The Building Tradesman Newspaper

Friday, November 15, 2019

End of post-recession prosperity looms for U.S. construction, Dodge Data says

By The Building Tradesman

With the end of another calendar year on the horizon, construction industry prognostications for the 2020 building season are starting to trickle in. 

Dodge Data and Analytics, one of the U.S. construction industry's leading information gatherers, offered this blunt assessment on Oct. 31.

“The recovery in construction starts that began during 2010 in the aftermath of the Great Recession is coming to an end,” said Richard Branch, chief economist for Dodge. “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.”

Fortunately, the effects of the slowdown will be blunted by the existing relative strength of the industry.

“Next year, however, will not be a repeat of what the construction industry endured during the Great Recession," Branch said. "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. By major construction sector, the dollar value of starts for residential buildings will be down 6 percent, while starts for both nonresidential buildings and nonbuilding construction will drop 3 percent.”

While U.S. construction spending rose 0.5 percent from August to September, it declined 2.2 percent for the 12 months between September 2018 and September 2019, the Commerce Department reported Nov. 1. During the first nine months of 2019, U.S. construction spending was $968.7 billion. 

While the spending side may be slipping a bit, the tight employment picture in U.S. construction means the jobs picture remains healthy, for now.

"The construction industry is still adding workers at a faster clip than the overall economy but growth has slowed as private nonresidential and multifamily construction spending shrinks," said Ken Simonson, Associated General Contractors' chief economist, on Nov. 1. AGC officials said demand for construction "is being undermined by uncertainty and tariffs that are part of a series of trade disputes with China, the European Union and other countries."

The AGC said the 2.0 percent growth in construction employment between October 2018 and October 2019 was the slowest in almost seven years. Compared to the greater U.S. economy, however, construction employment remained well above the 1.4 percent increase in total nonfarm payroll employment. 

Average hourly earnings in construction—a measure of all wages and salaries—increased 2.4 percent over the past year, although those uninspiring gains continue to be eaten up by a 1.7 percent inflation rate.

Dodge said the predicted pattern of construction starts in 2020 for specific segments of the economy is as follows: 

*The dollar value of single-family housing starts will be down 3 percent in 2020 and the number of units will also lose 5 percent. "Affordability issues and the tight supply of entry-level homes have kept demand for homes muted and buyers on the sidelines," Dodge said.

*Multifamily construction was an early leader in the recovery, stringing together eight years of growth since 2009. However, multifamily vacancy rates have moved sideways over the past year, suggesting that slower economic growth will weigh on the market in 2020. Multifamily starts are slated to drop 13% in dollars and 15% in units to 410,000 (Dodge basis).

*The dollar value of U.S. commercial building starts will retreat 6 percent in 2020. The steepest declines will occur in commercial warehouses and hotels, while the decline in office construction will be cushioned by high value data center construction. Retail activity will also fall in 2020, a continuation of a trend brought about by systemic changes in the industry.

*In 2020, institutional construction starts will essentially remain even with the 2019 level as the influence of public dollars adds stability to the outlook. Education building and health facility starts should continue to see modest growth next year, offset by declines in recreation and transportation buildings.

*The dollar value of manufacturing plant construction will slip 2 percent in 2020 following an estimated decline of 29 percent in 2019. Rising trade tensions has tilted this sector to the downside with recent data, both domestic and globally, suggesting the manufacturing sector is in contraction.

*Public works construction starts will move 4 percent higher in 2020 with growth continuing across all project types. By and large, recent federal appropriations have kept funding for public works construction either steady or slightly higher — translating into continued growth in environmental and transportation infrastructure starts.

*Electric utilities/gas plants will drop 27 percent in 2020 following growth of 83 percent in 2019.