Combined 2013 Construction Economic Outlooks Point to Project Hot Spots

U.S. construction spending is finally turning up. But a wise contractor won't let the relief of long-overdue resuscitation overheat his perspective on what will inevitably be a tepid 2013 recovery.

Forecasts from chief economists in the key construction sectors – the National Association of Home Builders, the American Road and Transportation Builders Association and the Association of General Contractors – paint an encouraging picture of gently rising construction spending in 2013.

Look closely to find where the bright spots and black holes lay.

• ARTBA 2013 Outlook by State

Housing's resurrection

Single-family starts are 70 percent above their pre-recession trough and hit their highest level in more than four years in September, at an 872,000-unit annual pace. But that pace is only 43 percent of what NAHB Chief Economist David Crowe calls a normal level (he uses the national average for annual housing starts from 2000 to 2003 as a benchmark).

"Housing is coming back," says Crowe. "Not strongly, but I do think we are beginning to see some pretty solid foundations for a continuing slow, but steady recovery in housing."

Crowe's NAHB forecast projects a 19 percent increase in total housing starts for 2013 (to 903,000 units).

Remodeling is already back, at 98 percent of the average annual level of activity it registered early in the millennium.

"And the multifamily residential sector is well on its way," Crowe reports. "More than two-thirds of the way back to normal.

"It's the single-family component – usually the largest sector of the three legs of the housing stool – that's been then weakest. And it's the one that I think is finally beginning to see signs of consistent recovery."

He expects national-average single-family starts to be about 55 percent of the 2000-to-2003 norm by the fourth quarter of 2013.

Primary drags on more-robust housing growth:

1. Continued price competition from foreclosed properties
2. New-home appraisals depressed by those distressed sales
3. Tighter mortgage-lending standards

The toughest housing markets linger in big housing states that saw the worst foreclosure rates at the peak of the recession, like California, Arizona, Florida and Nevada. Big, struggling housing markets continue to weigh heavily on the national housing recovery.

Transportation stalled

"We're hoping to see some growth (in transportation spending) resume, according to our forecast models, possibly in 2014, '15 and '16," says Chief Economist Allison Premo Black, of the American Road & Transportation Builders Association. "That's really going to depend on what's happening in the overall economy."

The MAP21 federal transportation reauthorization only increases transportation infrastructure spending to track inflation. But spending reforms in the legislation require states to obligate the money during each fiscal year, rather than allowing them to bank unspent funds, and that should improve the flow of funds.

• Inflation is Stealing Construction Spending and Profits

In 2013, federal transportation-infrastructure investment is expected to remain static at best. Congress faces a fiscal cliff of expiring tax credits and automatic spending cuts, along with intense pressure to cut the federal budget before reaching the government's borrowing limit.

• Politics Serves Up a Second Fiscal Cliff for Construction

While state and local tax revenues are recovering their pre-recession strength, state budget shortfalls are unprecedented. Perspective: in the wake of the last recession, the sum of state budget shortfalls in 2004 was about $80 billion. In 2010, that sum was $191 billion, and it was already at $55 billion by mid 2012.

Pavement construction spending is below 1998 levels and Premo Black expects it to stay down through 2012. It's 2013 growth should almost equal inflation at 2.8 percent.

Subway/light rail work is expected to end 2012 up, but decline more than 8 percent in 2013.