Tag Archive for 'nonresidential construction'

Morningstar U.S. Housing Outlook 2020

Expect Starts of 1.3 Million in 2020, as Conditions Remain Conducive to Growth

Despite a slow start in 2019, building has picked up during the second half of the year, and we think the momentum will continue in 2020. Contractors are poised to break ground on 375,000 new multifamily and 925,000 single-family units, up 3.6 percent in total from 2019. The only change to our forecast is an increase in how many of these starts will be multifamily units. Land constraints and limited savings among many adults have sustained multifamily activity above our expectations in recent years, leading us to re-evaluate our near-term mix assumptions. 

A disproportionate share of future growth should show up during the rest of 2019 and in the first quarter of 2020. Rising housing markets tend to achieve most of the incremental building during the offseason, when labor is less constrained. Positive sentiment among builders, buyers, and bankers gives us confidence that the recent momentum will be sustained, at least in the near term.

Our Long-Term Forecasts are Unchanged 

There have been no structural changes that warrant revisiting our long-term housing forecast, which is driven by two key factors: more household formation among the working-age population and population growth. 

The portion of adults age 45 and under who head a household should climb over the next five years as economic conditions and credit scores improve. The current inventory of vacant homes is too low to accommodate these new households, which should drive demand for new homes. Nevertheless, we still expect headship to fall short of levels seen before the global financial crisis, when lending standards were too relaxed.

Our forecast also assumes mild population growth, based on both census-forecast fertility rates and our internal immigration forecast. Immigration is poised to fall short of historical norms, with heightened restrictions imposed on illegal overland immigration and legal immigration from the Middle East. 

Year to date, household formation has strengthened among younger age groups, giving us no reason to revise our outlook for households. Immigration policy was also stable during the third quarter, so we have left our population forecast unchanged. All told, our current forecast assumes that starts stabilize at 1.4 million units per year during midcycle conditions.

Homebuilding 2019: In Like a Lamb, Out Like a Lion 

The year began on a low note. Adverse weather and tepid underlying demand left most investors wondering whether 2018 would be the cyclical peak for new-home construction. But surveys can be erratic, and demographic trends play out at a leisurely pace. As we expected, housing construction returned to year-over-year growth in the third quarter. 

Annualized new-home construction accelerated through 2019; third quarter starts rose 3.9 percent over the prior year to 1.28 million. That momentum should carry starts higher over the next five years before leveling off around 1.4 million properties per year. 

In 2020, we believe the foundation is laid for 1.3 million new homes. Public builders grew new orders by nearly 16 percent during the third quarter and are optimistic about the coming year. Land in inventory should give them the ability to meet our outlook for the year. Demand conditions are no slouch, either. Over the past few quarters, we estimate that underlying demand for new homes has averaged nearly 1.5 million units. Appetite is there, which will increasingly be filled by new construction instead of inventory reduction.

Acceleration in Single Family, Nearly Flat Multifamily Builders are Motivated and Able to Supply 3-4 Percent Unit Growth in 2020 

A decade of building bigger, better homes has left the market in need of entry-level offerings. But over the past few years, a growing share of public homebuilders learned that new buyers have different needs. At first, only a few builders shifted to lower-price offerings, but their early success has encouraged more to follow suit. These units come with narrower gross margins but can generate comparable returns on capital through higher volume and faster construction. This gives builders plenty of reason to pursue additional lower-price starts in the coming years. 

Over the past few years, public homebuilders have proved adept at growing new order volumes more than 10 percent per year when conditions are right. Management teams have inventoried land and the rights to purchase land over the past few years. As ordering picks up, the companies have been quick to deploy the requisite supplies and labor to job sites.

Finding capable construction workers has been the builders’ largest constraint. Tradesmen, such as electricians, plumbers, and carpenters, have been scarcer. However, higher pay and stable employment have caught the attention of discouraged workers. People who were newly searching for construction jobs drove most of the employment growth over the past 18 months. That means today’s low unemployment rates are unlikely to cap how many homes can be built each year. Average employment growth of 4-6 percent over the prior two years should support comparable growth in new-home construction.

