch:              It's turned it into, between Ships and Inflation Reduction Act, fuel and EV and battery plants it, it's somewhat turned the sector into a quasi-public sector.

Mark Zandi:                     Interesting.

Richard Branch:              If you look at our construction starts for 2022, manufacturing, $101 billion. In terms of our data set back to '67, in nominal dollars that's a record. If you look at it in square feet or constant dollars adjusted for inflation, it's a 35-year high.

Mark Zandi:                     Yeah. Amazing.

Richard Branch:              There's a lot of stuff in the pipeline. There's a lot of projects sitting in the pipeline that are ready to go.

Mark Zandi:                     So just to complete our discussion around the non-residential commercial market, is there anything else you want to call out that I didn't tease out? Any other observations you want to make there?

Richard Branch:              No. I think that lab, that life science work, that laboratory, the healthcare, the clinic, that's really... We're looking at some-

Mark Zandi:                     Where the action is.

Richard Branch:              ... that we've seen in those two sectors.

Mark Zandi:                     Very cool. Okay.

Cris deRitis:                      Are you seeing any hotels being built?

Richard Branch:              Had a good year last year, it's down this year. We think it's going to continue to be down. What's interesting though is, again, if you look at the pipeline, I think there's a floor on activity. When you look at the kind of projects that are sitting in the planning cycle and you look at it by value class, there's a lot of high end and luxury properties that are nearing the end of the planning process about to break ground.

                                           I would say those are, I don't want to say recession proof or slowdown proof, but those projects are likely to go ahead regardless in 2023, going back to the assumptions of no recession, debt ceiling, whatnot. So that provides a floor for hotel activity. If you look further down in the value chain to the more of the mid-market, mid-market with food, there's a lot piling up in the early stages of planning that I think is really good news for 2024 once the economy's on much much solider footing.

Mark Zandi:                     Great. Well, let's play the game, the stats game. Everyone picks a statistic, the rest of the group tries to figure out what that is through clues, deductive reasoning, and questions. The best stat is one that's not so easy, we get it immediately, one that's not so hard, we never get it, and if it's apropos to the conversation at hand, all the better.

                                           It's still tradition, Marisa, we're going to go with you first. What's your stat this week?

Marisa DiNatale:            29% in April.

Mark Zandi:                     In April, 29%. Government statistic?

Marisa DiNatale:            No.

Mark Zandi:                     Did it come out this week?

Marisa DiNatale:            Yeah.

Mark Zandi:                     Is it related to what we're talking about here, the construction trades?

Marisa DiNatale:            Yes.

Mark Zandi:                     Okay. I know the National Association of Home Builders came out with their sentiment index, but that was good. That was like 50.

Cris deRitis:                      Yeah.

Mark Zandi:                     But I know you, you like to dig deep into the bowels of these reports. Is it in that report?

Marisa DiNatale:            No.

Mark Zandi:                     Oh, okay. Cris, Richard, any ideas?

Richard Branch:              29%.

Cris deRitis:                      It's related to real estate.

Richard Branch:              Is it on the residential side of the market?

Marisa DiNatale:            It is residential related, yes.

Richard Branch:              Is it a year over year figure?

Marisa DiNatale:            No.

Richard Branch:              No.

Cris deRitis:                      Is it banking related?

Marisa DiNatale:            It's a share.

Cris deRitis:                      It's a share.

Marisa DiNatale:            It's a share of something.

Mark Zandi:                     Oh, okay. It's a report that came out this week, but not a government report.

Richard Branch:              Yeah.

Mark Zandi:                     I can't think of what that would be. Can you give us any other hints, Marisa?

Marisa DiNatale:            So it's not NAHB, but it's ...

Mark Zandi:                     Something along those lines.

Cris deRitis:                      NAR.

Marisa DiNatale:            NAR. NAR.

Richard Branch:              The number of existing home sales?

Mark Zandi:                     Is it the number, the share of metropolitan areas that did not experience price declines?

