2014 Construction Industry Forecast

In November, Equipment Today asked construction industry economists to weigh in on what to expect in 2014. Among key areas of concern are construction activity, unemployment and raw material costs. Although the economic climate can often be specific to markets in particular states or regions, the experts pointed to some overall favorable signs for 2014 and beyond. Here are their forecasts.

Highway Construction

ET: What do you see in store for highway and bridge construction in 2014? Will it be comparable to what we’ve experienced this past year?

Ken Simonson, chief economist, Associated General Contractors of America (AGC): I expect highway and bridge construction to hold steady for most of the year, but spending could tail off rapidly once the federal legislation (MAP-21) expires at the end of September. A handful of states have increased fuel taxes or other highway revenue sources, but it’s not enough to make up for dwindling state and federal gas tax receipts, and the public seems unlikely to support higher tax rates or new revenue sources other than tolls in a few locations.

Jeannine Cataldi, analyst for IHS Global Insight (IHS): Spending on highway and bridge construction will increase, but at a very moderate rate (less than 1.5% in real terms).

The expiration of the Surface Transportation Act means negotiations need to begin soon, and uncertainty will remain dependent on the length of any new agreements. Since these types of projects require longer term planning, a short-term agreement would leave spending more muted. There is much resistance to raising the gas tax, as well as to other means of raising funds that have been discussed — vehicle miles traveled (VMT), tolls, increased fees. The uncertainty with the Congressional spending sequester will most certainly keep spending on highway and bridge projects muted.

Factors that will lead growth are improving economic conditions, which lead to increased revenues at the state and local level. Also, the improving residential market will lead to more upgrades of existing roads and construction of new roads for new housing developments. In 2014, the increased demand for housing and an improving economy will be stronger.

Dr. Alison Premo Black, vice president and chief economist, American Road & Transportation Association (ARTBA): Although the continued recovery in the overall economy should help the highway and bridge market in 2014, the status of the federal Highway Trust Fund (HTF) and continued pressure on state and local budgets will impact the market. The good news is that bridge construction will continue to show real growth in 2014, building on a record year in 2013.

The big question is if state and local governments will continue to pull back on their highway spending as they did in 2013, or if they will start to spend more on infrastructure despite the uncertainty surrounding the HTF. We do know that the outlook will continue to vary from state to state — right now highway and bridge programs are up in 18 states and Washington, D.C., down in 19 states and fairly flat within +/- 5% of the remaining 13 states.

Anirban Basu, chief economist, Associated Builders and Contractors (ABC): My crystal ball shows that highway and bridge construction will continue to experience modest growth in 2014. The Moving Ahead for Progress in the 21st Century Act (MAP-21), signed into law in July 2012, will continue to fund surface transportation through 2014.

The long-term outlook for highway and bridge construction appears far more ominous, with states increasingly having to bear the financial burden despite their pension and health insurance cost issues.

Building Construction

ET: What will drive the residential and commercial construction markets in 2014 and do you see favorable growth in both segments?

David Crowe, chief economist, Economics and Housing Policy, National Association of Home Builders (NAHB): Residential construction will improve by 18% in 2013 over 2012, which was a slight deceleration from 28% growth in 2012. The slowdown in speed occurred in the single-family for-sale sector, which dropped from 24% growth in 2012 to an expected 17% growth in 2013. Multi-family for-rent construction also slowed its torrid growth rate from 39% in 2012 to 20% in 2013. Single-family construction paused as consumer confidence slumped, mortgage rates spiked and the economy’s growth rate stalled. Multi-family construction began a modest deceleration from very fast growth in 2011 and 2012 as virtually all newly formed households demanded apartments.

Single-family construction is expected to pick up some speed in 2014 as many of the speed bumps of the past are slowly diminishing. Headwinds remain but overall economic growth will help offset consumer concerns. And while mortgage rates will be higher, they will remain well below historic averages. Once the regulatory uncertainties about what lenders must do to lend to home buyers are clarified as a result of the Dodd-Frank legislation, and the future of Fannie Mae, Freddie Mac and FHA are clarified, mortgage underwriting should come back to more reasonable standards and open home ownership to those locked out now. NAHB expects 826,000 single-family starts in 2014, and to finally pass the 1 million mark in early 2015, a level not seen since 2007.

Multi-family construction will continue to thrive as household formations among younger families and individuals remains focused on renting. NAHB expects 326,000 multi-family starts in 2014 and headed even higher in 2015.

ABC: The construction industry will continue to mirror the modest growth seen in the broader economy, which will be entering its sixth year of recovery. Even slow growth ultimately unlocks construction opportunities, and the ongoing recovery has steadily produced lower vacancy rates, higher rents, and more comfortable lenders.

Expect nonresidential construction to expand in the high single digits next year, with similar growth in the residential sector. Recovery would be even more robust were it not constrained by a lack of conviction regarding overall macroeconomic and budgetary prospects in the U.S. Both segments will be bolstered by a global economy that is expected to accelerate to 3.6% growth in 2014, and growth could be even greater than expected if federal budget issues are resolved with any level of certainty.

AGC: I’m still very bullish about multi-family construction, but I expect single-family to level off sooner than most housing experts predict. Fewer people than a decade ago qualify for loans, believe home ownership is a safe investment, or are willing to “trade miles for mortgages” and put up with long commutes to have an affordable, detached house.

On the nonresidential side, I think the “shale gale” will create many construction opportunities — pipelines, railroads, manufacturing plants and even natural gas fueling facilities. I think warehouse and hotel construction will remain strong. But the formerly hot office, retail and hospital markets, as well as public construction, are likely to stay cold.

Cataldi, IHS: The residential market in 2014 will be driven by the continued release of pent-up demand as the household formation rate returns to more normal levels. As a result, demand for housing will remain higher than supply in the near-term.

