2010 Forecast

By Greg Sitek

“The Recession ended on June 30, 2009. All recessions begin or end on the last day of a month …”

One of the more difficult things to do is forecast economic trends or developments, much less activities. Typically this is exceptionally difficult in times when the economy is down. This year is probably an exception for a number of reasons. While most of the economists are predicting a grim 2010, I think that the year is going to be better than anticipated.

At the Recent AEM annual meeting, Mark Vitner, managing director, senior economist, Wells Fargo Securities, LLC, told the audience of construction equipment manufacturer and supplier executives, “The Recession ended on June 30, 2009. All recessions begin or end on the last day of a month …”

There were numerous groans from across the audience, but Vitner explained his thinking, which is based on an experienced and intimate understanding of the construction industry. The bottom line boils down to the fact that stimulus funds are in fact beginning to reach the levels that produce noticeable work.

Wind power projects have increased in number and provide opportunities that didn’t exist until recently.

It’s easy to forget that when we talk about stimulus funds and spending that this all applies to the public sector and not the private – road repair, cable installations for schools, water and sewer. Hotels, shopping centers, office buildings, terminals and the like fall into the private category.

Basically Vitner said that the stimulus and other government funding would produce positive growth in 2010 around a 2-percent level, and then the private sector would kick in at basically the same level in 2011.

This is not Utopia. As a country we have become spoiled with excessive affluence that has resulted in “too much.” If you consider the basics of “supply-side economics,” we have simply over-supplied ourselves. The housing market produced 2 million houses a couple of years ago, steadily increasing at record-breaking levels year after year for five or six years. A national inventory of nearly 1 million houses destroys the demand part of the equation. Where should we be? Our market should probably balance in the range of 1.2 to 1.6 million, max.

The auto industry was pumping out 17 million cars per year when production probably should have been in the range of 11 million to 12 million units per year. The “greed factor” was another major contributor to the longtime impending crash.

Executives wanting incomes in multiple millions and retirement packages the size of a king’s ransom; companies looking for double-digit profits that were above 20, 25 and 30 percent; and investors looking for similar double-digit ROIs were all contributors to the crisis.

It wasn’t long ago when the “dotcom bubble” popped and shattered millions of pipe dreams of unprecedented wealth. Yes, there were a lot of people who made millions and even billions during that time, but they also contributed to the ensuing problem. There were a lot more people who lost everything trying to grab the elusive brass ring.

Cobb County GA, sewer project is a massive undertaking that will continue for months to come. Water, sewer and utility projects are keeping a number of contractors working.

The return to reality is going to take a little time. Peter Sheahan – consultant, researcher and author – made an interesting observation in one of his presentations at the AEM meeting. He noted that the speed of recovery from a recession occurred at the same rate as the crash. The variable from one recession to another is the trough or the bottom, i.e. the time it takes before a recovery starts to gain traction or momentum.

Unemployment is at record levels and is the highest rate ever in some states, such as Michigan. Vitner expects this trend to continue until April 2010, increasing from the current level of 8.4 million to 9 million. It would take until 2016 to bring employment up to its prior peak levels.

The day before Thanksgiving, Ford Motor Co. announced that after more than $16.8 billion in losses since 2005, the company’s North American division has been gaining momentum and recently posted a quarterly profit – early evidence of a successful turnaround, according to Mark Fields, Ford executive vice president and president of the Americas.

• “We are not done with the turnaround,” Fields told the Detroit Free Press. However, he noted the automaker is positioning itself to be a world-class competitor, adding, “There is no finish line for that.”

• The division, which earned nearly $10 billion in 2000, has lost money every year since 2005. On Nov. 2, Ford reported a pretax profit of $357 million for the division. The division is still in the red for the year but on much better footing than it has been for some time.

Water and sewer projects, like the Cobb County Tunnel in Georgia, are still being proposed and let. This is an exceptionally large project with a tunnel that is 27-feet 4-inches in diameter.

At this time the other two automakers are not doing as well. The turnaround for them may take much longer. Construction equipment manufacturers are feeling the pain of this recession. Mining, China’s recovery and some public-based market segments like water/sewer and utilities are keeping them going. One of the biggest roadblocks for the equipment manufacturers is the lack of a new highway bill. Experience has shown that as long as the bill remains in suspension, so does the industry. Contractors are not willing to buy new equipment until there is something more substantive than 90-day extensions. Until the bill gets passed, the construction industry will stand by with its collective engines idling.

