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More Slow Growth Anticipated for 2014

Jacobs School of Music construction in Bloomington
Construction of such school structures as the Jacobs School of Music at University of Illinois Bloomington, above, will provide one of the few bright spots in the industrial construction market next year, according to two recently released reports, which concur that residential construction will jump while public sectors will limp slowly forward. Wikimedia Commons/Nyttend

New economic forecasts for the construction industry call for residential construction to lead the way in a continued sluggish recovery hampered by uncertainty.

November 26, 2013—The long, slow economic recovery in the U.S. construction industry is projected to continue in 2014, but will be led by spending in residential construction, according to economic forecasts released recently by McGraw-Hill Construction, in New York City, and FMI Corporation, in Raleigh, North Carolina. Although many sectors are improving, this improvement comes on the heels of deeply depressed levels.

“There is a recovery under way,” says Robert Murray, the chief economist and vice president of economic affairs for McGraw-Hill Construction. “It’s being led by housing, as in past recoveries. [But] we have seen signs of life for commercial buildings, although still at low levels. Institutional building is still in the process of turning the corner, but we are seeing more and more evidence that this is, in fact, taking place.”

McGraw-Hill Construction recently released the 2014 Dodge Construction Outlook, which projects a healthy 9 percent increase in total construction starts in 2014, to $555.3 billion. But single-family and multifamily home construction accounts for a combined $254.2 billion of that total. Low mortgage interest rates, increasing home prices, a decline in foreclosure activity, and low inventory levels are all factors driving the residential market, Murray says.

“When you look at the levels of activity, we are still way, way below what had been produced in the middle years of the prior decade,” Murray says. For example, in 2005 there were 1.6 million single-family home starts. In 2014, the projection is for just 785,000.

Construction starts for institutional buildings—schools, hospitals, prisons, and government buildings—are projected to grow just 2 percent, to $89.1 billion—a small rebound that is still well off the $130 billion in such starts logged in 2008.

“It’s essentially a five-year decline for the institutional building market finally reaching its end,” Murray says. “The basis for that is the gradual improvement that we’ve been seeing in state and local financing and the greater use of innovative financing mechanisms to offset the negative impact from federal spending cutbacks.”

Spending on construction starts in the electric utilities sector is projected to decline 33 percent to $15.5 billion, off strong years in 2011 and 2012. This can be attributed to the expiration of renewable energy subsidies and the fact that capacity utilization rates are falling in the industry.

At the same time FMI released its 2014 U.S. Markets Construction Overview, projecting a 7 percent increase in total construction put-in-place during 2014. Overall, FMI is projecting $977.1 billion in construction put-in-place next year.

“There is some confusion in the market. We are getting mixed signals. The economy is improving, but it is improving at a very slow rate,” says Randy Giggard, the manager of the firm’s Market Information Group. “People just don’t have a lot of confidence in the capability of the government to get anything done or their willingness to work together. It shows up.”

Giggard says uncertainty in 2013 surrounding the federal sequestration, the government shutdown, and debate over a government debt default are likely to cost the construction industry more than $150 billion. With a new federal budget deadline looming in January and a debt limit increase to be decided on as early as February, uncertainty will likely be a factor into 2014 as well.

“We see unemployment falling, but you can look past that and say some of that is because people have stopped looking,” Giggard says. “You can look at the inflation rate and say that it’s positive. Or you can look at it and say as soon as the [Federal Reserve] backs off, things are going to take a turn for the worse.”

In the stabilizing institutional sector, both reports project education construction spending to increase in 2014. The spending will be driven in part by recently passed bond referendums around the country. Additionally, higher education institutions and private schools are revisiting previously shelved construction plans.

“Education is interesting,” Giggard says. “A lot of communities take great pride in their schools and tend to pass referendums even in down times. We are seeing some improvement coming in the education market.”

FMI projects a slight increase in the health care segment of the institutional sector, while Dodge projects those starts to be essentially flat in 2014. Although the sector is overdue for a cyclical building phase, uncertainty over the implementation of the Affordable Care Act has increased uncertainty.

“Given the shaky implementation, that does add an element of uncertainty to the health care field,” Murray says. “Although there are a number of reasons why we should be seeing a greater amount of health care construction, [this] is working in the near term to put projects on hold.”

“The degree of uncertainly was particularly strong during 2012,” Murray says. “It did seem to ease in the first half of 2013. But [the economy] got another dose of uncertainty with the government shutdown. And it remains to be seen how long and how much that degree of uncertainty will continue going forward.

“Less uncertainty, and greater levels of confidence that an expansion is taking hold, would go a long way toward getting this industry back to a stronger recovery mode,” Murray says.



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