Outlook 2017: Moderate Growth

The Construction Economy Has Entered a Mature Phase of Its Expansion

Mark L. Johnson / December 2016

The original title of this article—“The Economy: What’s in the Cards?”—got us thinking.

Who can accurately interpret the cards—or tea leaves or crystal balls—associated with the world’s economies? Most economists tend to hedge their forecasts, The Economist says. If GDP has been 2 percent for the past year, then many will forecast 2 percent-ish for the next. No economist wants to forecast sudden changes like a recession.

“There’s no incentive to forecast a recession,” says The Economist. “If you’re wrong, you'll be fired. And if you're right, no one will thank you.”

Don’t worry. This article forecasts growth in 2017—though slower growth.

“The construction industry continues to plod along undeterred at a growth rate of 6 percent,” said Randy Giggard, manager of marketing information at FMI Corp., in a prepared statement. “The prudent among us will keep watch for signs of the next recession. But at this time, it seems most likely that the industry will continue to expand for at least another 18 months.”

So, no recession for 2017. No sudden changes. No forecasters getting fired.

What’s in the Cards?
According to the United States Census Bureau, the total value of construction put in place, at a seasonally adjusted annual rate, was $1.142 trillion in August. Combined year-to-date spending through August was 4.9 percent higher in 2016 than in the same months of 2015.

“While demand for construction remains robust, it is no longer growing like it was earlier this year,” says Ken Simonson, chief economist at Associated General Contractors of America.

Here are some indicators:

The business cycle. The Conference Board Leading Economic Index for the United States, a composite measure of economic activity, increased in September and has been trending upward since the beginning of the year.

“[The LEI] suggests that the economy should continue expanding at a moderate pace through early 2017,” says Ataman Ozyildirim, director of business cycles and growth research at The Conference Board.

Gross domestic product. The GDP outlook appears to be steady. The Wall Street Journal’s monthly survey of more than 60 economists shows average GDP estimates for the first quarter of 2017 and the second quarter 2017 at 2.17 and 2.26 respectively. Reuters reported that this level of GDP could alleviate federal policymakers’ concerns that the U.S. economy might be vulnerable to weakness abroad.

Construction momentum. The Dodge Momentum Index, a monthly measure of the first reports of planned non-residential building projects and an indicator of future construction spending, fell 4.3 percent in September. However, the rising momentum index trend line signals to wall and ceiling contractors that developers plan to move forward with projects despite economic and political uncertainties, Dodge Data & Analytics says.

Interest Rates. Interst rates remain relatively low for borrowers building homes and commercial projects. However, the Federal Reserve has been looking to raise interest rates to nix the possibility of a jump in inflation from the slowly expanding U.S. labor market, FMI says.

Inflation. There’s little sign of consumer prices rising, and oil and energy prices remain low, FMI reports. Simonson, however, believes prices for materials may tick upward in 2017 (though gypsum board prices are already up).

Consumer spending. Consumer spending comprises two-thirds of U.S. economic activity, Reuters reports, and it rose at 4.3 percent annual rate in the second quarter. Kiplinger forecasts retail and food services sales (excluding gasoline) rising 3.4 percent in 2017, bolstered by moderate wage gains.

“America’s consumer-led recovery continues to produce enough jobs to sustain itself,” says Associated Builders and Contractors Chief Economist Anirban Basu.

Employment. More people have jobs and are spending money, FMI says. The corollary here is that low unemployment translates into higher wages and difficulties in finding workers. “The U.S. economy remains on a moderate growth path with tight labor market conditions,” says The Conference Board. Fortune magazine says that the next president will need to focus on worker skills training to further economic growth.

What do these indicators portend for wall and ceiling contractors?

“The slow growth in certain sectors will continue as material prices hold steady, praying nothing unexpected happens to cause radical changes in our hemisphere,” says John Hinson, division president of the Dallas/Ft. Worth office of the Marek construction company in Coppell, Texas.

Industry Soothsayers
Here are the forecasts from a few leading construction organizations:

FMI. The construction consulting firm’s forecast for 2017 shows total put in place non-residential construction growing 4.4 percent to $488.5 billion, and total put in place residential construction growing 3.6 percent to $480.7 billion.

AGC. According to AGC’s “Construction Spending, Labor & Materials Outlook,” construction spending will grow 2 to 7 percent in 2017.

Dodge. Dodge Data & Analytics’ “2017 Dodge Construction Outlook” sees total new construction starts in 2017 increasing 5 percent to $713 billion. Dodge predicts moderate growth for single-family housing, commercial and institutional building and public works.

AIA. The American Institute of Architects’ semi-annual Consensus Construction Forecast projects overall spending in non-residential construction increasing 6.7 percent in 2017.

But, some parts of the country may see more vigorous growth next year.

“[The New York City area] outlook for 2017 is robust with World Trade Center and Hudson Yards sites in full swing,” says Lee R. Zaretzky, president of Ronsco, Inc. New York, N.Y. “One Vanderbilt just broke ground, and the [Jacob J.] Javits Convention Center [expansion] and The New Penn Station are underway.”