Wells Fargo looks at …

The impact goes beyond highways, bridges, terminals and the other components that comprise our transportation infrastructure. Wells Fargo does a quarterly e-mail survey asking participants industry-related questions. One of the questions they asked in the November survey reflects on some of the problems other contractors believe the industry is facing:

What do you consider the single most serious problem contractors face in 2010? (Top 5 listed)

Number Percentage
Lack of work 151 56.8%
Cash flow 32 12.0%
Availability of capital from lenders 25 9.4%
Profit margins 21 7.9%
Increased competition 11 4.1%

The lack of work should diminish as more funds find their way into the project arena. According to the Federal Highway Administration, it has obligated 78 percent of the funds issued to date – in dollars it means $20,942,504,032 of the $26,810,000,000 issued. As of November 9, 197 transportation projects have been authorized. It’s a matter of time before the balance is obligated and the authorized projects start producing visible results. At this time a little more that 50 percent of the projects are actually under construction. Looking at these numbers, it’s obvious that there is more to come. I agree, the sooner the better.

ICUEE in October of 2009 had its second highest attendance ever. Contractors were buying equipment as well as learning about new technologies and techniques. Both exhibitors and attendees were happy with the positive aspect of the show.

During the ICUEE show in October, I had the opportunity to visit with Derek Hutchins, president and owner of Hutchins Telecom, Louisville, Ky. Hutchins is currently engaged in an 18-mile cable installation project at Ft. Knox. (See article in December 2009 ACP magazines or visit online at www.site-kconstructionzone.com.) During the conversation he made several points that differ from the results of the survey and are worth noting.

First, there has been an increase in competition on some of the jobs, and it has been from contractors who are not familiar with the specific type of job they are bidding but need the work and will often come in low – lower than they can afford to.

Second, he has been faced with a shortage of skilled and experienced workers and feels that this trend will continue and probably get worse, especially if there isn’t an increase in construction employment. It would be interesting to see how many workers change to other industries. The Bureau of Labor Statistics’ most recent data that would reflect current trends is from 2006.

The second question looked at the various construction market segments:

Which of the following types of work do you believe offers the single greatest opportunity for construction contractors in 2010? (Top six listed)

Number Percentage
Highway construction 77 29.3%
Government projects 42 16.0%
Concrete and asphalt 35 13.3%
Bridges and overpasses 29 11.0%
Water, sewer and other utility projects 27 10.3%
Oil & gas or other energy-related construction 22 8.4%

There really are no surprises with the survey results. Even without a new highway bill, road construction will continue to offer the greatest opportunities. Road construction is essential at all levels: federal, state, county and municipal.

The American Recovery and Reinvestment Act of 2009 (ARRA) allocated $787 billion to stimulate the economy (visit Site-K Construction Zone for extensive coverage on ARRA and the Stimulus Package). Of that total amount, $288 billion has been allocated as tax benefits with only $83.8 billion having been paid out; $275 billion has been designated for contracts, grants and loans with only $57.7 billion spent; and $224 billion has been tagged for entitlements with only $78.6 billion finding its way into use (source: www.recovery.gov). This information is current as of November 13, 2009.

There is a lot of money in play and a lot more to come. The Department of Transportation has $30.1 billion available, but only $.85 billion of that has been paid out. In the last month the payouts have increased, and the trend looks like it will continue.

With the recent discovery of more than a hundred years of gas reserve, there has been increased activity in natural gas pipeline construction.

Hutchins pointed out that there would be more work in cable installation, especially in the world of academia. Schools were not linked to a central feed, and this was one of the things that would definitely get done as a result of stimulus funding.

We are all aware of the desperate need for bridge repair and replacement. This will happen and probably in the very near future. No one wants another major bridge tragedy, and there will be a focus on getting these repairs and updates moving.

As the money continues to move from the allocation or obligation column, it will shift over to the projects side of the ledger and start generating more work and more jobs.

Meanwhile, there are new markets opening or old ones expanding. I am surprised by the low ranking that “Oil & gas or other energy-related construction” received. Wind farms are beginning to develop, and wind-power projects have grown in size and number. At year-end 2005, total production of wind-power energy was 9,147 megawatts. At the end of April 2009 production had reached 28,635 megawatts and growing.

Several large wind-power projects have gone online. One in Vinalhaven, Maine, juts went online and is expected to produce enough energy to supply 2,000 residents in the area. The project consisted of three 1.5-megawatt turbines that would produce 11.6 million kilowatt hours of electric generation per year. The cost of the three turbines was $14.4 million.

When you think wind power, you probably have pictures of Don Quixote charging on his trusty steed Rocinante toward a gigantic windmill. Today’s wind turbines are far different and require construction activity to put them in place, link them together and tie them into a supply/distribution center. In most instances, the development of a wind farm requires the construction of access roads as well. Once installed, a certain amount of maintenance is required. At the present time all but 15 of the states have or are in the process of developing a wind-power resource.

