DESPITE A LATE 2014 CONSTRUCTION SEASON START, U.S. CEMENT CONSUMPTION TOTALS ARE EXPECTED TO SOAR PAST 95 MILLION METRIC TONS IN 2015
by the editors of Concrete Products
“The U.S. portland cement market is expected to grow 8.2 percent in 2014, followed by similar rates of growth in 2015 and 2016,” says Portland Cement Association Chief Economist and Group Vice President Edward Sullivan, who adds that minor adjustments to his latest outlook have been made regarding the construction sub-sectors, in particular housing starts, which have been trimmed slightly compared to forecasts released earlier in 2014. Sullivan expects total 2014 cement consumption (portland and masonry) to reach 88.6 million metric tons, followed by 95.7 million metric tons in 2015 and 103.3 million metric tons in 2016.
While single-family housing starts are not reaching projected levels, his forecast indicates a new emphasis on multifamily starts. Demographic trends and the still strict mortgage standards are pushing more potential homebuyers into rental units. Additionally, the oil price environment has changed significantly since summer 2014, and these new impacts have been integrated into the forecast projections for the paving sector.
Going forward, Sullivan believes that the underlying economic fundamentals are strengthening and reflected in the labor market. Sustained gains in monthly job creation in excess of 225,000 net new jobs monthly, in the context of sub-6 percent unemployment, translates into more consumer spending power, stronger state and local tax receipts, more favorable ROIs for commercial building, and stronger household formation—all leading to stronger construction spending in 2015.
Through October, year-to-date cement consumption was up 8.6 percent. October’s sales pace exceeded a 90 million ton seasonally adjusted annual rate—the third time during the past four months. Through the past several years, it can be argued that the cement market has engaged in a “step-wise” recovery, reaching a certain sales pace, remaining at that plateau, and then jumping to a higher sales pace and resting on that plateau and jumping again.
During the second half of 2013 through the first quarter this last year, for example, cement consumption floated consistently around an 80 million-metric tons seasonally adjusted annual rate (SAAR). Rather than reflecting a trend projection, cement consumption took a step up to the 85 million-metric tons SAAR pace during the second quarter. Now the pace of consumption seems to have reached a new, higher level near a seasonally adjusted 93 million-metric tons level. It should be noted that November and December 2013 were characterized by harsh weather. Absent a recurrence, strong year-over-year gains are anticipated in final 2014 figures.
The strengthening of the U.S. job market lies at the core of Sullivan’s optimistic outlook regarding the economy, construction markets and expected cement volumes in the years ahead (his 2019 total cement consumption forecast tops 124 million metric tons). The monthly job creation rate averaged 225,000 net new workers for 2014. This pace is expected to be roughly maintained through the first half of 2015. During the second half of 2015, the monthly job creation rate is expected to edge up to 250,000 net new jobs, or a 3 million-job annual pace.
These favorable conditions are further supported by the recent collapse in oil prices. In mid-September 2014, West Texas intermediate was priced at $94 per barrel; by mid-November, the price had declined $20, due to easing global demand and a ramp-up in U.S. production associated with fracking activity. The run-down in oil prices has materialized in a steep drop in prices at the pump so far, adding even more to consumer purchasing power.
RESIDENTIAL OUTLOOK DIPS
Sullivan has adjusted his outlook for housing starts downward. The adjustment is relatively small and places more emphasis on the multifamily segment than previously projected. Despite disappointing sales activity in 2014, PCA continues to believe the fundamentals support gains in the new year. Most important to this assessment is job creation. As job creation accelerates, the labor market is expected to increasingly tighten and result in stronger wage gains than have materialized thus far in the recovery. Furthermore, the creation of jobs is critical in generating household formation and favorable homebuyer affordability.
PCA believes the fundamentals are in place to support sustained gains in sales activity, but perhaps not at the accelerated rate previously expected. For now, however, even in the context of job growth, income gains, relatively modest interest rates, improving consumer confidence, and historically low mortgage-to-rent ratios, the 2015 rate of acceleration is expected to be modest. A key issue facing the single family market has been tight lending standards. Sullivan expects there will be a lag between the new lending rules and an impact on the market, with most of favorable impact materializing in 2016 and beyond. As a result, PCA has increased the composition of housing starts in favor of multifamily, with strong construction activity in the sector expected to persist throughout the five-year forecast horizon.