Apartment Construction Will Remain Near Recent Highs 

REIT managers have long warned investors that multifamily construction will slow. However, these companies do the bulk of their business in high-density U.S. cities, where rents are stretching budgets to a breaking point. But it’s important to remember that cities like San Francisco and New York make up only a fraction of U.S. apartment construction. 

The suburbs and lower-density urban areas still constitute a huge source of total multifamily construction. Skyscrapers are in the mix, but the United States has an abundance of land, making low- and midrise projects more cost-effective. Builders have options in most cities. Over 75 percent of multifamily units are being built in metros that are less dense than the average U.S. city. High land costs in the urban core will drive most builders into the near-suburbs and along light-rail lines to control costs and keep rents palatable.

A Healthy Economy and Low Rates Will Sate Housing Appetites Slow but Steady, Headship Rates are Creeping Higher 

Households collapsed indiscriminately across every age range following the global financial crisis. Foreclosures and merged living arrangements meant less construction was needed to house a growing population. This process of splitting apart or coming together is the single largest driver of demand for new homes. 

Wages are now growing steadily, and unemployment is nearing record lows. A stronger economic backdrop should facilitate marriage, childbirth, and divorce – events that demand more residences and are often forgone when times are tough. Barring an economic shock in 2020, we expect the upward trajectory in headship to continue over the coming years.

Rising headship rates have caused demand to outstrip supply over the past five quarters, reducing the number of vacant homes and apartments. We estimate underlying demand at around 1.5 million units annually, well above starts, which remain below 1.3 million as some demand is met with the drawdown of existing homes. Diminished inventories typically lead to higher prices per square foot, encouraging builders to increase output.

If you are interested in reviewing the complete Morningstar report visit Morningstar.com

This feature appeared in the February 2020 issues of the ACP Magazines:

California Builder & Engineer, Construction, Construction Digest, Construction News, Constructioneer, Dixie Contractor, Michigan Contractor & Builder, Midwest Contractor, New England Construction, Pacific Builder & Engineer, Rocky Mountain Construction, Texas Contractor, Western Builder

Uncertainty Clouds Our View

Wells Fargo Securities Economics Group 2020 Annual Economic Outlook

The current economic upswing in the United States, which has been in place since July 2009, is the longest continuous expansion since at least the mid-1850s. Although there is a popular perception that the U.S. economy is “due” for a recession, the passage of time does not necessarily make an economy more vulnerable to a downturn. Indeed, our base-case scenario calls for the U.S. economic expansion to continue through the end of our forecast period in Q4-2021, and we forecast that economic growth will remain positive over that period in most major foreign economies as well. But as the title of this report indicates, there are a number of notable uncertainties that cloud our vision at present. In our view, an economic downturn is not likely in the foreseeable future, but one is more than just a remote possibility. 

Recessions happen in one of two ways. First, an “exogenous” shock can lead to an economic contraction. For example, the moonshot in oil prices that occurred in the aftermath of the OPEC oil embargo in late 1973 was the proximate cause of the deep downturn in the U.S. economy in 1974 and 1975. A near trebling of oil prices in the months following the Iraqi invasion of Kuwait in July 1990 contributed to the 1990-1991 contraction in U.S. real GDP. But many exogenous shocks are difficult if not impossible to foresee, and most forecasters generally refrain from incorporating them explicitly in their outlooks. 

Second, economies can also slip into recession when imbalances build up in an important sector, such as housing in the previous decade or the tech sector in the 1990s. A sudden unwinding of these imbalances can then lead to an economy-wide downturn. A hallmark of the current expansion in the U.S. economy is its relative lack of large and noticeable imbalances. Consequently, our base-case scenario calls for the U.S. economy to continue to expand. That said, the 2 percent or so GDP growth rates that we forecast for next year and 2021 are hardly robust. Similarly, we look for the global economy to continue to expand through at least the end of 2021, but the 3 percent growth rates that we look for over the next two years are slower than the 3.5 percent per annum growth rate that the global economy has averaged since 1980. 