Marisa DiNatale:            No.

Mark Zandi:                     No. Okay. Oh, existing home sales came out. Right. So 29% share, so what would the share be in there? That it was 29%, right? 29%.

Marisa DiNatale:            Yep, 29%

Mark Zandi:                     It's in the existing home sales report.

Marisa DiNatale:            Yes.

Mark Zandi:                     Yeah. 29% of home sales are in the South. I'm making that up.

Marisa DiNatale:            No.

Mark Zandi:                     Is it regional?

Marisa DiNatale:            No.

Mark Zandi:                     No. I don't know, guys, I think she's got us.

Richard Branch:              Yeah, that's...

Mark Zandi:                     Yeah. Okay. We give.

Marisa DiNatale:            Give up?

Mark Zandi:                     Yeah, we give up. I give up.

Marisa DiNatale:            It's the share of home sales made up by first time home buyers.

Mark Zandi:                     Oh, that's a good one.

Richard Branch:              That's a really good one.

Mark Zandi:                     Of course. Of course.

Marisa DiNatale:            That is up a tick from the previous month. It was 28% in March and it was 28% in April of 2022. But that is very close to an all-time low since NAR's been tracking series. So the all time low was in November, it fell to 26%.

                                           So just going to this affordability, what we were talking about the single family market and the demographics, the corollary statistic is the age of the first time home buyer has risen to 36. It was 33 two years ago. So as affordability erodes, it's just more and more difficult to get first time buyers into the market.

Mark Zandi:                     Is that 36 year old, is that NAR data as well, the realtor data as well? Does it come from the realtor report or is that some other?

Marisa DiNatale:            It's from realtors, yeah.

Mark Zandi:                     It is? Okay.

Marisa DiNatale:            Yeah.

Mark Zandi:                     Wow. That is interesting. Yeah, makes a lot of sense. That's good. We should have have gotten that. Cris should have gotten that.

Cris deRitis:                      I should have. I just didn't' think of the housing.

Mark Zandi:                     But that was good. That was a very good one. Cris, you want to go next?

Cris deRitis:                      Sure. 33%.

Mark Zandi:                     A statistic that came out this week?

Cris deRitis:                      Yes.

Marisa DiNatale:            Housing related?

Cris deRitis:                      It is housing related. It is a statistic I constructed though.

Richard Branch:              Oh.

Mark Zandi:                     From government data?

Cris deRitis:                      Yes. So a hint is existing home sales is an input into the calculation.

Mark Zandi:                     What was this number again, 30?

Cris deRitis:                      33%.

Mark Zandi:                     The data from the existing home sales is part of this calculation. 33%.

Cris deRitis:                      Well, that's a little misleading. 33%.

Mark Zandi:                     Okay. Is it-

Cris deRitis:                      Let me make it easier. It's a [inaudible 00:49:12] listings. What does this refer to?

Richard Branch:              High end or-

Cris deRitis:                      No.

Richard Branch:              Is it... No.

Mark Zandi:                     Foreign buyers?

Cris deRitis:                      No.

Mark Zandi:                     Investors?

Marisa DiNatale:            Cash buyers.

Mark Zandi:                     [inaudible 00:49:23] cash buyers.

Cris deRitis:                      No. Might be. That's pretty close I think as well.

Mark Zandi:                     Yeah.

Cris deRitis:                      It's a new construction.

Mark Zandi:                     Oh.

Cris deRitis:                      The share of active listings that are for new home construction.

Marisa DiNatale:            Okay.

Cris deRitis:                      33%, that's a record high.

Marisa DiNatale:            Really?

Mark Zandi:                     That's interesting. Wow.

Cris deRitis:                      Yeah, and it just points to the lack of inventory of existing homes out there. So people are having to look elsewhere and if they can afford it, they're going with a new home.

Mark Zandi:                     That is interesting.

Cris deRitis:                      I thought so.