NONRESIDENTIAL GROWTH CONTINUES
With the strengthening in the labor markets and the overall economy, net operating income for nonresidential properties is expected to increase. From PCA’s estimated 7 percent growth achieved in 2014, nonresidential construction is expected to increase to 9 percent in 2015, followed by robust growth rates in 2016 and 2017 as well. The strong growth recorded during 2014 by office, industrial, retail and hotel sectors is expected to continue in 2015. In addition, sectors slow to recover and still recording declines in 2014 are expected to record modest increases in 2015.
Growth in nonresidential construction activity is only one ingredient pushing cement consumption in this sector. During the recession, cement intensities declined 24 percent and accounted for more than half of the total 53.4 million-metric ton decline experienced during 2005-2009. Cement intensity is the amount of powder consumed per real dollar of construction activity. While all sectors of the cement market experienced declines in intensity, it was most noticeable in the nonresidential sector, which experienced a 56 percent decline. Cement intensities have been recovering for several years. The recovery has been most noticeable in the nonresidential sector—amplifying cement consumption.
Sullivan reminds us that a 1 percent increase in cement intensity is equivalent to a 1 percent increase in construction activity. The projected 7 percent gain in 2014 nonresidential construction activity, for example, is expected to translate into a 30 percent increase in the sector’s cement consumption. Cement intensity growth in the nonresidential sector is expected to amplify cement consumption growth going forward. It should be kept in mind that PCA’s forecast for nonresidential cement intensities do not reach past cycle peak levels. If past cycle peaks are achieved by the end of the forecast horizon, it would imply an additional 5.7 million metric tons in cement consumption in 2019.
STATE, LOCAL FUNDING TO BOOST PUBLIC WORKS
Increased federal support to construction activity is not factored into Sullivan’s forecast; PCA assumes federal support of the highway program will remain fixed in nominal values. In the context of inflation, this implies a gradually diminishing factor contributing toward public construction. The gradual strengthening in public construction activity, however, does not lie with the federal side of the equation, but instead with the state and local side of the equation. As the economy builds momentum, job gains will add strength to states’ ability to spend and rising home prices will eventually support stronger construction spending at the local level as well. Both these conditions, however, still have some time to brew before resulting in a significant positive impact on public spending.
Roadway construction accounts for the largest area of public cement consumption. While this sector has suffered difficulties, PCA believes a trough point was reached in 2013. Growth is expected to push this sector to record successive gains during the back end of the forecast horizon. According to PCA’s scenario, roadway construction is tied to a recovery in state and local finances. State revenue collections have been increasing in tandem with job creation. This suggests continued strong growth in state revenue collections and an eventual return to surpluses by fiscal 2015.
With this, PCA expects an increase in discretionary state construction spending, which was hit hard during the recession. During the 10 years preceding the economic downturn, state highway/road construction discretionary spending accounted for roughly 2.4 percent of total state expenditures. Cutbacks in state discretionary highway/roads spending accounted for only 2.1 percent in 2008, 1.9 percent in 2009, and 1.8 percent in 2010. PCA expects the share of state spending dedicated to road construction will increase once state fiscal conditions turn to surpluses. Furthermore, The Transportation Infrastructure Finance and Innovation Act (TIFIA) reaches $1 billion in 2015, compared to $122 million three years ago. The increases in TIFIA funding provide greater ability for state and local governments to finance large-scale construction projects.
Sullivan also expects an increase in local spending on public construction beginning in fiscal 2016. While localities receive state and other funding, roughly 75 percent of tax revenues are from property tax receipts. Unfortunately, property values declined dramatically during 2006-2011, thereby reducing local budgets and construction spending. PCA estimates there is a three-year lag between changes in home prices and local spending activity.