Uncertainties related to the U.S.-China trade war have held back investment spending in the United States in recent quarters, and sluggish growth in capex spending has acted as a governor on overall GDP growth in the U.S. economy. However, strong fundamentals in the household sector have continued to support solid growth in consumer spending. In our view, trade policy uncertainties, which have weighed on investment spending, are not likely to dissipate anytime soon. Although the United States and China may very well agree to a Phase I trade deal, we are skeptical that the two sides will come to agreement on a comprehensive deal that returns tariffs to their pre-trade war levels, at least not in the foreseeable future. Consequently, we forecast that growth in investment spending in the United States will remain lackluster. 

If our base-case scenario of modest U.S. economic growth in the next two years is reasonably accurate, then the Federal Reserve likely will refrain from tightening monetary policy over our forecast period. Our base-case scenario looks for the Federal Open Market Committee (FOMC) to cut rates one more time (by 25 bps) in early 2020. We then look for the FOMC to maintain the resulting target range for the fed funds rate of 1.25 percent to 1.5 percent through the end of 2021. 

Growth in investment spending in many foreign economies likely will also remain sluggish as long as trade tensions between the United States and China, the two largest economies in the world, continue to linger. And with monetary accommodation in many major foreign economies at its limits and with policymakers in those economies unable or unwilling to undertake expansionary fiscal policies, meaningful acceleration in foreign economic activity does not seem very likely. Although monetary policy in major foreign economies probably will not become significantly more accommodative, central banks in those economies likely will not be tightening policy anytime soon either. 

The trade-weighted value of the U.S. dollar is more or less unchanged on balance relative to a year ago. Although the Federal Reserve has cut rates by 75 bps since July, most major central banks have continued to maintain extraordinarily accommodative policy stances. With interest rates expected to remain historically low for the foreseeable future, foreign exchange market participants may well look toward economic growth differentials for insight into currency market moves. With U.S. economic growth expected to slow further, at least in the near term, and with foreign economic growth showing some signs of bottoming out, we look for the U.S. dollar to depreciate modestly over the course of the coming year.

But a Number of Uncertainties Remain 

As noted earlier, there are a number of uncertainties that cloud our outlook. For starters, trade negotiations between the United States and China could conceivably turn acrimonious again, which could lead to even higher tariffs. Not only would another increase in tariffs weigh further on investment spending, but higher prices for consumer goods would erode growth in real income that could exert headwinds on growth in consumer spending. On the other hand, negotiators from the two countries could conceivably reach a comprehensive trade deal that leads to the complete removal of tariffs. In that event, the economic outlook would improve markedly. Unfortunately, trade policy outcomes are ultimately political decisions into which we have few insights. In other words, our vision regarding the political decisions that will determine trade policy is clouded. 

There are also uncertainties related to the November 2020 U.S. election to consider. There currently are a record number of individuals seeking the Democratic nomination for president, and their policy proposals span a wide range from center-left candidates such as former Vice President Biden and Mayor Buttigieg to more progressive candidates such as Senators Warren and Sanders. President Trump likely would pursue a whole different set of policies than his Democratic rivals if he is re-elected for a second term. Although we do not opine on the candidates in this report, we offer a description of some of the major policy proposals of the frontrunners. There is also the make-up of the next Congress to consider, which is impossible to predict at this point. 

How will individuals and businesses react to the inherent uncertainty that the election imparts? Although we found that prior elections have not had a discernably negative effect on the U.S. economy, could the polarized nature of American politics today and the wide range of potential policy outcomes cause consumers and businesses to take a cautious approach to spending in 2020? 