Another expanding market that will continue to add opportunities is natural gas production, transmission and distribution. Recently our natural gas reserve was re-estimated to be at least 100 years, thanks to new drilling technology and techniques. Recently I heard that this number had been revised upwards and was now at 200 years. If you were to add Canada and Mexico into these estimates and make them for North America, the numbers could very easily reach 200 years and more.

As a result of this, there has been a renewed interest in using natural gas as an energy source. As of November 2009 there are 3,921 miles of pipeline projects proposed or ready to be started. This is in addition to the projects that are already under way. This trend is expected to continue because natural gas is being emphasized as a viable alternative energy source to coal for power

It is estimated that there are more than 3,900 miles of pipeline projects proposed for the 2010 with the number steadily increasing.

plants and as an alternative to gasoline for cars. The need for construction will continue to increase as the pipelines are put in place and the demand for distribution terminals increases. The thing about this is that most of the construction falls into the private sector. For example, El Paso Pipeline invested approximately $8 billion in growth projects and approximately $450 million in pipeline maintenance in 2009.

So, you are reading this and asking what it means for you. This is understandable; I’m asking the same thing.

Let’s take a look at what the Associated Builders and Contractors (ABC) has to say about the future. “Despite forecasts for a subdued economic recovery and a relative scarcity of nonresidential building construction during the next one to four years, rising construction costs will be an issue due to a number of global factors, including China’s increasing demand for construction materials,” said ABC Chief Economist Anirban Basu. “Construction firms should prepare for 4 percent to 6 percent growth in construction costs per annum during the next several years, which is considerably slower than the two-year average for 2008 and 2009.”

Year-to-Date Performance: 2008 – 2009* and 2010 Forecast

Indicator 2008 2009 2010 % Change

2009-2010

Construction Put in Place (millions, seasonally adjusted annual rate) U.S. Census Bureau
Total Nonresidential
Lodging 35,818 23,060 20,100 -12.8%
Office 70,305 53,928 47,852 -11.3%
Commercial 84,942 53,827 46,582 -13.5%
Health care 47,699 47,933 48,500 1.2%
Educational 104,081 105,230 99,500 -5.4%
Power 81,801 90,489 92,328 2.0%
Manufacturing 61,269 73,582 59,600 -19.0%
Total Selected Industries 450,097 424,989 394,362 -7.2%
Private Nonresidential
Lodging 35,379 23,006 20,014 -13.0%
Office 57,084 38,976 34,440 -11.6%
Commercial 81,495 49,861 43,184 -13.4%
Health care 39,101 37,178 37,634 1.2%
Educational 18,585 16,553 15,058 -9.0%
Power 68,702 76,233 80,758 5.9%
Manufacturing 60,784 72,980 59,181 -18.9%
Total Selected Industries 325,751 291,781 279,182 -4.3%
Public  Nonresidential
Office 13,222 14,953 13,412 -10.3%
Commercial 3,447 3,966 3,398 -14.3%
Health care 8,598 10,755 10,866 1.0%
Educational 85,496 88,677 84,442 -4.8%
Power 11,457 14,256 11,570 -18.8%
Total Selected Industries 122,220 132,607 123,688 -6.7%
Construction Employment (thousands, not seasonally adjusted) U.S. Department of Labor
Nonresidential 837.4 710.7 695.1 -2.2%
Residential 832.3 677.8 719.5 6.2%
Producer Price Index (base date: June 1986) U.S. Department of Labor
Inputs to Construction Industries – Index Value 197.2 189.1 193.1 2.1%
Gross Domestic Product (2005 $billions) U.S. Department of Commerce
Real GDP 13,312 13,014 13,326 2.4%

* Latest figures available

The 2010 Outlook According to ABC

ABC has been highly pessimistic regarding the health of the nonresidential construction industry in 2009. For the most part, these dire expectations were met despite the passage of a massive stimulus package in February. As ABC had predicted, contractors did enjoy some relief in the form of generally declining materials prices, but this did not fully offset the impact of diminished contracting opportunities, and many ABC members reported declining revenues and shrinking backlogs throughout 2009. The major exceptions were those firms benefiting from federal project spending, working to help retool major manufacturing establishments, and involved in America’s expanding energy complex.

The industry’s general downturn has been neatly reflected in employment totals. During last year’s forecast, ABC noted, “While nonresidential construction employment was down 4.7 percent on a year-over-year basis in October [2008], this level of job loss pales in comparison to what is likely to emerge over the next 12 months.” Unfortunately, ABC’s prediction was correct. During a recent 12-month period, nonresidential building construction employment was down 13.3 percent while heavy and civil engineering construction was down 12.6 percent. The forecast for 2010 is for nonresidential construction employment to be down in the mid to high single digits on a year-over-year percent change basis.

