Special Report: State of the Construction Industry 2019

Economists weigh in on prospects for construction in the months ahead, with comment on highway and bridge construction, buildings, employment and materials costs

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The New Year got off to a rocky start with an extended federal government shutdown and instability in the global markets. Yet, there is optimism that the U.S. construction industry will continue to see favorable investment and activity in the months ahead.

To give you a better perspective on what to expect, Rental magazine asked economists from some of the leading construction industry organizations to share their insights and outlooks on what we may expect from 2019 and beyond.

Highway and Bridge Construction

RM. Travelers experienced plenty of highway and bridge construction in 2018, giving the appearance that infrastructure spending, in this sector at least, was trending upward. Of course, appearances don’t always reflect reality. How did federal, state, and local spending on highway and bridge construction in 2018 compare to the previous year, and do you see more funds earmarked for rebuilding the infrastructure this year?

Anirban Basu, Chief Economist for the Associated Builders and Contractors (ABC). Infrastructure investment was very strong in 2018, due in large measure to improved state and local government finances. Significant spending growth we observable in much of the nation in categories such as water systems, transit systems, highways, and flood control.

Ken Simonson, Chief Economist, Associated General Contractors of America (AGC). After shrinking by 4 percent in 2017, highway and street construction spending increased 6 percent in the first 10 months of 2018 compared to the same period the year before. The increase resulted not from higher federal funding but from states that have raised fuel tax rates or other funding sources in the past few years and from more toll construction, by both traditional toll agencies and by public-private partnerships. It appears spending will increase again in 2019 but not by as large a percentage as in 2018.

IHS Markit Spending on highways/streets declined in 2017, largely due to a wait-and-see attitude as the (at that time) incoming administration had touted grand infrastructure plans. As the year wore on, and no plan was announced or passed, state and local governments started making arrangements for spending in 2018.

Overall spending on highways/streets is expected to increase by 1.6 percent over 2017 levels. Looking ahead to 2019, there currently is no federal plan in place for increased investment in infrastructure. However, after the mid-term elections there is a stronger expectation that some type of federal funding plan can be achieved in 2019. Funding any federal bill remains the key headwind, but state and local governments have been taking a stronger role in raising revenues to undertake needed improvements. We expect that spending growth in the highways/streets segment will expand at an accelerated rate in 2019. (Source: Jeannine Cataldi)

Dr. Alison Premo Black, Senior Vice President and Chief Economist, American Road & Transportation Association (ARTBA). Public highway, street and related investment by state and local governments is expected to increase to $66.5 billion in 2019 from $63.4 billion in 2018.  This is the second year of consecutive growth for public highway construction.  The real value of public highway work, when adjusted for inflation, fell to $60.6 billion in 2017, down from $64.5 billion in 2016.

After falling 2 percent in 2018 to $31.2 billion, the real value of bridge and tunnel construction work is expected to increase to $31.7 billion in 2019, an increase of 1.5 percent.  

Increased investment at the federal, state and local level will continue to support the growing market.  Major developments include: 1) increased federal investment through the FY 2018 appropriations bill and the 2015 FAST Act law, 2) the approval of numerous state and local ballot initiatives to raise transportation revenues in 2016, 2017 and 2018, and 3) the action by 30 states to raise or adjust their motor fuel tax rates, and other fees, over the last six years.   

Federal highway investment received a boost from the FY 2018 appropriations bill—Congress approved $2.5 billion for highway programs in addition to an increase of $930 million approved as part of the core highway program under the 2015 FAST Act law.  The market impact of the General Fund investment from the appropriations bill will depend on how quickly states obligate the funding.   

Nearly $2 billion will be available to states using the same formula as the federal-aid highway program.  But states can take up to four years to obligate this money, unlike the traditional program, where funds must be obligated within the same fiscal year.  The remaining $500 million will be distributed through the federal and tribal lands program and a competitive highway bridge program.  

One wild card in the forecast is the outlook for the reauthorization of the FAST Act and the ability of Congress to find additional revenues to support the Highway Trust Fund.  If states start delaying projects in response to uncertainty over the future of the federal-aid highway program, then it would temper 2019 market growth. 

Overall, highway construction market activity is expected to increase in about half of the states and Washington, D.C.  in 2019.  The market should be steady in another five states, with activity expected to slow down in the remaining 20 states. 

Building Construction

RM. Construction in the commercial and housing markets seemed to be strong again in 2018 in most parts of the country. What are the major drivers of this construction and do you anticipate this level of new construction to be sustained in 2019 in both market segments? What areas of the country expect to see a continued uptick in construction activity?