The foreign economic outlook is not immune to uncertainties either. Much like the U.S. economy, the outlook in most foreign economies could be meaningfully affected by the different trade policy outcomes. That is, the outlook in these economies would brighten if trade tensions between the United States and China subside and, conversely, the outlook would darken if tensions ratchet up further. In addition, the U.K. parliamentary election results will have major implications for the Brexit process that has cast a cloud of uncertainty over the U.K. economy for more than three years. A Chinese crackdown in Hong Kong, should one occur, could impart a negative shock to global growth prospects. 

In sum, we believe that the economic expansion that has been under way in the United States for more than 10 years will continue for the foreseeable future, albeit at a subdued pace. Likewise, we forecast that economic growth in most foreign economies will remain modest over the next two years. But all economic forecasts, even in the best of times, are subject to at least a bit of uncertainty. In our view, the unsettled political and geopolitical environment at present imparts more uncertainty than usual into the economic outlook.

The Economic Outlook in an Environment of Uncertainty 

2019 was the year in which the U.S. economy broke the record for the longest economic expansion, and our forecast anticipates that this upswing can be sustained through 2021 provided a reasonable détente could be reached in the trade war. U.S. economic growth remained positive this year despite a global slowdown and a pervasive sense of uncertainty for business leaders and financial markets. Recent rate cuts from the Federal Reserve have returned at least a modest upward slope to the yield curve, alleviating one of the recession warning signs that was flashing yellow just a few months ago. A “settled rulebook for global trade,” as Chairman Powell referred to it, would go a long way in reducing the largest source of this uncertainty, though remarkably the trade war has not been the millstone some analysts feared it might be. The slump still under way in the manufacturing sector has not yet bled into the service economy in a major way or caused serious restraints in consumer spending.

All this is occurring alongside a relentless torrent of trade-related developments, including ongoing talks with China, the ratification of the USMCA and potential (though unlikely in our view) auto tariffs. Interestingly, this is frustratingly reminiscent of how the year began, with a 35-day shutdown that did not end until January 25, 2019. Of course, 2020 is also an election year, which could impart even more uncertainty as November 3 approaches.

Our baseline expectation is that a trade war alone will not bring the U.S. economy to its knees. Our forecast has the slow-growth expansion getting even weaker, at least in the near term, but – critically – we avoid recession. The nuances of the forecast come down to the outlook for trade – frustratingly, an unknowable factor as it is largely a political decision. If the trade war escalates much more than we presently expect and we do get a recession, then sending in the cavalry will be trickier than in prior cycles. The fiscal policy response could be limited by large and growing budget deficits. The monetary policy response would be bounded by the fact that the fed funds rate would be starting at a much lower point than in prior cycles. So as we make our case for where we see the U.S. economy heading, we also consider the upside and downside risks to our forecast from different trade policy assumptions. 

No Recession, Expansion Continues, Proceed with Caution 

We suspect that a comprehensive trade agreement will remain out of reach. But unlike 2019, when the cost of the trade war was progressively rising, we do not expect trade prospects to get meaningfully worse in 2020. 

Even without any deterioration with respect to the trade situation, we are looking for modest growth in the final quarter of 2019, with real GDP rising at an annualized rate of just 1.5 percent. Much of the weakness in the rate of GDP growth in Q4-2019 is due to sluggishness in business fixed investment spending and a continued drag from less inventory building. Residential construction activity, which is picking up slightly, is a silver lining in an otherwise cautious forecast. Given the tendency of homebuilding to have a multiplier effect, improvement in that sector may produce some additional follow-through into other areas of the economy. Even with our forecast for a weak fourth quarter, real GDP remains on track for a 2.3 percent calendar-year gain for 2019, right in line with the average annual growth rate for this expansion. 

Mark Twain once famously quipped that rumors of his death had been exaggerated. For now, Twain’s joke appears to be applicable to all the hand-wringing over imminent recession that gripped financial markets at various points earlier this year, culminating in a yield curve that remained inverted for weeks during the summer. Yet other than the pullback in manufacturing and some diminished confidence on the part of both businesses and consumers, the U.S. economy continues to expand. The FOMC has been proactive, cutting the federal funds rate 25 bps three times this year and providing needed liquidity to short-term funding markets by starting to expand its balance sheet again with purchases of short-term Treasury bills.

