As economic growth staggers, construction takes a minor hit
Lead economists in the construction industry project a minor drop in 2020 activity amidst a weakening economy driven by frictions in trade relations and shortage of qualified workers in the industry. “The primary question now is whether the slowdown in economic activity will persist into 2020,” said Associated Builders and Contractors Chief Economist Anirban Basu. “Many factors suggest it will, including a weakening global economy, a U.S. manufacturing sector that is arguably already in recession, vulnerability attributable to massive accumulations of public, corporate and household debt, and the uncertain outcomes attached to ongoing trade negotiations. On the other hand, U.S. equity markets have continued to surge higher in the context of better-than-expected corporate earnings and ongoing accommodation by the Federal Reserve. Put it all together and the outlook for the U.S. economy has seldom been more uncertain, especially given next year’s elections.”
The 2020 Dodge Construction Outlook, a mainstay in industry forecasting and business planning from New York-based Dodge Data & Analytics, projects total U.S. construction starts slipping 4 percent, to $776 billion, from this year to next. By major sector in dollar terms, residential building will be down 6 percent, while starts for both nonresidential buildings and nonbuilding construction will retreat 3 percent.
“The recovery in construction starts that began during 2010 in the aftermath of the Great Recession is coming to an end,” Dodge Data & Analytics Chief Economist Richard Branch told attendees of 81st annual Outlook Executive Conference in Chicago. “Easing economic growth driven by mounting trade tensions and lack of skilled labor will lead to a broad based, but orderly pullback in construction starts in 2020. After increasing 3 percent in 2018 construction starts dipped an estimated 1 percent in 2019 and will fall 4 percent in 2020.
“Next year, however, will not be a repeat of what the construction industry endured during the Great Recession. Economic growth is slowing but is not anticipated to contract next year. Construction starts, therefore, will decline but the level of activity will remain close to recent highs.”
Among key segments measured in year-over-year terms, the 2020 Dodge Construction Outlook predicts construction starts for single-family housing to be 765,000 units, down 5 percent; and, multifamily housing, 410,000, down 15 percent. On a positive note, public works construction starts will move up 4 percent in 2020 with growth continuing across all project types. Institutional construction starts will essentially remain even with the 2019 level, while education building and health facility starts continue to see modest growth.
Affordability issues and the tight supply of entry level offerings have kept demand for homes muted and buyers on the sidelines. In fact, sales of newly built, single-family homes decreased 0.7 percent to a seasonally adjusted annual rate of 733,000 units in October, off strong upward revisions to the September reading, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. However, on a year-to-date basis, new home sales for 2019 are 9.6 percent higher than the same period in 2018, and the past two months represent the highest monthly sales rate since October 2007.
“Forty-five percent of homes sold in October were priced below $300,000, which is an indication that more millennial buyers are taking advantage of low mortgage rates and entering into the marketplace,” says Greg Ugalde, chairman of the National Association of Home Builders, and Torrington, Conn. home builder and developer.
“For-sale inventory remains tight as this marks the third consecutive month below a six-month supply,” adds Danushka Nanayakkara-Skillington, NAHB’s assistant vice president of Forecasting and Analysis. “The low inventory rates show there is a need for added construction to meet growing demand.”
CEMENT GROWTH LAGS
The Portland Cement Association Fall Forecast paints a minor 2019-2021 growth curve for cement consumption, with respective annual gains of 2.4 percent, 1.7 percent and 1.4 percent.
“Public construction continues to receive the benefit of the 2018 federal budget that allowed for $20 billion in spending on roads, bridges, water, and rail projects over 2018 and 2019,” says PCA Senior Vice President and Chief Economist Ed Sullivan. “These gains come in the context of increased challenges at the state level to manage deficits as entitlement spending growth continues at a strong pace.”
PCA’s analysis adds that the labor market continues to power the United States economy and on a monthly basis has generated 161,000 net new jobs since the start of the year. Coupled with mild inflation rates and the continued rise of home prices, it will take some time before the economy experiences a significant downturn.
“The economy is now the longest economic expansion post-World War II history. Some of the pent-up demand zip that invigorates the initial stages of economic recovery are long past. As such, the economy is now more vulnerable to economic shocks,” Sullivan adds. “While PCA does not believe data suggests a recession is near, it does point to a gradually weakening economy.”
PCA forecasts real GDP will grow 2.4 percent this year and weaken in subsequent years to 2.1 percent in 2020 and 1.7 percent in 2021.
2019 PRODUCER REFLECTION
Thanks to the continued economy expansion and better weather conditions than the prior-year period, producers saw modest growth during the third quarter of 2019, and hope to continue that momentum in the new year. Martin Marietta Materials Inc. reported record results for the third quarter ended September 30, notably achieving more than $1.420 billion in total revenues and more than $421 million in gross profit.