One of the more positive aspects for contractors has been declining construction materials prices. Relative to prior years, materials prices have been stable, permitting contractors to submit bids on long-term projects with greater confidence. Between August 2008 and August 2009, nonresidential building producer prices declined nearly 8 percent, with copper ore prices falling 32 percent and softwood lumber prices off 9 percent. The outlook is for materials prices to be roughly flat next year, though a sharp downturn in the dollar could generate increases even in the presence of a still weak U.S. construction economy.

Commercial, lodging and office construction spending will be off significantly next year as office vacancy rates continue to rise and hotel occupancy rates continue to fall. Though consumers have bounced back in meaningful ways in recent months, retail activity will remain subdued, and the appetite for new retail space will remain at extraordinarily low levels with the exception of rebounding big box store construction.

Construction related to manufacturing will decelerate sharply. Previous years have represented a period of brisk retooling activity and it is unlikely that this pace of investment can be sustained. ABC projects that construction related to manufacturing will be off 19 percent in 2010.

Institutional construction, including hospital construction, will be soft due to depleted state and local budgets and significant pressure to contain health care costs. However, state governments will continue to receive substantial support from the federal government over the next year, which will help stabilize capital budgets. Once federal support ebbs, institutional construction may weaken further in years to come.

Portland Cement Association’s Reflections on the Economy

Ed Sullivan and his staff at Portland Cement Association (PCA) publish regular quarterly economic reviews – go to www.cement.org for a full economic review and forecast.

PCA expects 2009 will represent this recession’s trough for United States’ cement consumption – reflecting a 26.6 percent decline from weak 2008 levels. The cyclical downturn in cement consumption, measured peak-to-trough, represents a 54 million metric ton decline from 2005 peak levels – the worst volume decline in history. This downturn has coincided with a period of aggressive expansion and modernization. As a result, large market imbalances have materialized, resulting in a contraction in import supply, excess inventory accumulation, low utilization rates, extended maintenance downtime, sporadic furloughs and plant shutdowns. Unfortunately, the gains in cement consumption expected for next year are projected to be meager and probably back-ended. This implies current harsh conditions facing the industry will persist through 2010 and beyond. Utilization rates are not expected to reach 80 percent until 2012.

Key Forecast Assessments:

• Real GDP is expected to decline 2.7 percent in 2009 and grow at a pace of 2.1 percent in 2010. Growth in 2010 is back-ended.

• First-half 2010 economic growth is expected to be extremely anemic. The risks of the recovery faltering during the first half of 2010 will be extremely high – potentially leading to a double-dip recession. Such risks magnify the potential need of secondary stimulus actions.

• Unemployment is expected to peak at 10.4 percent during the first quarter of 2010. This reflects a cessation of job losses at the end of the first quarter 2010, followed by a one-quarter saddle point – neither creating nor losing jobs. Sustained job gains are expected to materialize in the second half of 2010 and beyond.

• The ease-in-lending standards are expected to materialize more slowly than many expect. Accelerated default rates are likely to moderate the pace in which banks lose their aversion toward risk. Lending conditions facing residential are expected to ease first, followed by nonresidential approximately six months later.

• The residential sector has largely run its course as a significant contributor to cement consumption declines. The expectation of a slow reduction in home inventories suggests that this sector will likely be a neutral contributor to cement consumption growth rates through mid-2010. Thereafter, the residential sector is likely to become a strong contributor to growth in cement consumption.

• Nonresidential cement consumption is expected to be a significant drag on cement consumption during 2009 and 2010. Weak underlying fundamentals and declining nonresidential cement intensities support this conclusion. By 2011 the drag on growth is

expected to become milder and will become a contributor to growth in cement consumption by 2012.

• State deficits are expected to be larger than previously forecast and will act as a larger drag on public construction activity during 2009-2010 – sterilizing ARRA spending impacts to a greater extent than previously expected.

• Bureaucratic delays have significantly diminished the level of ARRA outlays. Given lags, the anticipated significant positive impact arising from ARRA on cement consumption is not expected to materialize until the second half of 2010.

Taken together, these assessments suggest a 26.3 percent decline in portland cement consumption during 2009, followed by a 5.2 percent gain in 2010. Stronger gains are anticipated for 2011 and beyond.

Construction Forecasts from around the U.S.