Mark Zandi:                     Yeah. Yeah. Right. What's it typically? What's the percent typically, do you know?

Cris deRitis:                      Oh, 20%.

Mark Zandi:                     Oh, 20%.

Cris deRitis:                      20% was what it was pre-pandemic, and that was high at the time. So it's-

Mark Zandi:                     Right. That brings up a really good question, and I don't want to go too deep down this rabbit hole, but what do you ascribe the low inventory to? Why is there such-

Cris deRitis:                      Oh, the lock-in effect.

Mark Zandi:                     The lock in effect?

Cris deRitis:                      Yeah.

Mark Zandi:                     That's number one.

Cris deRitis:                      Existing homeowners locked in a record low interest rate. If they sell, they have to face a much higher rate. It just doesn't work for them.

Mark Zandi:                     Of course, it was low before the pandemic too, right? Before interest rates rose, right? I mean, inventories have been lean for quite some time.

Cris deRitis:                      Yeah, yeah, but they're especially lean.

Mark Zandi:                     No, they're especially lean now, absolutely.

Cris deRitis:                      It's even more of an disincentive to sell.

Mark Zandi:                     Right. Right.

Richard Branch:              So they hate their home and like their mortgage.

Mark Zandi:                     That's right. That's right.

Cris deRitis:                      Yeah, that's what we always say about it.

Mark Zandi:                     Okay.

Marisa DiNatale:            So you renovate.

Richard Branch:              Right.

Mark Zandi:                     Marisa knows all about that.

Marisa DiNatale:            Yep, and Cris.

Mark Zandi:                     Yeah.

Cris deRitis:                      Yes.

Mark Zandi:                     Oh, really? I didn't know Cris's renovating too.

Marisa DiNatale:            We just had a therapeutic session last week about our respective renovations going on forever.

Cris deRitis:                      We can speak to those construction workers focusing on the larger projects and neglecting the smaller renovations.

Mark Zandi:                     It's definitely a problem. Okay, Richard, you're up.

Richard Branch:              Sure. All right. I have a long list here, but I'll just pick the one off the top. 1985.

Mark Zandi:                     Okay. So something happened in 19... 1985 was the year that multifamily construction peaked.

Richard Branch:              Nope. Right concept, different sector.

Mark Zandi:                     Oh, okay. Oh, peak multifamily-

Marisa DiNatale:            Office?

Richard Branch:              Yeah, Marissa got it.

Mark Zandi:                     Office peaked. I think multifamily peaked in 1985, don't you think?

Richard Branch:              Probably. That's not my stat, but that's-

Mark Zandi:                     Yeah. Well, you know.

Richard Branch:              It's a half-

Cris deRitis:                      Check it out.

Mark Zandi:                     Yeah, check it out.

Cris deRitis:                      Yeah.

Richard Branch:              So 1985 was the peak year for new office construction. What I think is most interesting about that is each subsequent cyclical peak has been lower and lower and lower and lower. Where I get stuck a lot certainly talking to clients and folks in the industry is that these construction verticals, whether they're single fam, multifam, education, that they're static. It's important to remember that these are evolving markets.

Mark Zandi:                     Right.

Richard Branch:              The pandemic, at least in terms of office, it spinal tapped it, right? It turned that evolution up to 11. But that change or that lack of declining demand for office space has been going on for decades.

Mark Zandi:                     Yeah, it's interesting. Yeah.

Cris deRitis:                      Well, I guess 1985, that's also a peak of labor force growth, right? Because you had the boomers entering in, you had female participation rising quickly, so you had a lot of folks piling into the... A lot of them were college educated, white collar piling into that market, and now we're on the flip side of all of that.

Richard Branch:              Yeah, and I think there were some tax depreciation.

Mark Zandi:                     Oh, that too. That's departments, right?

Richard Branch:              Exactly right.

Marisa DiNatale:            1985 was the peak of multifamily starts.