None of this is to suggest that slowdown fears were entirely misplaced. Job growth had indeed slowed throughout the first part of the year, but not declined outright even in the face of capital spending cuts, disruption in supply chains, Boeing problems with its 737 MAX, and the recently settled strike at General Motors. Given those challenges, the 128,000 new jobs originally reported in October was surprisingly resilient. Employers added an average of 193,000 jobs per month in the third quarter. But the most recent jobs report revealed renewed strength in the labor market. Employers added 266,000 jobs in November and October’s gain was revised higher by 28,000 jobs. We expect that the pace of hiring will slow going forward, but it defies the rumors of death for the longest expansion on record. 

Speaking of rumors, it takes little more than just a glimmer of hope to move the needle in financial markets these days in the context of a potential resolution to the trade war. The manufacturing sector is ready for an armistice. The ISM manufacturing index remained in contraction territory for the fourth straight month at 48.1 in November. Just the mere indication of a thawing in trade tensions in October lifted the export orders index 9.4 points to 50.4 in October – its largest one-month rise ever. But, the index gave back some of that gain in November, when the prospects of a Phase I trade deal subsided, falling back into contraction at 47.9. That October surge, however, indicates that capital spending could snap back quickly if the headwinds from the trade war truly subside. 

Beyond the capex outlook, households are in a relatively strong position today. The Conference Board’s index of consumer confidence peaked in October 2018, but it remains historically high and the household saving rate is currently around 8 percent. Wages and salaries may have decelerated somewhat, but they are still up at a 4.3 percent annualized rate over the past three months, enough to sustain solid growth in consumer spending. Interestingly, wages are rising fastest at the lower end of the income spectrum, where workers tend to spend a larger portion of their take-home pay.

Until consumer fundamentals return to where they were prior to the escalation of the trade war, we have only modest growth in our outlook, looking for real personal consumption expenditures (PCE) to rise at a rate of just 2.1 percent in Q4 and to remain near this growth rate throughout most of the forecast period. Due to low base effects after a particularly soft ending to retail sales in 2018, our 2019 holiday retail sales forecast looks for a 5 percent jump from the same period last year. The recent pick-up in home sales, should it be maintained, could be a factor that boosts consumer spending. Most of the improvement has been in new home sales, where builders have found ways to deliver homes priced for first-time buyers. We look for new home sales to rise 9.4 percent this year and to grow nearly 4 percent in 2020. 

Given the recent improvement in the economic outlook, doubts are surfacing as to whether the FOMC will cut rates any further. At least some members of the FOMC have not been on board with the three rate cuts that the Committee has already implemented. The presidents of the Boston and Kansas City Federal Reserve banks dissented at all three policy meetings, preferring to leave rates unchanged. Furthermore, Fed Chair Powell has observed that although “monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade.” 

Although the statement at the conclusion of the October 30 FOMC meeting acknowledged a “strong” labor market and an economy “rising at a moderate rate,” it also noted that both headline and core inflation are stuck below the Fed’s 2 percent target. The Committee pledged to monitor incoming information. In our view, the FOMC is signaling that it likely is nearing the end of its “mid-cycle” period of easing, but it also does not have a preconceived notion of how policy will necessarily evolve. Therefore, we are not convinced the FOMC is done cutting rates just yet. With real GDP appearing to grow at a sub­ 2 percent rate in Q4-2019 and an inflation rate that is having difficulty edging above 2 percent on a sustained basis, we think the Committee will decide to cut rates another 25 bps in Q1-2020. (This forecast was predicated, at least in part, on our assumption that additional tariffs were to be levied on December 15.). Financial markets are not priced at present for additional tariffs, and market volatility could return, which would tighten financial conditions. If, as we forecast, real GDP growth edges a bit higher later next year, then we think the Committee will decide that no further easing is needed. But we also forecast that the FOMC will refrain from raising rates for the foreseeable future. In other words, interest rates likely will remain low for quite some time. 