Ward Nye, chairman, president and CEO of Martin Marietta, states, “Building on our strong momentum in the first half of the year, we once again delivered exceptional performance, establishing new quarterly records for revenues, gross profit, adjusted EBITDA and earnings per diluted share. These record-setting third-quarter results, driven by broad-based improvements in shipments, pricing and profitability across the majority of our Building Materials business, reflect the disciplined execution of our strategic plan and our team’s unrelenting commitment to operational excellence. Based on recent trends and our solid performance to date, we are raising our outlook for the remainder of 2019.”
Based on a preliminary view of 2020, Martin Marietta management currently anticipates low-to-mid single-digit growth in aggregates shipments and mid-single-digit growth in aggregates pricing. Supported by region-specific third-party forecasts and underlying demand trends, Martin Marietta believes the current construction cycle will continue for the foreseeable future and expand at a steady pace in 2020 for each of its three primary construction end-use markets.
U.S. Concrete Inc. also reported positive results for the quarter ended September 30. Consolidated revenue increased 1.1 percent from last year’s third quarter to $408.9 million, an all-time quarterly high. Further, ready-mixed concrete revenue increased 2.3 percent from the prior-year period to $354.1 million, also an all-time quarterly high.
William J. Sandbrook, chairman and chief executive officer of U.S. Concrete, Inc. says, “With the benefit of continued economic expansion and improved weather patterns I am pleased to announce our third quarter 2019 results, which include quarterly records of consolidated revenue, consolidated total adjusted EBITDA, ready-mixed concrete segment revenue and aggregate products segment adjusted EBITDA. Our revenue growth was driven by both higher ready-mixed concrete segment volumes and higher average sales prices in our aggregate products and ready-mixed concrete segments. The increased ready-mixed concrete volumes also enabled us to improve our adjusted EBITDA margin to 15.2 percent this quarter. These results validate our belief in the strength of each regional market we serve.”
Sandbrook continues, “Our margin improvement was aided by increased ready-mixed concrete volumes and solid operational improvements in our aggregate products segment. We continue to focus on enhancing our margins through cost containment and increased utilization of technology. We are increasing our technology investments with the objective of improving our customers’ experiences while increasing revenue and reducing costs.”
Vulcan Materials Co. Chairman and CEO Tom Hill states, “We are reaffirming our full year earnings outlook for 2019. As we enter the final quarter of this year, we are well positioned to have a strong finish to the year, achieving another year of double-digit earnings growth.”
|The 2020 projections were released at the 81st annual Outlook Construction Conference, staged this year in Chicago. Copies of Chief Economist Richard Branch’s full report, with additional details by building and nonbuilding sector, can be ordered from Dodge Data & Analytics, 800/591-4462; www.construction.com.|
“Looking ahead to 2020, we expect another year of strong earnings growth, led by improvement in aggregates unit margins,” Hill says. “With respect to aggregates shipments, our preliminary outlook is for low-to-mid single digit growth. Vulcan-served markets should continue to benefit from public construction demand, led by significantly higher levels of highway funding in our key states. Private construction shipment momentum remains positive across most of our markets. We expect this shipment momentum to continue into 2020. Demand fundamentals, including population and employment growth, continue to support longer-term growth in residential and nonresidential construction. We also expect a positive pricing environment as the shipment momentum in private demand and visibility of public demand should help drive sales price increases similar to 2019’s mid-single-digit range.”
AGING WATER INFRASTRUCTURE DRIVES 10-YEAR PIPE NETWORK EXPENDITURES
A new report from Boston-based Bluefield Research indicates more than $234 billion worth of capital expenditures (CAPEX) are forecasted over the next decade to address aging municipal water & wastewater pipe network infrastructure. Pipe networks and associated hardware make up 37 percent of total forecasted municipal CAPEX that includes water & wastewater treatment facilities, according to Underground Infrastructure: U.S. Water & Wastewater Pipe Network Forecast, 2019-2028.
“The cost of managing 3.2 million miles of underground distribution and collection systems is escalating for municipalities,” says Erin Bonney Casey, research director for Bluefield. “Stakeholders from utilities to customers have benefitted historically from this incredible array of pipes and hardware, but, unfortunately, the bill is coming due to rehabilitate existing assets, let alone build new ones to meet growing population demand.”
Water losses through leaks for U.S. utilities average 15 percent annually, with some cities, towns, and communities losing more than half of all water pumped and treated for distribution to customers. As a result, rehabilitation of existing pipes is the fastest growing spend category, increasing annually from $253 million in 2019 to $576 million by 2028. Network expansions, particularly in high population growth across the Sunbelt states, will drive the lion’s share of spend on new build.
“The scale of investment required necessitates prioritizing rehabilitation of these aging assets and is expected to usher in more advanced asset management, such as predictive analytics,” explains Bonney Casey. “And in some cases, as we are already seeing in select cities, the opportunities for private investment, or investor-owned utilities, will increase because of these escalating costs. Irrespective of the solution, utilities are increasingly forced to do more with less—and the pipe network is no exception.”