Mark Zandi:                     I'm just saying. I am just saying. I'm just saying. Yep, there you go. Yeah.

                                           Okay, that was a good one. That was a really good one. Okay, I think mine's hard, sorry, but I am good at giving clues. I have two statistics, but I'll begin with the first one. 7%.

Marisa DiNatale:            Housing related?

Mark Zandi:                     It is construction related broadly.

Marisa DiNatale:            Okay.

Mark Zandi:                     And think macro. Think big picture. Think about where we started the conversation.

Marisa DiNatale:            The share of the economy.

Mark Zandi:                     Yeah, the share of the economy. It's construction put in place.

Richard Branch:              Oh, there you go.

Mark Zandi:                     The total value of construction put in place across the whole shooting match according to the bureau. Not according to Dodge. Although, does the Bureau of Economic Analysis use Dodge data to construct its estimates? I believe it does, doesn't it?

Richard Branch:              Yeah, so actually Census is a client of ours.

Mark Zandi:                     Census, I should say, yes. Census, yeah.

Richard Branch:              They use a lot of public data as the basis for the put in place survey for non-residential.

Mark Zandi:                     Right, exactly. So total construction put in place divided by nominal dollars, divided by GDP, is 7%. You've got data back, in this case, monthly data, back I think 30-some years.

Richard Branch:              Yeah.

Mark Zandi:                     Guess what the average share is of GDP? 7% on the nose.

Richard Branch:              So it hasn't changed.

Mark Zandi:                     Yeah, it hasn't. Well, it goes up and down and all around. It peaked during the housing boom before the financial crisis, and it hit the bottom in the bust during the housing crash after the crisis, and it's been rock solid stable for a couple years. Just rock solid stable. Pretty amazing.

Richard Branch:              Yeah.

Mark Zandi:                     Oh, and I think your 15%, probably, that in my mind makes sense if you consider all the so-called multipliers, right?

Richard Branch:              Yeah.

Mark Zandi:                     All the ancillary businesses that are not construction, but are obviously driven off of the construction activity, and it feels like that would push it up to 14, 15%, at least in my mind's eye.

Cris deRitis:                      Yeah. Typically, when you think of all the housing services, mortgage brokers, insurance, all that.

Mark Zandi:                     There's a ton of stuff, yeah. Okay. Okay, here's the other one. Think about it in this context. 5%. 5%. Same thing, big picture, macro. One was output GDP, this is-

Marisa DiNatale:            It's not productivity is it?

Mark Zandi:                     Well, you're-

Marisa DiNatale:            Growth.

Mark Zandi:                     You're thinking along the wrong-

Marisa DiNatale:            Over the-

Cris deRitis:                      Share of employment?

Mark Zandi:                     Share of employment, exactly.

Marisa DiNatale:            Okay.

Mark Zandi:                     5% of all non-farm jobs are construction. You know what the average is? And here we have data back to 1933 from the BLS. You know what the average is?

Richard Branch:              I'd go with five.

Mark Zandi:                     5%.

Marisa DiNatale:            The [inaudible 00:56:27].

Mark Zandi:                     5%. I mean, I find that amazing.

Marisa DiNatale:            Yeah.

Mark Zandi:                     I just find that amazing. The construction trades are right exactly where they typically are. Obviously a lot of churn up and down and all around, and a lot going on underneath the hood here, but at the end of the day we're still kind of landing around.

                                           Then I look at that, I go, it's got to be a pretty productive sector, doesn't it? If the output share is seven and the employment share is five, I don't know. It's pretty simplistic, but nonetheless. Anyway.

                                           Okay, that was good. That was very informative. Yeah, very informative. Let's now, with the remainder of the time we've got, turn back to a very important part of the construction trades that at least I typically don't pay much attention to but I think we need to is public construction, public infrastructure. So what's the state of affairs there, I mean, given the bipartisan infrastructure law that was passed? Are things kicking in, are we starting to see that money get out?