On a national basis, home prices began recording sustained gains in mid-2012. This implies an increase in local spending activity could begin in mid-2015 (fiscal 2016). Furthermore, analysis suggests that municipalities have gradually increased the mileage rates applied to properties. As home prices rise, therefore, there is the potential that localities receive an additional boost to budgets via the higher property tax rates.
ABC, ARTBA WEIGH IN
Associated Builders and Contractors (ABC) forecasts a steady and ongoing economic recovery for the U.S. commercial and industrial construction industries in 2015. The reasonably brisk industry recovery in 2014 should continue in 2015.
“ABC forecasts nonresidential construction spending will expand roughly 7.5 percent next year,” said Chief Economist Anirban Basu. “The segments that will experience the largest growth in construction spending in 2015 include power (e.g. natural gas-related construction), lodging (leisure and business spending), office space (professional services employment creation), and manufacturing (rebounding industrial production).
“The public sector will see far more sluggish growth in construction spending,” Basu warns. “However, this fits a multi-year pattern with private nonresidential spending exceeding public nonresidential spending by 28 percent in 2014, up from 15.6 percent in 2013.”
“There are always issues, of course, including compensation costs that will rise more quickly per worker next year than in years past,” Basu cautions. “This will be particularly apparent in areas like Louisiana and Northern California, places that have experienced significant economic growth recently.
Additionally, while material price inflation has been suppressed, it may accelerate in 2015. Last year, prices were suppressed due to a combination of factors, such as softer growth in most of Europe and Asia, rising energy production in the U.S., and a stronger dollar. Some of these factors might not be as prominent next year, so the stage could be set for price increases close to 3 percent.
“Taking into account current economic momentum, especially in the form of employment growth, ongoing accommodative monetary policy and increased growth in consumer spending, further stoked by falling gasoline prices, 2015 should be a decent one for the U.S. economy,” concludes Basu. “Contractors should continue to experience a lengthening backlog and the industry should continue to see increases in nonresidential construction spending and employment growth.”
Consistent with the outlook from other economists, the American Road and Transportation Builders Association sees only modest gains for its members from 2014 to 2015. The U.S. transportation construction market will grow 3.1 percent from $185.9 billion in 2014 to $191.7 billion in 2015, according to a forecast by ARTBA Chief Economist Dr. Alison Premo Black. This is slightly above anticipated growth in the overall economy, with a U.S. Gross Domestic Product expected to grow between 2.6 and 3 percent, according to the U.S. Federal Reserve.
The ARTBA forecast for the largest segment—highway, street and related work—is tempered by two key factors: uncertainty over long-term federal funding, which represents 52 percent of state Department of Transportation capital outlays, and still-recovering state and local budgets. Outside of construction, state and local governments are expected to spend an additional $38.5 billion for maintenance work; $13.2 billion for in-house and consultant planning and design services; and, $7 billion for right-of-way purchases as part of their highway and bridge programs.
Dr. Black’s report predicts that the construction market for highways, streets and related work, private driveways and commercial parking lots will grow to $64.9 billion, up 2.1 percent from $63.5 billion in 2014. This includes 1.2 percent growth in highway, street and related work, from $51.8 billion in 2014 to $52.4 billion in 2015. To put this market in perspective, the amount of work completed in 2009 was $67.3 billion. The market is expected to be uneven across the country, with highway investment up in 24 states, down in 19 states and Washington, D.C., and within a plus/minus 5 percent in seven states.
Approval of more than $17 billion for transportation investment through legislative and ballot measures in 2014 will help support the market in the coming years. State legislatures approved 14 measures in 2014 to increase investment, while voters approved 79 percent of the local or regional transportation funding measures on November ballots.
The public private partnerships (P3s) market will also support new growth in 2015, with four states—Colorado, North Carolina, Ohio, and Pennsylvania—awarding their first P3 projects last year. Contractors will have an additional $30 billion-$40 billion in business opportunities from private highway and bridge work that is completed as part of housing developments and larger commercial structures, separate from parking lots and driveways.
Record growth is expected to continue in the bridge and tunnel construction market, increasing from $30.8 billion in 2014 to $31.3 billion in 2015. Bridge construction has grown from 19.6 percent of all highway work in 2000 to 37.3 percent in 2014. ARTBA says the share of bridge work will continue growing in the next five years.