Downside Risk: What If the Trade War is Not Resolved? 

The trade war has already taken a toll on various measures of U.S. manufacturing activity. The ISM manufacturing survey has included references to the tariffs or trade war in every month of 2019. We have also seen weakness in hard data such as orders and shipments. Core capital goods shipments rose 0.8 percent in October, but that came after declining the prior three months, leaving the three-month annualized rate of growth for this category at -3.3 percent. It is difficult to get excited about a near-term turnaround in business investment given the fact that despite a 1.1 percent gain in October, core capital goods orders declined the prior two months and are down 1.8 percent on a three-month annualized basis. The most recent data mean equipment spending is poised for a slight rebound in Q4, but nevertheless the trend in orders growth remains generally uninspiring. When we look at forward-looking measures of equipment spending like surveys and capital expenditure plans, there is a similar lack of conviction on the part of purchasing managers.

There have been instances – for example in May – when prospects of a major trade deal between the United States and China appeared to be at hand only for the budding agreement to be scuppered. In prior instances of failed talks, the United States has upped the ante by either raising tariff rates or exposing a new category of goods to tariffs. If a new round of tariffs goes into effect in the future, then 97 percent of U.S. imports of Chinese goods will be subject to tariffs. Without much in the way of new categories to subject to tariffs, further increases in the tariff rates would appear to be the most likely next step. So if the gloves come off completely, it stands to reason that businesses will hunker down and put off any major spending plans until the dust has settled on trade policy. Supply chain disruption, not just in the United States but all over the globalized manufacturing system, would become more difficult to avoid.

Amid the backdrop of apprehension over the past year, solid growth in consumer spending has been a needed and sometimes vital counterweight to those fears. Dissenting voters in the FOMC have even pointed to the robust pace of consumer spending to raise doubts about the need for more accommodative monetary policy. Initial concerns that the tariffs would immediately lead to higher inflation and hit consumers’ wallets have proven to be ill-founded. Because the initial rounds of tariffs largely targeted intermediate goods, they have so far – and by design – avoided directly impacting the typical U.S. consumer. More recent rounds impact finished goods such as toys, clothing, and consumer electronics. This more direct consumer exposure gives this last round of tariffs the capacity to impact U.S. inflation and consumer spending more meaningfully than earlier rounds did.

Still, consumer spending will not necessarily crater just because tariffs may push up prices of consumer goods. A typical household devotes only a third of its overall spending to goods. The other two-thirds is devoted to services, which have not been subject to tariffs. But higher good prices will lead to lower sales of those items, or squeeze wallet share for other spending, including services. The saving rate could also recede as consumers would only be able to stretch a paycheck so far. 

Although further increases in tariffs likely would push up inflation, the FOMC probably would respond to any intensification in the trade war by cutting rates further. Tariff hikes probably would cause just a one-off rise in the price level. That is, inflation would not continue to climb steadily higher on an ongoing basis. But any slowing in consumer spending growth due to deceleration in real income would cause further slowing in overall real GDP growth. In our view, the FOMC would look through the one-off increase in the price level and would ease monetary policy further in an effort to cushion the economy from the tariff-induced weakening in real PCE growth.

Upside Risk: What If the Trade War is Resolved Amicably? 

If the United States and China actually agree to a comprehensive (i.e., more than just $40 billion or so of American exports of agricultural goods) trade deal, then there is scope for the economy to find a higher gear in the year ahead. Without political editorializing, it stands to reason that with the election approaching, the current administration could reap some benefit from an amicably resolved trade situation and the faster growth backdrop that would likely accompany it. 