Richard Branch:              Aggressively so, yeah. If you look at data that the White House releases, I think they put it out every two to three months, they give an update of how much of the funds have been announced, 40% of all the street dollars have been announced, 43% of all the water. We're starting to see that flow through into starts. We're looking at across the country, North to South, East to West, street, bridge, water, sewer construction is up double digits far and away.

                                           What's interesting though, when you think back to that, at least to the nerd in me, if that 40% and that 43% announced from the White House, there's a big difference between announced, allocated, and spent, right? So that's money that that announcement is just initial dollars moving from Washington to Texas or wherever. Then Texas takes it and spends it out to the local DOTs or the state DOT. So there's a lot of money that hasn't been announced, there's a lot of money sitting in the allocation pile, and we're starting to see the end of the pipeline, the starts increase.

                                           So really really I think a positive outlook here, although I would offer there's a bit of a downside potential here too to all this activity. I hate saying this, but if we think about-

Mark Zandi:                     Before you go there, let's dwell on the positive for another second.

Richard Branch:              Okay, sure.

Mark Zandi:                     Just because this is something that's very important to our forecast for the economy. Given your sense of the lags between the allocation and the actual implementation and the actual project beginning, when do you think the maximum impact of the infrastructure law will be to the economy, in terms of the timeline, when should we expect that maximum impact?

Richard Branch:              Yeah. When we started building these assumptions into our model, we assumed '23 and '24 would be the best years in terms of growth for infrastructure. We're pushing that out, or we'll start pushing that out, I think to '24 and '25. We are noticing a little more of a delay between that allocation and spend. I think that has a lot to do with labor shortages. It has a lot to do with material prices that are still very high. So state and local communities, I think, are not putting the brakes on it, but they're certainly slow walking projects just to see if they can see some improvements in materials or labor allocation.

Mark Zandi:                     Got it. I mentioned the bipartisan infrastructure law. I mean, that's obvious. That's money directly to public construction. The Inflation Reduction Act, which was predominantly around climate related investments, does that also play a role here too, do you think?

Richard Branch:              We are definitely seeing in our utility sector, so utility scale wind and solar projects, part of the-

Mark Zandi:                     Picking up?

Richard Branch:              ... Inflation Reduction Act was the extension of the production tax credit and the investment tax credit for wind and solar. So that has spun up a lot of projects, not just in the pipeline, but as well as in the starts. So absolutely, we're seeing that. It's big gains there.

Mark Zandi:                     Okay. So you think that there'll be wind in the sails here through '24 probably into '25?

Richard Branch:              Yeah.

Mark Zandi:                     Yeah. Okay.

Richard Branch:              Even through '27, I think levels are still high, it's just those dollars are starting to take up.

Mark Zandi:                     Yeah. You start getting negative numbers because the level's starting to come back in.

Richard Branch:              Exactly.

Mark Zandi:                     But it's positive growth rates for the next year or two, you would expect?

Richard Branch:              Very, very positive.

Mark Zandi:                     Very positive.

Richard Branch:              High double digit.

Mark Zandi:                     High double digit. Okay.

Richard Branch:              High teens. High teens.

Mark Zandi:                     Yeah. Okay. Got it. Okay. So what's the negative?

Richard Branch:              Well, as we've been looking at it and thinking about, and this goes for manufacturing and all the dollars that are flowing into the manufacturing sector, this is a competition for labor. So the concern that we have is that smaller and medium-sized non-residential projects are going to get crowded out. They're not going to have access to workers or materials to get these projects done. So I think that's just an added downside.

                                           We've seen this before, too, when just prior to the pandemic where a lot of construction was in downtown urban Cores, these big mega projects, it essentially squeezed out any small to medium size projects in the area because there are just not enough labor to go around. So I think that's a particular downside too. Whether it's the public side of the building market for schools and healthcare, or whether it's the private side of the building market. I think there's an incredible, I hate to say the word risk, but there is a downside to all these dollars, all these public dollars, fueling manufacturing and infrastructure. It's a positive for the sector to be sure, but there is a downside there.