Illinois

According to the Illinois Road Builders Association the economy remains shaky, especially in the private sector. While the ARRA and Jump Start programs, together with the last year of the Tollway improvement program, helped many contractors in 2009, the long-term picture remains uncertain. The “Illinois Jobs Now!” plan will provide a multiyear robust highway and bridge outlook. The Tollway is not expected to make any significant investments in the next year, and the federal reauthorization outlook is uncertain.

Stimulus funding has helped with paving and road maintenance but has not had an impact on large-scale infrastructure projects.

The Illinois association noted that the delay in reauthorization of a highway bill was resulting in no improvements to failing bridges and congestion relief. It was also interrupting the acquisition of equipment and long-term planning.

According to the group, 2010 is going to be a good year for the engineering community. Construction projects won’t hit the streets until 2011. Obviously the Obama Administration has emphasized the need for more transit. Under the stimulus, rail and CREATE partnership, funding is becoming available to the transportation community. The industry continues to promote the need for safe, efficient and sustainable infrastructure.

Missouri

AGC of St. Louis says, “The commercial construction market in the St. Louis region has not begun to rebound at this time. Funding for projects is extremely difficult to attain. There are projects that have been placed on hold indefinitely while they await fully executed funding documents. Our sources are reporting that the funding stream is so constricted that in order to proceed, some projects are being redesigned (usually downsized), and funding is being sought through consortiums rather than single-source financing.

“Some highway projects in Missouri have received stimulus funding, but by and large, states are utilizing stimulus funds to back-fill their own revenue shortages.

“Without financial institutions willing to fund projects, the outlook for privately funded projects is bleak. Likewise, the steady decline in state revenues doesn’t lend itself to states being inclined or able to fund public works projects or economic development projects through the use of tax incentives.”

Washington

AGC of Washington state says, “We can’t say that the commercial construction industry in Washington state is experiencing a recovery. On a more positive note, the residential construction industry seems to have bottomed out and is experiencing an uptick, and that’s a positive, if longer-term, bellwether for commercial construction.

“As of the end of October, nearly 60 highway construction projects had been completed with the help of stimulus dollars. These are not necessarily ‘new’ projects but rather fast-tracked projects that would not have been built for some time. Nevertheless, it is helpful. According to the Washington State Department of Transportation, workers on state and local Recovery Act highway projects earned over $10.4 million in September alone for a total of $29.1 million to date. Plus, addressing vital infrastructure needs can help fuel a rebound in private construction markets.

“Other than highway work, stimulus funding has not had a major impact on the state’s commercial construction industry. However, more is beginning to come online, such as grants for energy and environmental projects including energy efficiency upgrades for small businesses, upgrades to wastewater treatment systems, and cleanup of contaminated sites.

“Economists tell us to expect a difficult year for Washington state’s commercial construction in 2010. While public construction may remain a relative bright spot, factors such as tight credit markets, high unemployment and climbing office vacancy rates will continue to dampen construction in this state. One very unofficial anecdote is the count of tower cranes on the Seattle skyline. Looking at downtown from our offices at the AGC Building on Lake Union, we counted nearly 20 tower cranes 18 months ago. At this moment there are six, primarily from Amazon.com and Gates Foundation projects.  Unfortunately there’s not much in the pipeline to replace to take their place when these projects are completed.

“A priority for AGC of Washington in 2010 will be to convince the Legislature to find financing for the documented need for infrastructure investment – not just in transportation but water and sewer systems and more. We will ask the Legislature to establish a process to develop practical approaches to fund these needs.

“The negative impact of the delay in reauthorizing the federal highway trust fund is offset somewhat by the stimulus-funded projects. Nevertheless, reauthorization is vitally important and would be helpful to the industry. A multiyear reauthorization is necessary to allow long-term planning and prevent the budget difficulties most states are experiencing from stalling transportation programs. It just isn’t practical for Washington State Department of Transportation to plan and carry out larger projects without a long-term commitment of federal dollars.”

The Challenge Ahead

Mark Vitner ended his presentation by telling the audience that construction would be up in 2010 by approximately 2 percent with a majority of the spending coming from the public sector, but that in 2011 it would be up another 2 percent or close to that with most of the spending coming from the private sector.

We have not looked at housing. According to all sources, housing is not coming back in 2010 and may not start on a serious comeback until 2014. The housing inventory is still extremely high, and with unemployment at its current level we can’t expect the market to be flooded with buyers.

2010 will be difficult and challenging but will have opportunities for those who are willing to work hard and extend themselves. At this point, a lot of your success will depend on your confidence in yourself and your future. Since its very beginning, this country has not let its citizens down. It won’t now.

This article ran in the January 2010 issues of the ACP magazines.

Leave a Reply

Your email address will not be published.

*