Rising Construction Costs Vs Interest Rates. Which is Worse?

: August 19, 2014

 

By Erika Morphy

WASHINGTON, DC—Expect the talk at this year's gathering of financial luminaries in Jackson Hole, WY to be all about interest rates and not just because its theme for 2014 is "Re-evaluating Labor Market Dynamics."

 

Simply put, the direction of interest rates—and when will they finally start to rise—is among the most important economic issues for the year. Interest rates, of course, could be called a perennial issue of importance, but 2014 is a shade difference as a contingent of economists, businesspeople and policymakers become more worried that the Federal Reserve Bank is waiting too long to pull the trigger.

 

For instance, private economists surveyed by the Wall Street Journal overwhelmingly said they are more concerned the Federal Reserve will hold off on raising rates too long than they are of the Central Bank raising them too soon or too quickly.

 

At the same time, though, there is another cloud looming on the horizon, one that is coming in perhaps faster than the specter of rising rates. Construction costs have risen sharply in recent months with the price of steel alone jumping some 40% over a 90-day period. Consulting firm Rider Levett Bucknall says US construction costs rose 1.15% in the first quarter of 2014, the largest three-month increase since 2008.

 

Our question, on Jackson Hole eve, is which is worse for the industry: the uncertainty around interest rates or these rising building costs.

 

Another question, as suggested above, is what do people think will happen with interest rates, both this week and the coming year.

 

The argument for the Fed to start raising rates sooner rather than later is straightforward: the recession is long over and the unemployment rate has from 7.3% last year to 6.2% today.

 

The argument for the Fed holding off on raising interest rates is equally compelling: there is little indication of inflation in the economy and more importantly, wages are not rising and jobs that are being created after the recession do not pay as much as the ones lost. In addition, yields on US Treasurys are at a fourteen-month low thanks to investors seeking a safe haven from global turmoil—but also signaling a confidence in the Central Bank.

 

Please come back here throughout the week as we will be examining all of these questions – about rates, about how badly will construction costs hurt development—and a related question about whether rising rents can mitigate the aforementioned.

 

Stay tuned for part 2