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The good-news-bad-news cycle continues to impose a ceiling on construction and infrastructure spending activity.

Brian Taylor March 18, 2013

The expansion of the financial media to include 24-hour television news networks and websites that are updated second-by-second provides information that should help both lenders and business owners make informed decisions.

The instant news cycle and the way it can be presented also has its critics. As economic recovery in most parts of the world, including the United States, occurs at a slow pace, the messenger is sometimes blamed not for having the nerve to bring bad news, but for delivering it on such a nonstop basis. The resulting uncertainty can grip even those with a good business plan and solid reasons to take out a loan or to approve a loan (from the lender’s side of the desk).

As 2013 gets underway, that pattern remains very much in place. One positive economic indicator is followed 24 hours later by a troubling one. A fiscal agreement in Washington is inevitably followed by another looming deadline that inserts itself into the news cycle within a week or two.

The occurrence of the same pattern is pointing to 2013 being another year of slow GDP growth and slow growth in construction activity.


Cliffs and Sequesters

Contractors involved in building and repairing highways, bridges and government buildings in the U.S. continue to watch the Obama administration and Congress wrestle with one fiscal deadline after another.

After lawmakers and the White House struck a deal shortly after New Year’s Day that avoided across-the-board tax increases and federal spending reductions, it was only a matter of weeks before a March 2013 “sequester” deadline on discretionary spending was again causing the Obama administration and Congress to take different positions on the merits of looming spending cuts.

As of late February, USA Today reported that the White House Office of Management and Budget had identified 150 places within its $1.04 trillion budget that “spending on domestic programs will be cut 9 percent and defense spending will be cut 13 percent with seven months remaining in fiscal 2013.”

The newspaper also quoted Jason Furman, deputy director of the White House National Economic Council, as saying, “Nationwide, hundreds of thousands of jobs would be lost,” adding, “The bulk of the job loss would be private jobs that are lost because of the reduced economic activity because of the sequester and the impact that would have on the entire economy.”

Estimates from the Congressional Budget Office predicted 750,000 jobs could be lost in 2013 if the spending cuts take place as planned. Contractors hoping to take part in rebuilding after Superstorm Sandy may be among those affected, as the $60.4 billion in emergency aid approved by Congress is “subject to sequestration and will be cut by almost $3 billion,” according to USA Today.

In the midst of fiscal cliffs and sequesters, construction industry forecasters have nonetheless tried to predict how things will play out in the sector in 2013.

In a forecast released in mid-January, Associated General Contractors (AGC), Arlington, Va., says, “Significantly more construction firms are planning to add new staff than plan to cut staff, while demand for many types of private sector construction projects should increase this year, according to survey results.”

Stephen E. Sandherr, the association’s CEO, says, “While the outlook for the construction industry appears to be heading in the right direction for 2013, many firms are still grappling with significant economic headwinds.”

Contractors are most optimistic about the outlook for hospital and higher education construction, he adds, while they have lower expectations for manufacturing; private office and retail, warehouse and hotel construction.

“A significant—but smaller than last year — number of contractors report that customers’ projects have been delayed or cancelled because of tight credit conditions,” the AGC report summary also states, noting that 40 percent of responding firms report that tighter lending conditions have forced their customers to delay or cancel construction projects.

“Unfortunately, there are almost as many causes for concern as there are signs of optimism,” says Ken Simonson, the association’s chief economist.


Disruption Deficit Needed
Avoiding the fiscal cliff provided a basis for the Portland Cement Association (PCA), Skokie, Ill., to increase its forecast for construction activity in the United States in 2013.

“PCA has upwardly revised its projections for the economy, construction activity and cement consumption for 2013,” the trade group announced on its website in January. “The upward revisions reflect adjustments made to our forecast in light of the recent fiscal cliff accord. According to this scenario, the near-term disruptive economic aspects associated with the fiscal cliff are significantly reduced. According to PCA’s new assessment, cement consumption is expected to grow at rates consistent with 2012 levels—perhaps stronger.”