Mark Zandi:                     Well, I guess if you're in the construction industry, you say, I'll take it. I mean-

Richard Branch:              I was talking to a client about infrastructure and I got to that point in the conversation. I said, "Well, here's where it gets a little bit boring, right? Because everything is up, it's the rising tide lifts all boats." He is like, "Whoa, whoa, whoa, whoa. Nothing about this is boring. This is the best news you've had all day."

Mark Zandi:                     Yeah. Right. We are seeing wages in the construction trades rise rapidly, which goes to the construction costs and to your point about delays in construction projects, but presumably that should help alleviate some of the labor issues going forward. But you're right, it was just competition against other parts of the economy.

                                           Okay, very good. One last thing. Somehow, I don't want to end on a down note, but the debt limit, obviously that's top of mind as the president's negotiating with Speaker McCarthy. It feels like we're getting kind of happy talk today, the last hour I looked. That could change very quickly. But it feels like we're coming to a deal and hopefully we do in the next week or two without too much drama and damage.

                                           But it sounds like you took our couple breach scenarios and ran them through your models to gauge what kind of impact they would have if we actually did breach the debt limit. Do I have that right?

Richard Branch:              You have it right, yeah.

Mark Zandi:                     I do. Okay.

Richard Branch:              We took your short breach and your prolonged breach and random through our econometric models and it was stark, to be honest. The short breach was fairly mild. I think I mentioned at the outset we're looking at total construction up two in 2023. That short breach scenario would change that plus two to a minus three.

                                           As we ran scenarios through our system, very similar numerically and amplitude to I think it's your S3 scenario in terms of the impact on, not the macro side, but just the impact on construction starts. But the prolonged breach was scary. That plus two in baseline changes to a minus 14.

Mark Zandi:                     Yeah.

Richard Branch:              When we looked peak to trough, down 30%.

Mark Zandi:                     Oh, really? Down 30.

Richard Branch:              You go back to the Great Recession, peak to trough was down 40.

Mark Zandi:                     Oh wow. Okay.

Richard Branch:              So this would be over a shorter period of time.

Mark Zandi:                     Right. Right. Of course, that doesn't account for what will be in either scenario higher interest rates going forward.

Richard Branch:              Right, exactly.

Mark Zandi:                     Because investors are going to demand a premium thinking, well, you guys breach this time, what about next time and the time after that, and demand a risk premium. Yeah. Right.

                                           That's interesting. Very good.

                                           Hey, I want to end with a something we haven't done in a few podcasts and talk about probabilities of recession. Richard, I don't know if you've thought about this at all, but if you have, I'd like to get your opinion. But let me start with Marisa. Can you just remind everyone what your probabilities of recession starting in 2023 are, and in 2024, what they were, and if they've changed at all?

Marisa DiNatale:            I'm still at about 50% for 2023. 2024, I'd up it to 55.

Mark Zandi:                     Okay.

Marisa DiNatale:            That's not different than it's been.

Mark Zandi:                     Not materially different?

Marisa DiNatale:            No.

Mark Zandi:                     Yeah. So your mood hasn't changed here?

Marisa DiNatale:            Not really, no.

Mark Zandi:                     Despite all the whatever is going on. Okay.

                                           Cris, what is your probabilities?

Cris deRitis:                      Well, before I give them, let me just announce that because you said it, headline across the wire now is that the Republicans walked out of debt ceiling talks.

Mark Zandi:                     Oh wow.

Cris deRitis:                      Saying White House isn't being reasonable. So put that in your calculus.

Mark Zandi:                     Yeah, here we go.

Richard Branch:              Well, it was too good to be true, right? I mean ...

Cris deRitis:                      45%, 65%.

Mark Zandi:                     45% this year.

Cris deRitis:                      This year. 65 next year.

