The Associated Builders & Contractors, American Institute of Architects and National Association of Home Builders chief economists assembled in Washington, D.C., for a mid-year market forecast, outlining stable to strong residential and commercial project activity through 2017.
“Nonresidential construction spending growth will continue into the next year with an estimated increase in the range of 3 to 4 percent,” said ABC Chief Economist Anirban Basu. “Growth will continue to be led by privately financed projects, with commercial construction continuing to lead the way. Energy-related construction will become less of a drag in 2017, while public spending will continue to be lackluster.”
“Our forecast shows single-family production expanding by more than 10 percent in 2016, and the robust multifamily sector leveling off,” noted NAHB Chief Economist Robert Dietz. “Historically low mortgage interest rates and favorable demographics should keep the housing market moving forward at a gradual pace, but residential construction growth will be constrained by shortages of labor and rising regulatory costs.”
“Revenue at architecture firms continues to grow, so prospects for the construction industry remain solid over the next 12 to 18 months,” added AIA Chief Economist Kermit Baker. “Given current demographic trends, the single-family residential and the institutional building sectors have the greatest potential for further expansion at present.”
Each economist discussed leading, present and future indicators for sector performance, including ABC’s Construction Backlog Indicator; AIA’s latest Architecture Billings Index and Construction Consensus Forecast; and, the NAHB/Wells Fargo Housing Market Index.
NONRESIDENTIAL MARKET
The joint forecast with AIA and NAHB followed an ABC assessment of mid-year nonresidential construction spending and market trends. Activity in the sector dipped 1 percent in June, a third consecutive month of contraction, according to an ABC analysis of U.S. Census Bureau data. Nonresidential spending, which totaled $682 billion on a seasonally adjusted, annualized rate, fell 1.1 percent on a year-over-year basis, marking the first such decline on an annual basis since July 2013.
“On a monthly basis, the numbers are not as bad as they seem, as May’s nonresidential construction spending estimate was revised higher. However, this fails to explain the first year-over-year decline in nearly three years,” says ABC’s Basu. “There are many forces at work, most of them negative, with the noteworthy exception of construction materials prices, which are down on a year-over-year basis. To the extent that savings are being passed along to purchasers of construction services, spending would appear lower in dollar terms than when measured in physical terms such as square footage.
“Thanks in part to the investment of foreign capital in America, spending related to office space and lodging are up by more than 16 percent year-over-year. The global economy is weak, and international investors are searching for yield and stability. U.S. commercial real estate has become a popular destination for foreign capital. However, the weakness of the global economy may also help explain the decline in manufacturing-related construction spending of nearly 5 percent for the month and more than 10 percent year-over-year.
“Though many contractors continue to report extensive backlog, the data suggest that average firm backlog may begin to retrench,” warns Basu. “The only significant driver of economic growth in America presently is consumer spending. Corporate profits remain stagnant and business investment remains underwhelming. Public sector spending does not appear positioned to accelerate anytime soon despite the passage of a federal highway bill last year.”
Precisely half of the 16 nonresidential subsectors expanded at mid-year. Two of the largest subsectors—manufacturing and commercial—experienced significant contractions in June, however, and were responsible for a majority of the dip in spending. Tepid spending by public agencies also continues to shape the data. Despite a monthly pick-up in spending, water-supply construction spending is down 14 percent on a year-over-year basis. Public safety construction spending is down 8.4 percent from a year ago, sewage and waste disposal by nearly 15 percent, highway and street by about 6 percent, education by 4 percent and transportation by more than 3 percent.
2016 INDEXES RISE
An Associated General Contractors of Americas analysis paralleled the minor, three-month nonresidential construction spending lag ABC observed, but also confirmed that most market segments posted solid increases in the first half of 2016 compared to the same period in 2015.
“The drop in construction spending over the past three months is probably more a reflection of the very strong gains posted early in the year than of cooling demand for construction,” notes AGC Chief Economist Ken Simonson. “Nearly every major segment had first-half gains of more than 5 percent compared with a year ago. Contractors, surveys and the media all continue to report plenty of projects are starting or will soon.”
Construction spending in June totaled $1.134 trillion at a seasonally adjusted annual rate, 0.6 percent lower than the May total, he adds, noting that a) March–June spending declines followed unusually large increases in the previous three months, probably because of an exceptionally mild winter in some regions; and, b) the year-to-date increase of 6.2 percent for January–June 2016, compared with the same months of 2015, provides a truer picture of the industry’s condition.
Private residential spending was virtually unchanged for the second month in a row and 7.8 percent higher year-to-date. Spending on multifamily residential construction slid 1.5 percent for the month but soared 22 percent year-to-date, while single-family spending fell 0.4 percent from May to June but rose 11 percent year-to-date. Private nonresidential construction spending decreased 1.3 percent for the month but climbed 7.9 percent year-to-date. The largest private nonresidential segment in June was power construction (including oil and gas pipelines), which slipped 0.7 percent for the month but rose 8.2 percent year-to-date. The next-largest segment, manufacturing, lost 4.5 percent for the month and 2.7 percent year-to-date. Commercial (retail, warehouse and farm) construction declined 1.6 percent in June but climbed 8.6 percent year-to-date.
Public construction spending declined 0.6 percent from a month before but was still up 1.5 percent for the first five months of 2016 combined. The biggest public segment—highway and street construction—shrank by 1.4 percent for the month but was up 3.9 percent year-to-date. The other major public construction category, education, dipped by 0.5 percent in June but gained 5.9 percent for the combined January-June period.