The Building Tradesman Newspaper

Friday, November 09, 2012

Forecast: construction to stay on improving course out of recession

By The Building Tradesman

Look for modest growth in U.S. construction in 2013.

That welcome bit of news comes from the annual forecast by McGraw Hill Construction, which released its 2013 Construction Outlook on Oct. 24. The report predicts that total U.S. construction starts for 2013 will rise 6 percent to $483.7 billion. That comes atop a 5 percent increase anticipated for 2012 vs. 2011.

“New construction starts in 2010 edged up 2 percent, followed by another 1 percent gain in 2011, and 2012 is headed for a 5 percent increase to $458 billion,” said Robert Murray, McGraw-Hill Construction’s Vice President of Economic Affairs. “This still leaves the volume of total construction starts 32 percent below the 2005 peak on a current dollar basis, and down about 50 percent when viewed on a constant dollar basis. The modest gains experienced during the past two years have in effect produced an extended bottom for construction starts, in which the process of recovery is being stretched out.”

Spending for individual sectors of the construction economy for 2012 is forecast as follows, along with McGraw-Hill’s comments:

Single family housing: +24 percent. “The positives for single family housing have become more numerous – the pace of foreclosures has eased, home prices are stabilizing, and mortgage rates are at record lows.”

Multifamily housing: +16 percent. “Improved market fundamentals will help to justify new construction, and this structure type continues to be viewed favorably by the real estate finance community.”

Commercial building: +12 percent. “Store construction will feature more upgrades to existing space and the derived lift coming from gains for single family housing. Next year’s level of commercial building in current dollars will still be more than 40 percent below the 2007 peak.”

Institutional building: Flat. This follows a steep 13 percent drop estimated for 2012. “For educational facilities, K-12 construction will slip further while college and university construction should at least stabilize. Healthcare facilities are expected to make a modest rebound after this year’s downturn.”

Manufacturing building. + 8 percent.  Better after a decline in this sector in 2012.

Public works construction. –1 percent. “Federal spending cuts in particular restrain environmental projects. The new two-year federal transportation bill should help to limit the impact of spending cuts on highways and bridges.”

Electric utility construction: –31 percent, after three good years.  Lower after “reaching a record high in current dollars during 2012. This year was boosted by the start of two very large nuclear power plants, and projects of similar magnitude are not expected for 2013. The expiration of federal loan guarantees for renewable energy projects would also dampen construction in 2013.”

The forecast for 2013 is in large part dependent upon what happens in Congress with the “Fiscal Cliff,” which refers to the potential financial meltdown the U.S. government will face at the end of 2012. Set up as alternative nobody wanted, the cliff is the result of the bipartisan Budget Control Act of 2011.

In order to complete the budget, the following will happen without intervention by the end of this year:

  • The end of last year’s temporary payroll tax cuts (resulting in a 2 percent tax increase for workers);
  • The end of certain tax breaks for businesses;
  • The end of the Bush tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law.
  • And, the spending cuts agreed upon will begin to go into effect. According to Barron’s, over one thousand government programs – including the defense budget and Medicare – are in line for “deep, automatic cuts.”

It is widely feared that if the country falls off the economic cliff, it will fall back into recession, wiping out any hoped-for gains in construction or in any other economic sector.

“The fiscal cliff poses a significant downside risk to the near-term prospects for the U.S. economy and the construction industry,” Murray said. “Assuming that efforts to cushion the full extent of the fiscal cliff are successful next year, keeping the U.S. economy from sliding back into recession, then there are several positive factors to benefit construction, including low interest rates and improving market fundamentals for several project types.”