Mark Zandi:                     In 2024. That sounds-

Cris deRitis:                      The same.

Mark Zandi:                     Kinda sorta where you've been, right?

Cris deRitis:                      Yep.

Mark Zandi:                     Okay. Richard, I know that's putting you on the spot here, but do you think about things in these terms? Do you have a sense of the probability of recession this year and again next year?

Richard Branch:              Yeah, we certainly put thought into it. We look at all your scenarios across the spectrum. I would say I pretty much agree with Marisa here. I think 50, maybe a little bit less than 50 for this year. 55, maybe a little bit higher than 55 for.

                                           24.

Mark Zandi:                     Okay. All right. Has that changed in any material way?

Richard Branch:              Not recently, no.

Mark Zandi:                     Not recently, okay. Okay. All right. Well, I think I'm at now 40% for 2023. That's lower. I was at 45, down to 40. I'd say maybe 50 in '24. I'd say on the south side of 50 for 2024. I'm feeling increasingly confident that we're going to make our way through without an economic downturn. Inflation feels like it's coming in reasonably gracefully. It feels like the Fed is done tightening, or if not, very, very close. I feels this economy's just so resilient no matter what's thrown at it. All the slings and arrows. Russian War, debt limit drama, an unprecedented increase in interest rates, we still keep chugging away. So I don't know, I'm feeling better about things than I have.

Richard Branch:              Even after Cris' statement?

Marisa DiNatale:            Yeah, despite Cris's headline?

Mark Zandi:                     Well-

Cris deRitis:                      I thought I could sway you.

Mark Zandi:                     Yeah, I mean, didn't you think all that happy talk was too good to be true? I mean, really? That just doesn't sound right to me. It didn't sound right to me.

Marisa DiNatale:            They have to come to an agreement by what, Sunday or something? Is that-

Mark Zandi:                     They can suspend. Push comes to shove, you just suspend.

Marisa DiNatale:            Yeah, they could, but will they?

Mark Zandi:                     I think the odds of that are high. I mean, if the alternative is I'm going to breach, I think the alternative would be ... Because they're negotiating. It's not like they're not negotiating. So I think they would do that.

                                           If there's a breach, then we're all wrong, right? Because we were all-

Marisa DiNatale:            Very, yeah.

Mark Zandi:                     ... all below 50%. Because we're going in recession this year, it's just a question of-

Cris deRitis:                      Yeah, but some of us are more wrong than others.

Mark Zandi:                     I I guess so. I guess so. All right, fair enough. All right, but I don't think that's going to happen. You're not handicapping a breach here either, are you, Cris?

Cris deRitis:                      No.

Mark Zandi:                     No.

Cris deRitis:                      No. I think it's still part of the game.

Mark Zandi:                     It's still part of the game. I mean, at the end of the day, McCarthy's got to get some of these guys on the Republican side to vote for it, and if he gives in too early, they're going to say, "You didn't fight hard enough. I'm not voting for that." Right? So I'm not surprised. I'm not surprised.

                                           Great. Anything else? We miss anything? That was a wonderful conversation. I feel like I've got a much better grip on what's going on in the construction part of the economy, which is a key part of the economy.

                                           I think because going back to my glass have full kind of perspective, the fact that the construction trades are just simply hanging in there is like, whoa, that's amazing. Right? Because interest rates have risen dramatically, it's the most interest rate sensitive sector of the economy and it's doing okay. Really? Okay. I mean, go figure. I mean, that feels like another reason that... I hate to say it, Cris.

Cris deRitis:                      Just don't say it.

Mark Zandi:                     Okay, I won't say it. He knows what I'm going to say. Okay, I won't say it. I won't say it.

                                           Anyway, I think we're going to call it a podcast. Hey Richard, thanks so much. Really-

Richard Branch:              Yeah, thank you guys. I really appreciate it.

Mark Zandi:                     ... enjoyed your conversation. Really appreciate it. With that, we're going to call it a podcast. Take care, everyone.