In a Jan. 18 news release expanding on the forecast of its Chief Economist Ed Sullivan, the PCA states, “Improving underlying economic fundamentals, the existence of large pent-up demand balances and the diminishment of economic fiscal cliff uncertainty will combine to result in strong growth rates in 2013 and an increase in cement consumption.”

The revised forecast from the PCA predicts an 8.1 percent growth in cement consumption in 2013, significantly higher than the tepid growth projected in its fall 2012 report. The upward revisions, which imply a similar boost in concrete production, reflect “adjustments made in light of the fiscal cliff accord, recognition of stronger economic momentum and markedly more optimistic assessments regarding residential construction activity,” says the PCA.

“Housing starts should reach nearly 950,000 units, with single-family construction near 700,000 starts during 2013,” says Sullivan. “We see starts hitting the 1 million mark in 2014 or 2015.”

But the party is not quite ready to start, Sullivan cautions, adding that the first quarter of 2013 would actually show declines compared with the same period in 2012. “It is important to point out that this potential decline in first-quarter growth rates does not signal a weakening in market fundamentals but rather a hangover from favorable 2012 weather conditions. Stronger gains in cement consumption growth are expected during the second quarter.”

The AGC is hopeful that this activity will increase employment in the construction sector as well. AGC says its survey results “provide a generally optimistic outlook for the year even as firms worry about rising costs and declining public sector demand for construction.”

Sandherr says 31 percent of the firms surveyed plan to add staff in 2013, while only 9 percent plan to make layoffs.


Uneasy on the Home Front
The residential construction market is emblematic of the on-again, off-again nature of the economic recovery. Although the sector enjoyed a small winning streak of several months of improvement in 2012, the gains were sometimes minor, and in January 2013 a decline in housing starts broke that streak.

In 2013, it appears contractors involved in this sector again will see modest improvements in activity at best.

Data collected and distributed by the U.S. Bureau of the Census showed the number of new housing starts falling 8.5 percent in January 2013 compared with the month before. “It is the first major read on the state of the housing market in 2013, and, at first glance at least, it isn’t a very happy one,” reported the Washington Post in late February.

In an analysis of the data, Neil Irwin of the Post says the news may not be as bad as it appears based on that one statistic. Winter weather in January may have kept the housing starts figure down, but a look at housing permits show a rebound may yet be underway.

“The number of permits issued for new home construction actually rose in January by 1.8 percent to a 925,000 annual rate. That was stronger than the 1 percent gain analysts had forecast,” writes Irwin. He also says December 2012’s housing starts number was such a big rise—“a revised 15.7 percent bump, even stronger than the 12.1 percent gain first reported”—that if one averages December and January to arrive at a 931,500 annual rate, it indicates an upward trend from the 865,000 monthly average for October-November 2012.

The National Association of Homebuilders (NAHB), Washington, D.C., also points to positive trends in the face of the one worrying statistic. “In January 2013, single-family housing starts were virtually unchanged from an improved pace in the previous month, registering a 0.8 percent gain to 613,000 units,” the group says in a February news release. “This was the strongest pace of single-family housing production since July 2008.”

NAHB Chief Economist David Crowe says, “Today’s report is quite positive in that it shows continued upward movement in single-family housing production and permitting activity for both single- and multi-family units. Meanwhile, the decline in multi-family starts reflects an adjustment from an unsustainably large gain in December and is consistent with the up-and-down swings that are often associated with that sector.”

Up-and-down swings, it seems likely, will continue to be part of the construction activity landscape in 2013.

 

The author is editorial director of Construction & Demolition Recycling and can be contacted at btaylor@gie.net.

 

A Green Chute
One consultant’s take on how green building will fare in 2013 can be found in an online sidebar at www.CDRecycler.com/cdr0313-green-chute.aspx.

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