Demolition 2017: Uncertainty abounds

Demolition 2017: Uncertainty abounds

AGC’s chief economist discusses the potential impact of a new president and Congress on the construction industry.

February 14, 2017
Kristin Smith
Association Activities Construction Forecasts & Statistics

A new administration and republican control of the House and Senate could echo in a new era for the U.S. construction industry. But no one is certain what implications new labor, trade and fiscal policy will have for the construction industry.

Ken Simonson, chief economist, Associated General Contractors of America, Arlington, Virginia, addressed this topic during the National Demolition Association’s (NDA’s) Demolition 2017 Convention & Expo, held in late January in Las Vegas.

Simonson noted construction spending reached its peak 11 years ago in February 2006. It has been climbing steadily since 2011, according to U.S. Census Bureau data, but even now, it is 2 percent below the peak without taking into consideration inflation.

Construction employment shows employment topped out two months after spending did in April 2006 and bottomed out at the same time at the beginning of 2011 and has a much more gradual climb up so that even as of December 2016, employment was still 13 percent below its peak.

“You might think there are plenty of workers left, but as I think all of you know that ain’t necessarily true for most of the industry and most of the country.”

2016 was a flat year for construction employment, according to Simonton. He said the industry added 102,000 workers for the year, which was a 1.5 percent growth rate- the same as the overall economy but only a third of the workers it added the previous year.

In late 2016, Simonson said, media was reporting that companies were holding off of investment and hiring because of uncertainty of the election outcome. He was not sure he believed that.

“Now I feel like there is more uncertainty than there was before,” he said. “Every morning we wake up and hear about some new Tweet or proclamations that are overturning what has been going on. Some of this is positive for construction, but other things I think either a big negatives or at least adding a lot of uncertainties.

Simonson said he sees at least six different types of uncertainties affecting construction. The first is regarding huge investment in infrastructure – as much as $1 trillion over 10 years.

“Obviously that would mean a lot of work for the demolition industry as well as the construction industry,” remarked Simonson, “But we haven’t seen any specifics on how that would actually be paid for, who would decide what types of infrastructure projects and what specific projects would be done. And we are also hearing a lot of skepticism in Congress about whether it should be done at a time when the economy is at close to full employment. Do we really need this kind of stimulus?”

Simonson said there is agreement that much infrastructure worn out, functionally obsolete or unsafe and should be replaced, but Congress and some states are not willing to increase taxes or shift funds to pay for these projects.

The second are of uncertainty is immigration. “This has both direct and indirect consequences for construction,” said Simonton. “Historically the construction industry and probably the demolition industry also has relied heavily on immigrant workers.”

If the borders are shut down or tightened up it could reduce the pool of workers for these types of jobs. Even if our companies are not disproportionally employing immigrants, we’ve reached a point where the number of Americans retiring is just about equal to the number coming into the work force.

“If we are going to achieve higher economic growth rate, we are either going to need more workers or more productivity,” said Simonton.

He added that a border tightening could threaten the U.S. growth rate and he sees a threat to the pool of labor that construction industry relies on.

The third area of uncertainty Simonson outlined is trade policy. He said the initial moves may look favorable for construction if companies decide to retain or increase their productive capacities here in the U.S. He warned, however, that other countries could begin taking counter measures. He added that if the U.S. is trying to put on new taxes or tariffs to force companies to produce here, all of the industries that rely on exports and imported goods, including construction, or that are carrying goods to the markets from the ports could be losers.

“The net impact on the U.S. economy and on the construction firms that rely on all of those segments could also be negative,” Simonson says.

The fourth area of uncertainty is regulatory relief. “We’ve seen some bold moves by President Trump starting within hours of his taking office,” Simonson referenced the freeze on regulations that were not yet final, and an announcement that agencies would have to repeal two regulations for every one they adopted.

Simonson said the AGC sent the Trump transition team a 55-page document listing regulations it would like to see rolled back or modified, though he added, “The reality is that for building contractors that a lot of regulation is at the local or state level.”

He told attendees not to hold their breath that some of the regulations that have already been finalized would be rolled back, as it would be a lengthy process to rewrite them.

The fifth area of uncertainty is fiscal policy. “Both President Trump and House republicans seem determined to go forward with a major tax reduction,” Simonson said. “As yet, they don’t appear to be talking about the same type of tax reduction in terms of the categories that would be affected.”

Which tax rates are cut will make a difference in what kind of tax bill contractors are facing. If individual tax rates are cut, but they are paid for by scaling back deductions on property taxes or depreciation in structures, that could impact property developers.

Monetary policy is sixth area of uncertainty, which is clearly being affected by the new uncertainty under how much the defecity is going ot expand. We’ve seen Interest rates have recently moved up a percentage point, and are much more in flux than they have been, noted Simonson. This, too will have implications for construction costs.

A seventh area of uncertainty is the having an effect on construction and employers is the expected repeal and possible replacement of the Affordable Care Act, said Simonson. “Until hospitals know what kind of utilization and reimbursement rates they are going to receive under whatever replaces the Affordable Care Act, they may hold off on doing construction.” He added that hospital construction usually involves demolition first because it usually consists of expanding or modernizing an existing campus or an two older hospitals being replaced by a new one.

Simonson pointed to two surveys on construction which show a favorable outlook. The first was by the AGC and Sage, Atlanta, of 1,281 contractors that was conducted in November through mid-December. “On balance, the contractors were more optimistic about the dollar volume of work available to bid on in 2017 than they had been in the previous six years of the survey,” noted Simonson. “Only 9 percent of those respondents expect the volume to shrink, compared with 46 percent who expect the volume to increase, for a net positive reading of 36 percent. The remaining 45 percent expect volumes to remain roughly constant.

For the first time in the survey’s history, respondents were upbeat, on net, regarding all 13 business segments included in the survey, Simonson reported. “Contractors were most optimistic, on balance, about hospital construction and retail, warehouse and lodging construction, with net positive readings of 23 percent for both categories, followed by private office construction (20 percent net positive).”

Readings for manufacturing were double-digit net positive (18 percent); highway and public building construction (15 percent apiece); higher education, K-12 school, and water and sewer construction (14 percent each); other transportation (such as transit, rail and airport projects) and multifamily (11 percent each); and power (10 percent).

All of these scores, except for multifamily, were higher than in the 2016 survey, reports Simonson. “Even spending on federal projects—the one negative score in that survey—had a net positive reading in the 2017 survey.

“The optimism is a bit surprising, given that construction appears to have slowed in the second half of 2016. Employment in the industry rose by 102,000, or 1.5 percent, last year, only about one-third as many workers as were hired in 2015. And employment increased in just 32 states and barely half (183, or 51 percent) of the 358 metro areas for which the Bureau of Labor Statistics provides construction figures.

The American Institute of Architects reported on Jan. 27 that its latest “consensus” forecast of economists who follow construction closely predicts a 5.6 percent increase in nonresidential building construction in 2017. That would be a slight pickup from the gain estimated by the Census Bureau for 2016.

“That panel also was widely optimistic across market segments, particularly regarding office space, with a predicted 11 percent increase in spending,” says Simonson. Next came amusement and recreation (8 percent), hotels and retail (7 percent each), education (6 percent) and healthcare facilities (5 percent). Expectations were roughly flat for industrial facilities and slightly negative for public safety (-1 percent) and religious structures (-2 percent).

Demolition 2017 Convention & Expo was Jan. 29-31 at The Mirage, Las Vegas.