ARTBA is forecasting that light rail, subway and railroad construction will increase from $18.3 billion in 2014 to $20.9 billion in 2015. The total value of airport runway and terminal construction will grow from $12.5 billion in 2014 to $13.1 billion in 2015. Finally, the ports and waterway construction market will increase slightly to $2.8 billion in 2015, up from $2.7 billion in 2014, according to Dr. Black’s report.
|U.S. CEMENT CONSUMPTION FORECAST
|(000 Metric Tons)
|Total Cement Consumption
|Total Cement Consumption
|Source: Portland Cement Association
HOME BUILDING GAUGE
Following a four-point uptick the prior month, builder confidence in the market for newly built single-family homes fell one point in December to a level of 57 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).
“Members in many markets across the country have seen their businesses improve over the course of the year, and we expect builders to remain confident in 2015,” said NAHB Chairman Kevin Kelly, a Wilmington, Del., builder and developer.
“After a sluggish start to 2014, the HMI has stabilized in the mid-to-high 50s index level trend for the past six months, which is consistent with our assessment that we are in a slow march back to normal,” added NAHB Chief Economist David Crowe. “As we head into 2015, the housing market should continue to recover at a steady, gradual pace.”
Derived from a monthly survey NAHB has conducted for 30 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” It also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
Two of the three HMI components posted slight losses in December. The index gauging current sales conditions fell one point to 61, while ones measuring expectations for future sales and prospective buyer traffic dropped a single point to 65 and held steady at 45, respectivley. Looking at the three-month moving averages for regional HMI scores, the West rose by four points to 62 and the Northeast edged up one point to 45, while the Midwest registered a three-point loss to 54 and the South dropped two points to 60.
The HMI data followed a NAHB report indicating nationwide housing starts had surpassed 1 million in November, marking the fifth month the critical watermark had been reached in 2014, according to U.S. Department of Housing and Urban Development and Census Bureau figures. Total housing production fell slightly—down 1.6 percent from in November from October—to a seasonally adjusted annual rate of 1.028 million units. Three-month moving averages for total and single-family production were at their highest levels since the Great Recession.
“These numbers are in line with our latest surveys, which show that single-family builders are confident that the market is gradually recovering,” noted Kelly upon release of the housing start data.
“Over the course of the year, the number of houses under construction has been on an upward trajectory, signaling that housing is moving forward,” explained Crowe. “With strong demand, affordable home prices and favorable interest rates, we should see housing production continue to grow into 2015.”
Single-family housing starts were down 5.4 percent to a seasonally adjusted annual rate of 677,000 units in November, while multifamily production rose 6.7 percent to 351,000 units. Regionally in November, combined housing production increased in the Northeast, Midwest, and West, with respective gains of 8.7 percent, 14.4 percent, and 28.1 percent. However, total production dropped in the South by 19.5 percent.
DODGE ECONOMIST SEES 9 PERCENT GAIN IN 2015 CONSTRUCTION STARTS
The 2015 Dodge Construction Outlook, a mainstay in industry forecasting and business planning, projects U.S. residential, nonresidential and nonbuilding work climbing to $612 billion this year, up from the $564 billion estimated for 2014 and high by recent historical standards.
“The construction expansion should become more broad-based in 2015, with support coming from more sectors than was often the case in recent years,” says Dodge Data & Analytics Chief Economist Robert Murray. “The economic environment going forward carries several positives that will help to further lift total construction starts.
“Financing for projects is becoming more available, reflecting some easing of bank lending standards, a greater focus on real estate development by the investment community, and more construction bond measures getting passed. While federal funding for construction programs is still constrained, states are now picking up some of the slack. Interest rates for the near term should stay low, and market fundamentals for commercial building and multifamily housing continue to strengthen.”
By sector, the 2015 Dodge Construction Outlook finds:
- Commercial building will increase 15 percent, slightly faster than the 14 percent gain estimated for 2014. Office construction has assumed a leading role in the sector upturn, aided by expanding private development as well as healthy contract activity related to technology and finance firms. Hotel and warehouse work should also strengthen, although the pickup for stores is more tenuous.
