Anirban Basu

Anirban Basu is chief economist of the Associated Builders and Contractors (ABC), Washington, D.C. and CEO of Sage Policy Group, Baltimore. As one of the mid-Atlantic region’s most recognizable economists, Basu provides timely, comprehensive analyses on important trends in the U.S. commercial and industrial construction industry, in addition to producing ABC’s quarterly Construction Backlog Indicator, a forward-looking national economic indicator that reflects the amount of work that will be performed by commercial and industrial contractors in the months ahead.

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Positive signs

Construction

Nonresidential construction’s recovery is beginning as leading indicators are positive.

February 19, 2014

The U.S. economy has vast and explosive potential. Its growth rate averaged more than 3 percent during the quarter century preceding the Great Recession. It has the power to produce and support a host of prodigious companies—from Microsoft and Facebook to Boeing, Walmart, Coca-Cola and dozens of others. It leads the world in research and development and soon will become the leader in production of oil and natural gas. It is the global center of space technology, 3-D printing, nanotechnology and the life sciences. It is the most educated large nation in the history of the world.

Unfortunately, this potential has not been realized over the past several years and subpar economic growth and an unemployment rate hovering around 7 percent are just two manifestations of the nation’s lackluster economic recovery. Last year, the U.S. economy expanded just 1.9 percent. There were several factors to blame for last year’s myriad disappointments, including higher tax rates, sequestration, rising interest rates, the possibility of debt default, federal government shutdown and uncertainty emanating from health care reform.
 

Set to grow

Despite a sluggish 2013, nonresidential construction should accelerate in the coming year. Over the course of last year, the U.S. economy gained momentum due largely to consumer outlays and investment in inventories to meet household demands. The stock market boomed, with the Dow and the S&P 500 rising by nearly 30 percent and the

NASDAQ surging by nearly 40 percent. Confidence among various economic actors has been rising, including among financiers, developers and even government budgeting officers.

Unfortunately, to date, the long-awaited sustained recovery in construction has yet to transpire. December served as a fitting ending to 2013 for nonresidential construction spending. Nonresidential construction spending fell 1.3 percent on a monthly basis and declined 1.1 percent on a year-over-year basis. The dip in spending was, at least in part, attributable to a frigid December.

Additionally, December tends to represent a cyclical trough in construction spending. For these reasons, December’s numbers should not alter what is a relatively positive forecast for 2014’s nonresidential construction industry.

The fact of the matter is that construction’s leading indicators have largely turned positive. Average backlog has been on the upswing and architectural billings have generally edged higher.

The outlook also is improving for those operating in a demolition context. One of the principal elements of a strong demolition market is confident capital budgeting by state and local government budgets. These state and local governments are often looking to replace old stadiums, dilapidated housing and other community elements with fresher development that is more conducive to fiscal and economic sustainability.

Detroit’s bankruptcy notwithstanding, fiscal conditions are improving for most local governments. Property taxes are rebounding in the face of rising property values. State tax revenues are nearly back to prerecession levels and state government payrolls will recover by the end of 2014 according to Moody’s Analytics.

To date, publicly financed segments of the construction industry have been slowed by hesitant state and local government budget officials. Moreover, because one-third of state revenues come from the federal government, most states have lacked the necessary confidence to move forward with capital budgeting in an environment characterized by feuding among federal budgeters. But the federal government recently passed a budget, which helps support bolder state and local government capital budgeting. That represents a plus for demolition contractors.

Growth in a handful of private construction categories has barely offset public sector sluggishness in most recent quarters. Health care stands to be among the largest sources of opportunity given the push toward outpatient and clinical care. However, it is likely that some number of acute care hospitals in America will falter due to the desire among policymakers and insurers to avoid expensive in-patient stays. Power has been a consistently strong segment over the past several years, and commercial construction should increase in accordance with consumer spending growth. Lodging-related construction will continue to trend higher as hotel occupancy rates edge higher and anticipated growth in exports next year should lead to an acceleration in manufacturing-related construction.

Confidence regarding construction prospects is hardly relegated to economists. Associated Builders and Contractors’ (ABC’s) Construction Confidence Index indicates that roughly 60 percent of contractors think their revenues will rise in 2014. Perhaps more impressively, 82 percent of contractors expect their profit margins to rise or remain flat, indicating that December’s dip in spending is not indicative of what 2014 will bring.
 

Positive indicators

ABC’s Construction Backlog Indicator (CBI) represents another positive indicator. Despite remaining flat in the third quarter, CBI rose to 8.2 months in the second quarter, a 3.9 percent increase. While the Northeast and Southern regions experienced the greatest expansion in CBI, several states have experienced large-scale job growth. Texas, North Dakota and Louisiana all have benefitted from their status as energy producers. States that were hit especially hard by the recession also are adding construction jobs: California, Arizona, Georgia and Florida all have added construction jobs as their housing markets stabilize.

Over half of the respondents to the Wells Fargo 2013 Construction Executive Survey experienced higher construction activity relative to a year ago, and 22.4 percent report much higher activity. Perhaps of more importance is the fact that only 15.5 percent of respondents perceive declining construction volumes.

All of this stands for the proposition that nonresidential construction is set to begin to recover in earnest in 2014. Recently released data for January indicate that the period of recovery may have already begun.

The U.S. construction industry added 50,000 jobs during the month even as most other economic segments disappointed. Nonresidential construction added 21,000 of those positions, a significant improvement from the 14,100 jobs lost in December. While it is likely that some of the jobs lost in December were gained back in January 2014, the overall picture is consistent with steady construction labor market recovery.

Another indicator that portends well for 2014 is the remarkable stability of construction material prices. Despite the rampant volatility seen over the past decade, input prices rose only 1.3 percent from December 2012 to December 2013. Although surging stock and asset prices coupled with monetary stimulus would suggest price volatility, this volatility has failed to come to fruition. Both monthly and yearly increases in the most recent data release showed astonishing stability in the materials prices. An improved economy will increase the demand for construction inputs (along with their prices), but not to the extent seen in 2004, 2005 and 2007.
 

National outlook

ABC expects to see U.S. economic growth climb to 2.6 percent in 2014, up from 1.9 percent in 2013 and roughly equivalent to the 2.8 percent growth in 2012. This is partly due to the new Federal Reserve Chairman Janet Yellen, who has a reputation for targeting unemployment rather than inflation in her policymaking. Because inflation pressures will most likely remain suppressed, an accommodative monetary policy should stay in place throughout 2014.

With office vacancy rates falling, infrastructure crumbling and hotel occupancy rates rising, there should be more demand for construction this year. Occasionally, the desire to build something new will require the removal of something old. The implication is that demolition contractors also are likely to be busier this year.

 


Anirban Basu is chief economist of the Associated Builders and Contractors (ABC), Washington, D.C. and CEO of Sage Policy Group, Baltimore. As one of the mid-Atlantic region’s most recognizable economists, Basu provides timely, comprehensive analyses on important trends in the U.S. commercial and industrial construction industry, in addition to producing ABC’s quarterly Construction Backlog Indicator, a forward-looking national economic indicator that reflects the amount of work that will be performed by commercial and industrial contractors in the months ahead.

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