The most vulnerable part of the economy in 2019 has been the retrenchment in capital spending and the production cuts and softening in manufacturing employment that have come with it. Based on the fact that the export orders component of the ISM posted a record monthly increase in October on the mere indication of a trade deal suggests to us that the manufacturing sector is like a coiled spring that is being held back, at least in part, by the difficulty of complying with an ever-changing list of imported goods subjected to tariffs. The survey data from the ISM corroborate a similar sentiment that we hear in client meetings and trade shows with businesses in the manufacturing sector. 

As noted previously, the consumer impact from the trade war is evident in two ways. The first is that confidence, while still elevated, has been knocked down from the highs of autumn 2018 before the trade war with China picked up in earnest. The second is the fact that the latest rounds of tariffs has the potential to meaningfully impact prices for consumer goods that were not previously subject to tariffs. Both of these factors would reverse if the United States and China were to agree to a trade deal. In such an environment, consumer spending could return to the healthier pace of growth that existed prior to the escalation of the trade war, perhaps on the order of 3-to-4 percent on an annualized basis. 

As the economic outlook improves, the case for further Fed easing would not be very compelling. In fact, the FOMC could even start to reverse its recent rate cuts. Such a complete trajectory reversal would be unlikely in 2020, particularly as the FOMC might wish to avoid any perception of monetary policy interference as the election approaches, but rate hikes could become more likely in 2021 in such a scenario.

The full 2020 Annual Economic Outlook is available at wellsfargo.com/economicoutlook

This feature appeared in the February 2020 issues of the ACP Magazines:

California Builder & Engineer, Construction, Construction Digest, Construction News, Constructioneer, Dixie Contractor, Michigan Contractor & Builder, Midwest Contractor, New England Construction, Pacific Builder & Engineer, Rocky Mountain Construction, Texas Contractor, Western Builder

ABC Reports: Construction Input Price Growth Accelerates in August

Construction input prices rose 0.6 percent in August and are up 3.7 percent on a yearly basis, according to an analysis by Associated Builders and Contractors (ABC) of data released today by the Bureau of Labor Statistics. Nonresidential construction input prices behaved similarly, rising 0.6 percent for the month and 3.5 percent for the year. 

Only three of the 11 key construction input prices fell for the month. The inputs experiencing declines in prices were steel mill products (-1.5 percent), prepared asphalt, tar roofing and siding products (-0.3 percent), and natural gas (-1.8 percent). Crude petroleum prices exhibited the largest increase, rising 11 percent on a monthly basis and 15 percent on an annual basis.

“If we consider what ought to be happening with respect to materials prices, we would expect them to be marching steadily higher,” said ABC Chief Economist Anirban Basu. “After all, the global economic recovery is an increasingly synchronized one. China is on pace to meet growth expectations this year. Europe, Japan, Brazil, Russia and other nations are experiencing meaningfully better recoveries this year compared to 2016. While some economies like Great Britain’s and India’s have stumbled a bit lately, the broader story is one of more rapid global economic growth, driven in large measure by a low interest rate, post-austerity policy environment.

“The world’s improving global economic environment has helped stabilize demand and prices for various commodities. As a result, we are not observing the sharp declines in input prices that occurred during much of 2014 and 2015,” said Basu. “Demand for materials in the United States also remains reasonably high, given ongoing momentum in a number of private segments and indications of stable activity among road builders. The fact that asset prices have been rising, including in key global equity markets, has contributed to pushing materials prices higher, with positive wealth effects triggering greater confidence among real estate developers.

“For now, policymakers around the world appear focused on supporting economic growth.  While this may ultimately translate into problematic global inflation, for now inflation remains under control,” said Basu. “That suggests that accommodative monetary policy will continue to remain in place in much of the world, which will support asset prices, economic growth and demand for construction materials. While surging construction materials prices are unlikely during the near term, with the exception of areas recently impacted by Hurricanes Harvey and Irma, so too are large declines.” 

Visit ABC Construction Economics for the Construction Backlog Indicator, Construction Confidence Index and state unemployment reports, plus analysis of spending, employment, GDP and the Producer Price Index.