- Institutional building will advance 9 percent, continuing the moderate upward trend established this year. The education category is now seeing an increasing amount of K-12 school contracts, augmented by passage of recent construction bond measures. Healthcare facilities are expected to show some improvement relative to diminished 2014 activity.
- Single-family housing will rise 15 percent in dollars, corresponding to an 11 percent increase in units to 700,000 (Dodge basis). Access to home mortgage loans is projected to expand, lifting housing demand, although the millennial generation’s gradual shift towards homeownership limits the potential number of new homebuyers in the near term.
- Multifamily housing will increase 9 percent in dollars and 7 percent in units to 405,000 (Dodge basis). Occupancies and rent growth continue to be supportive, although the rate of increase for construction is now decelerating as the sector matures.
- Public works construction will improve 5 percent, a partial rebound following the 9 percent decline estimated for 2014. Highway and bridge volume should stabilize, and modest gains are anticipated for environmental public works. Federal spending restraint will be offset by states’ greater financing role, owing to higher user fees and increased use of public-private partnerships.
- Electric utilities will slide 9 percent, continuing a downward trend that followed an exceptional volume of construction starts reported for 2011-2012. With more projects now coming on line, capacity utilization rates will stay low, limiting the need for new construction.
- Manufacturing plant construction will settle back 16 percent, following the huge increases reported during both 2013 (+42 percent) and 2014 (+57 percent) that reflected the start of massive chemical and energy-related projects.
Dodge Data & Analytics presented the 2015 forecast at the 76th annual Outlook Executive Conference in Washington, D.C. Copies of the report with additional details by building sector can be ordered at www.analyticsstore.com.
AGC ECONOMIST: CONSTRUCTION EMPLOYMENT ROBUST, VULNERABLE TO SKILLS SHORTAGES
In a recent release, The Associated General Contractors of America Chief Economist Ken Simonson cited a report from the Department of Labor that confirmed 38 states and the District of Columbia added jobs between November 2013 and November 2014, while construction employment increased in 26 states and D.C. between October and November.
“These year-over-year and one-month changes show that construction is doing well in most of the country,” Simonson notes. “Yet, the list of states that have added construction jobs varies from month to month, showing that the industry’s recovery remains vulnerable to worker shortages and unfavorable governmental actions.
“Although more than three-quarters of states have added construction jobs from year-earlier levels throughout 2014, the list of states with gains keeps changing. Only North Dakota, Louisiana and Oklahoma exceeded their pre-recession peaks for construction employment last year, while most states were still at least 10 percent below previous highs.”
Energy and commercial sectors spur mid-sized contractors’ 2015 optimism
Surveying construction executives of firms ranging from $10 million–$1 billion in annual revenue, equipment finance giant GE Capital, Americas finds 75 percent of respondents “extremely” or “somewhat” confident in their local economies, and 65 percent indicating the same for the United States. Respondents see energy-related construction as the strongest sector in the next 12 months, followed by office, transportation and residential.
Half of the executives surveyed have increased headcount over the past 12 months, as the industry experienced 5.4 percent, year-over-year growth in mean total employment—up two points from trends GE Capital gauged in March 2014. Nearing 2015, capital expenditures are top-of-mind for mid-sized contractors, with 41 percent of executives surveyed confirming year-over-year equipment investment increases, and about one-third weighing financing for additional purchases.
Healthcare costs are a top concern at middle-market construction firms, along with uncertainty of government actions—particularly as it relates to public construction project spending. With more than one-third of firms GE Capital surveyed expecting an increasing cost structure in 2015 operations, the ability to maintain or grow margins is a looming challenge. From 2014 to 2015, the more optimistic survey respondents see margin growth averaging 3.7 percent.
The average revenue and headcount of the 59 survey respondents was $144 million and 642, respectively. In partnership with the Ohio State University Fisher College of Business, GE Capital maintains the National Center for the Middle Market, whose quarterly updates of contractors are part of the U.S. CXO Industry Economic Outlook Survey, covering construction plus seven other business or consumer sectors. — www.gecapital.com/construction; www.middlemarketcenter.org