ABC. While apartment construction remained elevated in 2018, total spending is no longer climbing quickly. Single-family home construction slumped due in large measure to higher mortgage rates. Commercial construction, by contrast, was red hot in a number of segments, including hotels and data centers.

AGC. Spending was very closely balanced in 2018 among residential, private nonresidential and public construction. In addition, the spending increases were widely spread across the nation. All but six states added construction employees between October 2017 and October 2018. In 2019, I expect slightly less growth in public construction, except for airport and K-12 school construction. Private nonresidential categories will be modestly positive, with the strongest categories being pipelines, warehouses and data centers. Residential construction growth will be helped by an increase in multifamily. Most states will continue to add workers--if contractors can find them.

Robert Dietz, SVP & Chief Economist, National Association of Home Builders (NAHB). While the single-family construction market is expected to post a gain for 2018, it will be at a smaller growth rate than we expected at the start of the year. A nearly 100 basis point increase in mortgage interest rates over the course of 2018, combined with the cumulate effect of prior home price increases, has reduced housing affordability to a 10-year low. Our expectation is that mortgage rates will continue to rise alongside gains for the 10-year rate, given a tight labor market and the Fed’s intended policy to continue to tighten monetary policy, albeit at a slower rate than expected a year ago.

For 2019, we expect a small gain for single-family construction, but housing affordability will hold back construction volume going into 2020. For multifamily development, we expect roughly flat conditions with the market leveling off. This level of apartment construction, however, is higher than we estimated last year given the 2018 single-family slowdown.

NAHB expects home construction growth to continue to be concentrated in the West and the South, where job and population gains are strong. This is particularly true for markets in the Mountain state, such as Montana, Idaho, and Utah.

IHS Markit. Commercial construction remained healthy in 2018, led by spending in the warehouse, office and lodging segments. Warehouse spending is expected to slow, but remain above 10 percent, for the year. Office and lodging spending are expected to end 2018 with stronger growth than in the previous year. Tax cuts enacted in 2017 had some benefits to businesses. The outlook for 2019 is for moderate spending growth in the commercial market. Tariffs enacted through 2018 are having some impact and we expect that office and lodging will grow, but at slower rates through the year.

The housing market has been flat through 2018, with an expected growth rate for construction spending of less than one percent for the year, weaker than growth of 8 percent in 2017. Rising mortgage rates and rising prices have made housing less affordable. In addition, costs to build homes are rising, and builders are finding it is more profitable to construct larger homes, which tend to fall outside of many potential homeowner price points. These headwinds will keep the overall housing market flat in 2019.

Areas that are expected to see stronger activity will be in the south and west markets where there is room to build. These are also areas with stronger population growth. (Source: Jeannine Cataldi)


RM. Low unemployment is good for workers, but not so good for employers in need of both skilled and semi-skilled help. In fact, almost everywhere one turns employers cite a labor shortage as a serious issue. Whereas the long-term solution seems to lie in retraining workers and developing more apprenticeship programs, the near-term for employers will likely lead to higher wages, along with more reliance on work visa programs and efficiencies generated by new technologies. Do you see this labor challenge continuing to plague the construction industry in 2019 and, if so, what can businesses do to mitigate its impact?

ABC. Yes, skills shortages will continue to plague contractors in 2019 and likely beyond. Retirement of some of the nation’s most experienced, skilled, and dedicated construction workers will persist for the foreseeable future as will inadequate entry of younger workers. While expanded apprenticeship programs, retraining, and other techniques will help, construction’s skills shortages will likely ultimately be solved by the emergence and diffusion of new technologies, including robotics, drones, 3D printing, artificial intelligence, and modularization.

AGC. Yes, the worker shortage will intensify as more sectors compete for workers. Contractors need to adopt wide variety of approaches to recruit, retain, and substitute for workers.

NAHB. As of October 2018, there were nearly 300,000 open construction sector jobs, a significant increase over a year ago. While the housing market slowdown will ease some of the upward pressure on the count of unfilled construction sector positions, we expect the skilled labor shortage to remain a key supply-side constraint for the construction industry. Solving the industry labor woes will take a concerted effort of builders working through state and local home building and industry associations, alongside national organizations like the Home Builders Institute and the National Housing endowment, in partnership with trade schools and community colleges.

For home building, the labor shortage will also increase the market share of modular and panelized construction, although those market segments in total currently represent less than 4 percent of total single-family construction. Nonetheless, even a small gain in that share will help lift the industry’s labor productivity and help builders build more with less.

