Savannah Chamber

9 3 Nonresidential Construction Although slightly higher interest rates are a headwind, spending for new nonresidential construction will increase modestly in 2015, continuing the weak up cycle that began in 2013. Credit conditions will ease for those looking to build commercial space, but will remain very tight in markets with high vacancy rates. Employment and population growth gradually will generate gains in net occupancy, however. Foreign investors will continue to take advantage of a buyer's market for U.S. real estate. There will be some negative trends: less spending on power plants; and fairly weak public spending on nonresidential construction due to lagging revenue collections. Office and retail vacancy rates will remain high, but demand for new office space will increase the most in markets heavy with the high technology and energy industries. Retail construction will continue to be limited by too much existing space as well as online competition, but pockets of new retail development will appear in the most desirable locations. Industrial development will continue to benefit from rising levels of industrial production and capacity utilization, with new development focused on locations with logistical advantages. Less positively, spending for publicly funded structures will remain close to recessionary lows in many places. The primary problem is that weak real estate markets have led to downward adjustments in assessed property values. Typically these adjustments lag movements in market prices by several years; and property tax bases are just beginning to respond to the upturn in home prices. Consumer Spending Consumers' inflation-adjusted contribution to GDP growth will be positive, and larger in 2015 than it was in 2014. Steady, but moderate, job creation coupled with a limited amount of wage and salary growth will help to repair household balance sheets. Some additional loosening of still tighter than normal credit conditions also will support consumer spending, which will be about 2.8 percent. Improving household finances is one reason why consumer spending will continue to grow. Going into the recession, household finances were in terrible shape. The household debt service ratio (debt payments divided by after-tax income) stood at an all-time high of nearly 14 percent. Add in other financial obligations, such as car lease payments, rent, homeowner's insurance, and property tax payments, and the financial obligation ratio reached almost 19 percent, an all-time high. In 2015, homes prices will continue to rise, albeit much more gradually. Credit conditions will continue to loosen. Equity prices also will climb, but further gains will come much more slowly than in recent years. The savings rate will hold steady at 5.1 percent, so a higher savings rate will not be a headwind in 2015. But, over the long term, many people will need a savings rate of 7 or 8 percent in order to be comfortable in retirement. In short, a rising savings rate will be a secular headwind for consumer spending that will intensify through the end of the decade. The protracted period of household deleveraging has been painful, but necessary. One concern is that continued volatility in the financial markets may cause jittery consumers to push up the household savings rate very sharply in 2015, which would precipitate a recession. Fortunately, that is not the most likely scenario. One factor behind deleveraging was the unprecedented cycle of wealth destruction that erased 19 percent or $13.3 trillion of households' net worth. On an inflation-adjusted basis, full recovery of the wealth that was lost is did not occur until the third quarter of 2013. As of mid-2014, households' inflation-adjusted net worth was 7 percent above its pre-recession peak. On a nominal basis, households' net worth exceeded it pre- recession peak by 20 percent.

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