U.S. Construction Outlook: Rosy With A Chance Of Volatility

Our friends over at Reed Construction Data recently put forth a very comprehensive and well-articulated US residential and non-residential construction forecast.

Here are some high points:

The Fiscal Cliff: We Won’t Fall Off
Bernard Markstein, Reed’s chief economist, said he expects there to be an extension of current law for three to four months while US legislators work out the problem. [The fiscal cliff] will create unnecessary uncertainty for US businesses, but I don’t think we’ll fall off of it -- they’ll ultimately work things out, he said.

Residential, Commercial, Institutional
Between 1.1 and 1.4 million new net households were being created per year pre-recession, according to Kermit Baker, chief economist for the American Institute of Architects and, it turns out, originator of the Architecture Billings Index (ABI); then they dropped precipitously to around 600,000 per year. We may now actually reach 1 million new net household formations this year:

The residential sector is healthiest because single-family homes are moving forward, but the good news is the non-residential sector entered the construction downturn in better shape fundamentally, so its recovery could be even easier. There are encouraging signs on the commercial/industrial front, Baker said.

As far as the ABI is concerned, although activity has been uneven at best since the recession, there are reasons to be optimistic for future architectural design activity, according to Baker.

What Are Those Reasons for Optimism? In the commercial and industrial sectors, Markstein took us through the complexes that look to benefit most from growth.

Education, power generation and highway construction complexes will continue to be important components of non-residential spending, and Reed Construction is very positive on manufacturing spending in 2013 and 2014, Markstein said, as delayed spending will come to fruition, reshoring will be a factor, and much lower natural gas prices will have a lot to do with the rebound.

Commodity Costs To Stay Volatile
So said Ken Simonson, chief economist for Associated General Contractors of America. He pointed to a cumulative increase of 16 percent for the producer price indexes (PPI) for materials over the last 3.5 years:

But when the numbers play out in January, we’ll have had a 2-4% increase in materials prices in 2012, compared to 5-6% last year and the year before, he said.

Simonson’s outlook for 2013-2017 has total construction spending increasing 6-10% per year, due to shale-based gas and oil, a widening of the Panama Canal and demographic changes as drivers.

Materials costs will also increase 3-8% per year, labor costs up 2-4% per year, and bid prices up 2-5% per year.

What About Hurricane Sandy?
All the speakers on Reed Construction Data’s webinar agreed that the aftermath of the storm is a relative non-story.

First off, it takes ages for folks to get insurance money, so any rebuilding or development will be spread out over the years too thinly to move the needle.

That said, some structures won’t be rebuilt, and others would be delayed for 3-5 years -- and that’s on top of the projects that have been interrupted or cancelled either because the business or the homeowner don’t have the funds, or don’t see positive prospects.