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September/October 2009
Year Ahead for Construction: Far From a Perfect 10
Industry will see only modest growth in business next year
By Ken Simonson
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| SIMONSON |
on-residential construction has had a rough year so far in 2009. Unfortunately, 2010 will provide modest relief, at best.
U.S. nonresidential construction spending put-in-place in the first half of 2009 was virtually unchanged from the amount from January through June 2008, the Census Bureau reported. Non-residential construction employment tumbled 13.5% from July 2008 to July 2009, according to the Bureau of Labor Statistics. The unemployment rate for construction workers—residential and non-residential combined—was a dismal 18.2% in July, not seasonally adjusted. That was the highest of any industry reported by BLS and nearly double the all-industry average.
A third measure of the state of construction activity is included in the quarterly estimates of gross domestic product from the Bureau of Economic Analysis. In the second quarter of 2009, real (net of inflation) investment in private, non-residential structures shrank by a seasonally adjusted annual rate of 15%, following an even steeper 43% contraction in the first quarter. “Seasonally adjusted” is a statistical technique to remove normal weather- or holiday-related fluctuations. “Annual rate” allows for comparison of quarterly or monthly changes to full years.
In contrast, real government investment in structures soared 21%, after a 4.3% first-quarter decline.
What can the industry expect going forward? Nationally, the economy is showing signs of returning slowly to health. Real GDP—the sum of all purchases of goods and services by households, businesses, government and net exports—most likely grew in the third quarter and should get gradually stronger through 2010.
In particular, consumer spending and federal government purchases, fueled by stimulus legislation, are likely to contribute to rising real GDP. Business investment in inventories should resume once consumers begin buying again. But business investment in equipment and structures, state and local government purchases and net exports are likely to remain weak for several more quarters.
The implication for construction is that the best prospects are in single-family residential and stimulus-funded non-residential work. The inventory of unsold new homes dropped to a multiyear low of 271,000 in July, seasonally adjusted, according to an August 26 Census Bureau report. That figure is one-third fewer homes on the market than in July 2008. Single-family new-home sales in July were up for the fourth straight month, 30% above the low point in March.
These figures point to a rebound nationally in single-family construction. Permits, a very reliable indicator of homebuilders’ near-term intentions, also rose steadily from March through July, by a cumulative 27%, seasonally adjusted. Actual single-family starts climbed 37% over five consecutive months from a low in February. But multifamily construction remains stuck in low gear for the foreseeable future.
“AGC has pushed lagging agencies to step up the pace of project awards.”
— Ken Simonson
Chief Economist
AGC of America |
There appear to be two and perhaps three types of non-residential construction that will do well in 2010: power, federally funded stimulus and military base-realignment projects and possibly private institutional work, such as hospitals and colleges.
Nationally, spending on private power construction grew 15% in the first half of 2009 compared to the same months of 2008, according to the Census Bureau. In some states, this growth included wind farms, transmission lines and solar or other alternative-power sources. Incentives and mandates to clean up emissions and generate more power from renewable sources will keep this market growing.
The highway portion of the stimulus bill comprises $27.5 billion, distributed to states and turned into contracts quite promptly. But most of the money has not been awarded yet. The full alphabet soup of federal agencies, ranging from the Environmental Protection Agency to the General Services Administration to the U.S. Army Corps of Engineers, will be doling out the money under a variety of programs.
AGC has pushed lagging agencies to step up the pace of project awards. Base-realignment work, which has been strong for the past year, will also continue at a high rate but will help only in limited geographic areas.
Until the simultaneous economic and financial market collapse a year ago, universities and hospitals were ordering lots of construction. Thanks to recent gains in the stock market and improved tax-exempt bond markets, these institutions may be able to resume their multiyear expansion and modernization programs in 2010.
But aside from these few potential bright spots, many contractors will find the going slow in 2010. Developers, manufacturers and state and local government-funded work will continue to diminish for several more quarters.
Contact Ken Simonson at: simonsonk@agc.org
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