The Mixed News of Autumn

by: Pierre G. Villere

As we finish the third quarter of 2020, a year for the history books, I continue to puzzle over the dichotomy in the current American economy. In a career approaching five decades, all of it spent in the financial and deal world, I can’t figure out how so much prosperity and pain are co-existing side-by-side.

To be sure, as we look at the construction materials space, not a single producer I have spoken to has complained about business. Yes, the pandemic has dealt its challenges, mostly in how to keep our workforces safe, but somehow the work continues on and production has been remarkably resilient. By mid-April, I thought the bottom was surely going to fall out of the broad aggregates industry in the United States. It didn’t.

Sharp Contrast. As the first cool hint of fall greets us this month, the metrics we monitor are in sharp contrast. In late August, the S&P 500 marked a record high; many consider the S&P to be the benchmark U.S. stock index compared to the tech-laden NASDAQ or the Dow Jones Industrial Average, which only measures 30 of the largest stocks.

After peaking at a record 3386 on Feb. 19, the index then plunged an astonishing 34% within a matter of weeks, a historic free-fall that ended the longest-running bull market in history. From there, the index pointed uphill, marking a new all-time high of 3389 in late August, up 4.9% this year. The whole chapter, from peak-to-peak, spanned just 126 trading days and marks the index’s fastest-ever recovery from a bear market.

But as a subset of the S&P, and an important indicator of the economic strength of our industry, the publicly traded housing stocks have been a shining star within that index. The S&P 500’s home-building sub-industry index was up 23% in late August, marking its first record in 15 years as new homes were on an annual pace of almost 1.5 million.

This boom is a reflection of rock-bottom interest rates and corresponding strong demand from buyers. In July, the average rate on a 30-year fixed mortgage fell to 2.98%, its lowest level in nearly 50 years of record-keeping. So, while construction activity bottomed out in April, it has since mostly returned to pre-pandemic levels. Further, consumer spending on furniture, appliances and home improvement have outperformed other sectors, helping buoy gross domestic product.

Employment Picture. But the contrast in the current employment picture is striking, especially considering the good news in the stock markets and the construction economy as a whole, and the new-home business in particular.

The number of Americans seeking unemployment benefits in a single week peaked at nearly 7 million in late March, a time when much of the economy was forced to close. U.S. employers added nearly 9.3 million jobs the past three months, and while that is a strong pace of hiring, it hasn’t yet replaced half of the 22 million jobs lost in March and April.

And as the pace of hiring slows, it becomes more likely that many Americans will be unemployed for a longer period. The unemployment rate was 10.2% in July, and at press time, late August claims for jobless benefits rose to 1.1 million, suggesting a wobble in the employment picture as the economy slowly recovers.

And it comes as no surprise that a large proportion of those who remain unemployed work in the hospitality industry, which has been decimated by closed restaurants, vacant hotels and empty airline seats.

Fortunately for our producers, demand remains steady in most markets, and strong in others. We should consider ourselves lucky that the pandemic did not cripple us like it did the hospitality industry, and from my vantage point, aggregates are still poised for prosperity.

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter @allenvillere.

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