Sector Forecasts
Here are some forecasts by construction segment.
 
Educational. “Bond issues should boost funding in some districts,” Simonson says. But, he notes that enrollment nationally in pre-kindergarten through high school is flat. Also, he believes colleges and universities will need fewer classrooms and dormitories as their enrollments trend downward and as more students opt for apartment rentals in lieu of dormitory rooms. FMI forecasts the education segment to grow 4.7 percent from $86.4 to $90.5 billion in 2017. AIA sees 6.6 percent growth in education facilities next year.

Commercial. “Disruption in traditional commercial construction is occurring not only for online shopping but also in the form of boutique startups,” FMI says.

E-commerce is prompting the need for more distribution centers, AGC says. FMI forecasts the commercial segment, which includes, retailing, warehousing and data centers, to grow 4.0 percent from $70.8 to $73.6 billion in 2017. AIA forecasts 7.5 percent growth in 2017.

Office. AGC sees office space growing mainly in cities rather than in suburban office parks. Office construction, Simonson says, shows 2017 growth in the 5 to 10 percent range, but it’s trending toward a saturation point.

“Employment sets records each month,” Simonson says, “but office space per employee keeps shrinking.”

FMI forecasts the office segment to rise 4.8 percent from $63.9 to $67.0 billion in 2017. AIA forecasts 8.8 percent growth in office space next year.

Health care. Health care construction will grow in 2017 by building smaller facilities. Hospitals face more competition, Simonson says, from stand-alone urgent care facilities and outpatient clinics. AGC sees 2017 growth of 3 to 8 percent for health care. FMI sees health care growing by 5.0 percent in 2017—from $41.0 to $43.1 billion. AIA predicts a 2017 increase of 6.9 percent in health care construction.

Lodging. STR’s September 2016 Pipeline Report shows 549,142 rooms in 4,510 projects under contract in the United States—a 24.4 percent increase from 12 months prior. But, this level of lodging construction is likely to drop in 2017 as revenue per available room begins to slow. FMI projects lodging to grow 5.3 percent from $25.6 to $27.0 billion in 2017. More optimistically, AIA forecasts 7.8 percent growth in hotels next year.

Residential. The National Association of Home Builders/Wells Fargo Housing Market Index is trending upward, though September’s figure was down. HMI, based on a monthly survey of NAHB members on single-family housing, rates market conditions for the sale of new homes and the traffic of prospective buyers of new homes.

AGC forecasts single-family residential construction to grow 6 to 11 percent and multifamily residential construction to grow 5 to 10 percent in 2017. FMI projects total residential construction, both single-family and multifamily, to grow 3.6 percent from $463.9 to $480.7 billion in 2017.

Employment Surpasses 2008
Construction employment in September, AGC says, reached 6,669,000—the highest level since December 2008. And, construction unemployment has dropped to 5.2 percent.
 
That’s good news, but it comes with a cost. Construction industry employment through September increased twice as fast at 3.4 percent for the prior 12 months as the 1.7 percent increase for total U.S. non-farm payroll employment.

As the available supply of workers continues to shrink, average hourly earnings, a measure of wages and salaries for all workers, increased 2.8 percent in construction over the past year to $28.30 in September. And, of course, the shortage of skilled workers has grown worse.

“Demand for construction remains quite strong,” Simonson says, “but contractors continue to struggle to find qualified workers.”

Most states and cities saw construction jobs growth in 2016.

Construction employment in 36 states was up year-to-year through August. One state, Nebraska, had no change in construction employment during that period. The District of Columbia and 13 states—Alabama, Alaska, Arkansas, Connecticut, Illinois, Kansas, Kentucky, Maine, Montana, New Mexico, North Dakota, West Virginia, Wyoming—saw decreases in construction employment during the 12 months through August.

Similarly, construction employment was up in 220 of 358 metropolitan areas year-to-year through August. Construction employment was the same in 62 metro areas and down in 76 metro areas during the period.

Recession Unlikely in 2017
The International Monetary Fund recently trimmed its growth forecast for the world’s major economies for 2017, Fortune reports. The updated IMF forecast was a signal, Fortune notes, that “all countries could be at risk of slipping into a recession.”

However, U.S. construction executives seem undaunted in the face of such dire concerns. FMI asked its Nonresidential Construction Index panelists for their opinion about when they think the next recession in construction will begin. Overall, 78 percent said they don’t expect a recession to occur until the first half of 2018.

While panelists see less money going around next year, for many it’s a sense of relief. FMI says a few contractors participating in its NRCI survey said slower growth wouldn’t be so bad. Many construction companies have been working either at capacity or above it for some time, FMI says.

So, the cards look good for 2017. And one card, the recession card, is unlikely to be dealt. It’s been a long road coming out of the Great Recession. Is the construction economy finally on firm ground?

“I wouldn’t say it’s resting on firm ground. I’d say its shifting ground,” Simonson says. “But, it does look like there’s a lot of work ahead.”

Mark L. Johnson is an industry writer and marketing communications consultant.