IHS Markit. Tight labor market conditions in the construction market will persist in 2019, resulting in yet another year of labor shortages and strong wage growth in the industry. The good news is the construction labor market is responding to demand. The construction industry added 225,000 workers through November compared to 2017. We also expect some demand-side relief as the positive effects of the Tax Cuts and Jobs Act subside. Real nonresidential spending growth will slow from 5.5 percent growth in 2018 to 2.7 percent growth in 2019. Rising interest rates will also weigh on the residential sector; real residential spending will decline 1.1 percent in 2019.

The bad news is the construction industry is in the midst of a demographic transition and is expected to retire 30 percent of its workforce over the next ten years. While demand growth next year is expected to slow and the pipeline of younger workers is improving, the outflow of experienced workers will keep construction labor markets tight, leading to an acceleration in average industry wages from 3.1 percent growth in 2018 to 3.6 percent growth in 2019. (Source: Emily Crowley)

ARTBA. Recruiting, training and retaining workers will continue to be an issue at the local, state and regional level in 2019.  Industry wages for employees on job sites were up 3 percent in 2018, on average.   Longer term, changes in technology will help drive increased productivity to address labor challenges.  

Despite these challenges, half of highway and bridge contractors have significant capacity to increase construction work above current levels, according to the latest results of ARTBA’s quarterly market survey.  Fourteen percent of respondents said they are working at below 75 percent capacity, and another 36 percent are working at 75 to 90 percent capacity and could take on more work.  

 Raw Material Costs

RM. The administration’s trade policies have caused alarm in some quarters, with tariffs already reflecting higher costs of certain raw materials, including steel. If tariffs remain a constant in 2019, what impact will they likely have on the cost of raw materials and what sectors of the construction industry will be most impacted? What other forces may play an instrumental role in raw material costs in 2019?

ABC. There will be many factors shaping construction materials prices in 2019. One of them will be a weakening global economy, which will generally help to suppress further price increases. Indeed, the recent decline in oil prices is at least partially attributable to weaker than anticipated global demand. Moreover, domestic supply has been rising in certain instances in response to tariffs and higher prices. This appears to be the case with steel and softwood lumber. Further, the U.S. dollar is likely to remain strong in 2019, which would tend to further suppress construction material price increases. The implication is that materials prices in 2019 may not rise as rapidly as they did during much of 2018.

AGC. Steel tariffs will affect even more contractors than in 2018, when some were protected by having pre-ordered steel or bought from inventories. Contractors may also find some customers delaying or canceling projects because their production costs have increased or their export markets have dried up.

NAHB. Tariffs on Canadian softwood lumber produced a large amount of price volatility in 2018. During the summer of 2018, higher lumber costs were adding $8,000 per new single-family home. Additional tariffs on steel, aluminum, and other Chinese goods could increase development costs by $1 billion or more dollars in 2019, offsetting some of the benefits of the 2017 tax cuts. Moreover, the higher costs produced by tariffs represent an inflation risk, thus adding pressure to increase interest rates and slow the overall economy. A new U.S.-Canadian softwood lumber agreement is needed, and broader trade issues need to be resolved quickly to allow the economy to grow.

IHS Markit. Construction material costs are rising at levels last seen before the recession. Inputs to construction index tracked by the Bureau of Labor statistics is rising close to 7.5 percent in 2018. This aggregate index includes materials and energy that goes into construction but excludes labor. Therefore, it is a good representation of the topline inflation that builders face with higher raw material prices throughout 2017 and 2018.

Behind this high escalation in 2018 are important drivers such as fabricated steel (10 percent price increase) or refined petroleum products (close to 30 percent price increase). Section 232 tariffs and other trade decisions certainly played an important role in the escalation of prices for raw materials such as steel and aluminum. We expect Section 232 tariffs to stay in place in 2019, however prices for steel and aluminum will be lower compared to 2018. They have already begun to drop.

While part of the strength in pricing in the United States can be explained by tariffs, the other part of the explanation is the strength of the US economy. With fiscal stimulus boosting growth, and solid gains in income, we expect fourth-quarter GDP growth to come in at 2.5 percent, bringing growth over all for 2018 to 3.1 percent. However, for next year, we expect dynamics such as:  slowing global growth, a strong dollar, fading fiscal stimulus, tightening monetary policy, a hesitant stock market, the effects of recent tariffs, and the approach to capacity constraints, which will point to a slowing pace in US growth that will also have a tempering effect on demand and raw material prices. (Source: Deni Koenhemsi)

ARTBA. ARTBA estimates overall highway and bridge project costs, which remained below general inflation between 2013 and 2016, rose 2.7 percent in 2017 and 3.8 percent in 2018, largely due to increased costs for diesel fuel and materials. 