ABC Reports: Nonresidential Construction Spending Plummets in June, Driven by Public Sector

Nonresidential construction spending fell by 2 percent on a monthly basis in June 2017, totaling $697 billion on a seasonally adjusted, annualized basis according to an analysis of U.S. Census Bureau data released today by Associated Builders and Contractors. June represents the first month during which spending has dipped below the $700 billion per year threshold since January 2016.

June’s weak construction spending report can be largely attributed to the public sector. Public nonresidential construction spending fell 5.4 percent for the month and 9.5 percent for the year, and all twelve public subsectors decreased for the month. Private nonresidential spending remained largely unchanged, increasing by 0.1 percent for the month and 1.1 percent for the year. April and May nonresidential spending figures were revised downward by 1.1 percent 0.4 percent, respectively.

“Coming into the year, there were high hopes for infrastructure spending in America,” said ABC Chief Economist Anirban Basu. “The notion was that after many years of a lack of attention to public works, newfound energy coming from Washington, D.C., would spur confidence in federal funding among state and local transportation directors as well among others who purchase construction services. Instead, public construction spending is on the decline in America. Categories including public safety and flood control have experienced dwindling support for investment, translating into a nine percent decline in public construction spending over the past twelve months.

“On the other hand, several private segments continue to manifest strength in terms of demand for construction services,” said Basu. “At the head of the class are office construction, driven by a combination of job growth among certain office-space-using categories as well as lofty valuations, and communications, which is being driven largely by enormous demand for data center capacity.

“While there are certainly some parts of the nation experiencing significant levels of public construction, those areas have increasingly become the exception as opposed to the rule,” said Basu. “The more general and pervasive strength is in private segments. Based on recent readings of the architecture billings index and other key leading indicators, commercial contractors are likely to remain busy for the foreseeable future. The outlook for construction firms engaged in public work remains unclear.

Despite Lofty Backlog, Nonresidential Construction Spending Remains Stagnant in May, Says ABC

Nonresidential construction spending expanded by 0.3 percent on both a monthly and yearly basis in May and stands at $714.3 billion on a seasonally adjusted annualized basis, according to analysis of a report from the U.S. Census Bureau released today by Associated Builders and Contractors (ABC).

Private nonresidential construction spending fell to $433.6 billion in May, a decline of 0.7 percent. Private nonresidential construction is now at its 2017 nadir, though it is 0.8 percent higher than one year ago. Contrary to the prevailing trend, public nonresidential construction spending rose 1.9 percent in May on a monthly basis but remains 0.5 percent lower than in May 2016.

“Interpreting nonresidential construction spending data has become more challenging in recent months,” said ABC Chief Economist Anirban Basu. “Among the sources of perplexity is the fact that the nonresidential construction spending data do not align neatly with trends in other key data.

“For instance, backlog remains strong and has been rising, according to and other recent industry surveys,” said Basu. “Construction employment has also continued to expand, consistent with the notion that the average contractor has been getting busier.  Industry stakeholder confidence remains reasonably high, though many industry participants continue to express alarm regarding growing construction skills shortages. But this sense of industry recovery is barely apparent in the nonresidential construction spending data, which indicate that spending has hardly expanded in nominal terms over the past year and is actually down in real terms.

“The other apparent inconsistency comes from the shift in construction spending growth from the private sector to the public sector,” said Basu.  “In prior quarters, it was private segments that drove industry-wide growth, particularly office, communications, lodging, amusement/recreation and commercial segments.  However, there has been some weakening in a handful of private segments recently, despite anecdotal information and survey data indicating elevated real estate developer confidence, low interest rates and busier architects.

“In May, it was public spending that led the way, including in the highway and street category, which has generally been a source of enormous disappointment since the Fixing America’s Surface Transportation Act became law in late 2015.  Whether the recent uptick in public construction spending is part of an emerging sustained trend or simply statistical anomaly is not clear.  What is clear is that overall nonresidential construction spending growth appears to be stalling, with many prospective purchasers of construction services having apparently adopted a wait-and-see attitude.”