During the recession, household formation reached all-time lows, with many people living with their parents longer, rooming with friends and, in general, delaying getting out on their own. As the economy has been improving, this demand began to be released into the multi-family market, with people choosing to rent until they could get into a house.

As demand for housing has picked up, the supply has not kept pace and has led to higher prices. These higher prices have enticed builders to get back into the market. As it takes approximately seven months for a new home to be built, it will take a little longer for the market to see the impact of this increased building. We expect this to show in 2014 and 2015.

The commercial market will gain momentum as well in 2014, following on the heels of the residential market growth. As consumers spend more, the commercial market will begin to grow. Also, the commercial market was hampered in 2013 by weak external demand due to slow growth in key export markets. It is expected that these markets will see improved conditions going forward, and this will also benefit the commercial market in the U.S.

Unemployment

ET: Will employment gains realized this year in residential and commercial construction carry over to next year? Conversely, if there continues to be healthy growth in both markets, will there be enough labor, skilled and unskilled, to satisfy the demand?

ABC: National construction employment expanded by 11,000 jobs in September and the sector has added 185,000 jobs over the past year. Remarkably, despite slow growth in construction employment over time and the fact that not all of the jobs lost during the downturn have been recovered, contractors are increasingly facing skills shortages. This is particularly true in natural resource intensive environments such as Texas, North Dakota and Louisiana.

AGC: I expect contractors to put up more “help wanted” signs as the number of projects continues to increase and the existing workforce reaches the limit of the hours it can be used (or is willing to work). But after five years of falling employment, followed by three years of modest job growth, many workers have left the industry. It will be hard for contractors to find experienced workers for many projects.

IHS Analyst Laura Hodges: Employment gains will continue into 2014 and will actually pick up over the next two years. IHS expects double-digit growth rates in both residential and commercial construction activity in 2014 and 2015, and employment gains will follow.

The U.S. construction sector has only begun to claw its way back from the unprecedented employment declines in 2008-2009 and will add back 1 million jobs over the next two years. While employment gains will be robust in the near term, we do not expect construction employment to reach pre-recession peak levels until the second half of 2017. Therefore, there should be enough workers to satisfy demand.

That said, pockets of growth do exist and some regions, such as the Gulf Coast and North Dakota, could experience market tightness for skilled labor. Employers in these regions need to be prepared to recruit outside of their region and support training programs nationally. Finally, in areas of stronger growth, temporary shortages may occur as it may take time to pull construction workers back into the workforce after a five-year hiatus from activity.

NAHB: Employment gains in residential construction have been mild. Residential construction employment is the same now that it was in September 2009. There have been some gains in the last year, but many of the former construction workers found work in other fields and builders are finding it difficult and expensive to attract new workers.

Some of the added construction activity has brought full-time work to those who remained in the industry and some is being conducted by single individuals acting on their own behalf. These individuals are not counted in the total labor numbers and cannot expand their workload beyond their own capacity. As the overall economy strengthens and confidence in hiring returns, the sole operator companies can and will expand.

Raw Material Costs

ET: What can contractors expect to pay in terms of a percentage increase over this year?

IHS Analyst Charlie McCarran: Material cost pressures have strengthened considerably over the first three quarters of 2013. As the recovery in residential and commercial markets continues to accelerate, pricing leverage will increasingly favor sellers in most material markets. In our current outlook, cement and ready-mix concrete prices are expected to rise 5.3% and 3.3% respectively in 2013.

Construction steel prices, which are at bottom, will soon be rising on the back of stronger demand. After declining 7.3% in 2013, rebar prices should advance 9.9% in 2014. A Chinese slowdown does represent an important downside risk to our steel outlook. The country has been a chronic over producer of steel and can barely absorb what it produces when GDP is growing at double digits. If growth were to slow considerably, domestic markets would be unable to absorb this excess production, which would pull global steel prices lower.

Lumber, which has been one of the most volatile construction materials in 2013, should finish the year 13.8% higher. The gains will continue next year as new home construction rises at double-digit growth rates.

Asphalt is the one material that is expected to finish 2013 sideways, rising a mere 0.3% due to weaker inflation-adjusted spending on highway and street construction. With oil prices poised to fall next year on rising North American tight oil production, asphalt prices should retreat somewhat over the course of 2014.

AGC: Materials costs have not been much of a concern for many contractors in the past three years. Gypsum prices are probably the biggest concern, as wallboard manufacturers have pushed through multiple price increases. Copper prices are far below their early 2011 records, and aluminum and steel also have been well behaved. In 2014, I expect modest upturns in most prices, but nothing like the sharp spikes for metals and fuels that occurred before the recession.

ARTBA: Material prices and overall project costs have eased in the highway and bridge construction sector since the Great Recession of 2008 and the sharp decline in the overall construction market. We expect any increase in project costs in 2014 to be in line with historical averages of around 3%.

ABC: Despite surging stock/asset prices, geopolitical uncertainty in many parts of the world, and the ongoing extraordinary monetary stimulus in the U.S., construction material prices have remained remarkably stable in 2013. That said, Europe has exited its recession, and growth in China appears to be firming.

If the U.S. can quell the uncertainty emanating from its ongoing federal budgetary issues, the pace of materials is likely to accelerate at a rate more reflective of the global economy. Contractors can expect material prices to increase in the mid-single digits.

NAHB: Building materials costs increased early in 2012 then calmed as construction activity softened. Critical materials such as lumber and wood panels reached prices near the same levels they were during the boom. Some of the spike was due to the withered state of the production facilities and the same stresses in the construction sector from trying to build back an industry devastated by the Great Recession.

As housing production enters a steadier, more predictable growth path, building material production will do the same and prices should not peak and trough as much as they have in the most recent past.

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