Prices for the materials used in highway construction projects were up an average of 8 percent in 2018.  This increase is largely driven by the cost of diesel fuel and other energy inputs, which were up an average of 26 percent for highway contractors, according to the U.S. Bureau of Labor Statistics (BLS).   Other sectors of the construction industry also saw similar price increases.

According to BLS price data, the average selling price of key highway materials inputs in 2018 were up for asphalt (+6 percent compared to 2017), cement (+2 percent), concrete block and brick (+2 percent), aggregates (+3 percent), ready-mix concrete (+4 percent), iron and steel (+11 percent) and diesel fuel (+36 percent).   

The uncertainty created by the steel and aluminum tariffs enacted in March 2018 will continue to have an impact on the highway construction market.  Steel is an important input for transportation construction—for every $1 spent on highway and bridge construction, 10 cents goes toward steel-related materials. 

It is difficult to isolate the impact of tariffs on the price of steel-related products from other market forces, such as the cost of energy, transportation or input materials.  A 2003 report by the U.S. International Trade Commission (USITC) found that the economic impact of the steel tariffs implemented under the Bush Administration in 2002 on the construction industry was mixed.  While 56 percent of contractors reported spot prices for steel had changed, about 67 percent of construction firms indicated there had not been a change in contract prices.  Of the contractors surveyed, 83 percent indicated there had not been any major contract modifications after the tariffs were implemented.   

BLS price data shows that average annual prices in 2018 for steel manufacturers making more material-intensive products, such as steel bars, tubes, well casings and conduits were up 12 to 14 percent, compared to 2017.  Steel-related products that include more labor inputs, such as bridge expansions joints, structural steel, scaffolding, gratins, railings and highway guardrails were up 6 to 8 percent in 2018 compared to average prices in 2017.

Overall Economic Outlook for 2019.

RM. Is it fair to say that GDP growth in 2018 exceeded expectations? If so, what were the drivers and do you see similar growth for 2019 and beyond?   

ABC. GDP growth in 2018 roughly equaled expectations. Many economists predicted 3 percent growth this year and that appears to be what the economy delivered. Next year will usher forth a period of slower economic growth, with corporate investment softening.

AGC. Expansion will continue in 2019 but the stimulus provided by the 2017 Tax Cut and Jobs Act will fade and tariffs may be more of a drag than in 2018. I have no prediction beyond 2019, but so far see no reason to expect a recession.

NAHB. 2018 GDP growth came in just under 3 percent, where NAHB had forecasted it given the lift provided by tax reform and tax cuts. For 2019, we are calling for a slower growth rate of 2.5 percent and closer to 1 percent for 2020 as higher interest rates slow more than just the housing market. Our modeling shows that the Fed will likely only raise rates twice in 2019, resulting in a pause to evaluate market data.

On the promising side, the housing market will benefit from favorable demographic tailwinds, including the Millennials increasingly moving from rentership to homeownership. In fact, due to this aging, the U.S. has seen nine straight quarters of fairly robust growth of demand on the ownership side of the housing market. Moreover, a near 50-year low for the unemployment rate supports demand for both rental and for-sale housing.

However, a near 100 basis point increase in mortgage rates has had stronger than expected impacts on housing demand this year this summer and fall. This was clearly reflected in the November edition of the NAHB/Wells Fargo Housing Market index, which dropped 8 points to a level of 60 in November – still positive, but it was the lowest reading in two years and the largest drop in four years. Unless income growth accelerates markedly, housing affordability can be expected to decline further in 2019, which will produce a real estate related drag on the economy.

IHS Markit. Our current outlook is for overall 2018 GDP growth to reach 3.1 percent—the best since 2004. Stimulus from the 2017 tax act and 2018 budget acts, still-accommodative monetary policy, healthy consumer balance sheets, firm gains in employment and income, and high levels of both consumer and business confidence will propel the economy through 2019 at a slower, but still above-trend 2.4 percent pace. This will nudge the unemployment rate to a cyclical low of 3.4 percent while “core” inflation edges above 2 percent.

By late 2019 the economic environment will be shifting. Stimulus from recent tax cuts and spending increases will be fading, and a fiscal contraction in 2020 can only be avoided by legislation that may prove a challenge for the new, divided Congress. Tightening monetary policy will have turned restrictive. Global growth, which peaked in 2017, will be slowing even as the dollar remains elevated. The negative impact of recently enacted tariffs will be accumulating, and the demographically driven housing recovery will be cresting. The economy’s ability to grow will be constrained by its proximity to capacity.

A slowdown seems inevitable, and a downturn increasingly likely. To communicate these risks, the forecast shows the economy slowing through trend in 2020 and then entering mild "growth recession" in 2021, making 2018 as good as it gets for now. (Source: US Economics commentary, IHS Markit November 2018)