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Construction Spending Outlook Strongest in Years

residential construction site
Demand for residential construction, especially multifamily housing, should combine with port projects and shale and gas exploration to keep the engineering and construction markets strong through 2014. Wikimedia Commons/EdwinCasadoBaez

With key indicators pointing up, economic experts in the construction industry predict steady growth if energy and commodity prices remain stable and political fallout from debt ceiling debates is minimized.

June 4, 2013—Experts project that the steady economic recovery in the construction industry will continue through the rest of 2013 and into 2014, led by strength in a rebounding housing market and the heavy construction sector. But they also caution that while the outlook is the brightest it has been since the economic crisis of 2008 and the ensuing deep recession, the sector still faces pitfalls in the form of potential volatility in energy and commodity prices, continued economic weakness in some European countries, and the fallout from political debates as leaders in Washington address the debt ceiling later this year.

“Until the broader economy gets better, the construction recovery is likely to remain relatively muted by historical standards,” said Kermit Baker, the chief economist for the American Institute of Architects (AIA), in Washington, D.C., speaking during a webinar earlier this month. The webinar, “Riding the Roller Coaster: Ups and Downs in Construction Spending, Materials and Labor,” was sponsored by Reed Construction Data, in Norcross, Georgia; the AIA; and the Associated General Contractors of America (AGC), in Arlington, Virginia.

“Focus has been shifting over to supply issues for the industry, such as the labor force,” Baker said. “Unemployment in the construction industry has shrunk dramatically, but the industry employment rate doesn’t really reflect that. That suggests that many may have moved on to other industries.”

Additionally, unusual price volatility for such commodities as lumber, plywood, and concrete suggest that manufacturers reduced their capacity sharply in answer to the fiscal crisis, Baker said. How long it takes to bring this capacity back on line is the key to whether the constraints will drive up prices to the point that it discourages further construction.

Baker said that AIA’s billing index points to continued growth in the sector. The index is a barometer of the billing activity of design firms and is seen as a leading economic indicator for construction activity, which trails the index by 9 to 12 months.

“We’ve seen eight straight months of gains. The fourth quarter of 2012 was the best quarter that we had seen since the downturn began. The first quarter of this year came in even stronger. Things seem to be moving in the right direction,” Baker said.

Ken Simonson, the chief economist for the AGC, said that he sees dispersed pockets of strength in the industry connected to shale oil and gas development, port projects inspired by the widening of the Panama Canal, and demand for residential construction.

“The single-family [market], I think, could flatten out by the end of the year,” Simonson said. “I think there are a lot of markets where prices may start getting away from what people can afford to pay, particularly with the tighter restrictions on who is eligible for a mortgage.” Multifamily residential growth will likely remain strong through 2014, he added.

“Land supplies are very low in some key markets across the country, and it takes a lot of time to get raw land ready for development,” Baker said. “Builders were not investing in land entitlement to any significant degree during the downturn.”

Bernard Markstein, the chief economist for Reed Construction Data, presented an estimate of total construction spending of approximately $900 billion in 2013 and approximately $1 trillion in 2014. The residential sector will account for more than $300 billion of spending in 2013. Heavy engineering, led by strength in energy and highway projects, will contribute about $270 billion.

The 2013 estimate is approximately 21 percent below peak construction spending in 2006, when the residential sector contributed more than $600 billion and heavy engineering was approximately $200 billion. The forecast is based on the likelihood that the overall economy avoids the pitfalls it faces in the coming months, especially a political fight over raising the national debt ceiling.

“Although debt is rising more slowly—partly because of the sequester and low interest rates—we will eventually approach the debt ceiling and if we hit that without raising the debt ceiling, it would grind government to a halt and definitely create a major problem for the economy in general,” Markstein said. “That is something we clearly want to avoid. I think it will be avoided. But, as has been typical, we will run up to the edge of the precipice, because that’s the way that politics works until something is solved.”



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