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Economic Outlook 2014: Count on Growth

The headlines sometimes convey doubt. For example, “Will There Be Enough Workers to Fill 130,600 Construction Jobs in NYC in 2014?” asks a July 2013 article in Real Estate Weekly.

Labor procurement may become a big issue. But right now, who’s fretting about finding workers when there’s money on the table? The GCs out there want bids.

“The interiors market in New York City is looking very optimistic,” says Lee R. Zaretzky, president of Ronsco, Inc., New York, New York. “There has been a significant increase in bidding activity and project starts since the fourth quarter 2012, and it’s being sustained.”

It’s not just New York. Projects are growing in number throughout the United States and among various construction segments. Consider these FMI Corporation forecasts: Multifamily residential put-in-place construction—rising 25 percent in 2014. Single-family residential construction—growing by double-digits through 2017. Office construction—growing 4 percent in 2014, 5 percent in 2015.

“In terms of [the AWCI] membership,” says FMI Managing Director of Research Services’ J. Randall Giggard about drywall and acoustical ceilings companies, “the news is pretty good.”

Billions in Development

“What we’re seeing, and frankly what we’re hoping for, is a slow but steady recovery,” Giggard says. “It’s been a little more stable than what it’s been over the last couple of years and improving at a good projected rate. That’s not a bad thing. From a labor standpoint, we drove 2 million people out of the construction industry. If it picked up too fast, we wouldn’t be able to do the work.”

Yet, construction is picking up steam. In many regions and locales, the pace of building is moving along briskly. The construction industry has queued up some big projects.

Take, for example, what Fortune has labeled “America’s Largest Real Estate Project Ever”—the $20 billion, 26-acre Hudson Yards development on the West Side of Manhattan. Construction began in 2012. Four towers are slated to open in 2015, 2017 and 2018, along with additional office, apartment and retail spaces. Total construction involves 18 million square feet over the next decade.

In Maryland, work has begun on a $3.2 billion facility at Fort Meade. Here, according to Wired, the government is building 14 office structures for the National Security Agency and the U.S. Cyber Command. Wired says Phase II and Phase III of the project are on the drawing board and have a 16-year development timeline. “They would quadruple the footprint to 5.8 million square feet,” the magazine says, “enough for nearly 60 buildings and 40 parking garages, costing $5.2 billion and accommodating 11,000 more cyberwarriors.”

Out West, technology giants, Facebook, Google and Microsoft are all fueling new projects. And in September, demolition began on the first phase of a 36-acre office and apartment project in Bellevue, Wash. The Wall Street Journal reports that the development will become a $2.3 billion district of tech-industry-driven, mid-rise office buildings, stores and apartments.

While total office construction is about half of the levels achieved during the 2000s, construction cranes are visible in many cityscapes. The Journal reports “speculative towers without pre-leasing are under way in San Francisco, and expanding oil and gas companies have led to a flurry of development in Dallas and Houston.”

Even condo construction is coming back. “If you want to talk about the multifamily condo market,” Giggard says, “it’s just going crazy again in New York, Miami and San Francisco.”

Of course, these examples characterize only pockets of work. Is a true broad-based recovery under way? Can construction firms put worry behind them? Is the government a factor or not?

Consider some leading economic indicators.

The Business Cycle: Modest Improvement

The Conference Board Leading Economic Index for the United States, a composite measure of economic activity, increased consecutively each month from March to August, the last month available for publication (see the “Business Cycle” chart below).

“The latest reading points to more pep in the pace of economic activity in the near term,” said Ken Goldstein, economist at The Conference Board, in a prepared statement. “One unknown is how resilient confidence will remain, both consumer and business, given the mixed signals from the housing and labor markets.”

Other economists share the view of a gradual strengthening of economic growth.

“The Fed is looking at GDP forecasts for 2013 that are down a bit from where they were, but they’re still looking at 2014 in the 3 percent range,” says Dr. Martin A. Regalia, senior vice president for economic and tax policy and chief economist at the United States Chamber of Commerce. “We see a modest improvement in growth occurring into the early part of next year that might push the GDP growth, maybe not in excess of 3 percent, but closer to 2.8 percent.”

New construction starts in September advanced 13 percent to a seasonally adjusted annual rate of $556.0 billion, according to McGraw Hill Construction, a division of McGraw Hill Financial. Nonresidential building bounced back after losing momentum in August. For the first nine months of 2013, total construction starts on an unadjusted basis were reported at $379.3 billion, up 2 percent from the same period a year ago. If electric utilities are excluded from the year-to-date statistics, total construction starts in the first nine months of 2013 would be up 11 percent, McGraw Hill Construction says.

The Dodge Momentum Index, a monthly measure of the first reports of planned nonresidential building projects, advanced 2.9 percent in September to 118.3, according to McGraw Hill Construction (see the “Momentum Index” chart at right). The Momentum Index often leads construction spending for nonresidential buildings by a full year.

Drywall firms, too, have decent numbers to tout.

“We’re expecting a 50 percent revenue increase in 2013 from 2008 levels,” Zaretzky says. “Margins continue to be low, and we’re seeing a slow improvement due to increased activity—fewer bidders on projects and projects being awarded sooner after bid date, which eliminates the predatory ‘bid fishing’ and ‘number selling’ that GCs have been perfecting during this downturn.”

Inflation: Nothing Alarming

The seasonally adjusted Consumer Price Index for All Urban Consumers (see the “Inflation” chart at right), the broadest measure covering 88 percent of the total population in the United States, rose 0.1 percent in August, the latest available report from the government at press time. Year over year, the index increased 1.5 percent before seasonal adjustment.

“There’s nothing really there,” Regalia says. “The recent inflation numbers are extremely benign.”

What about inflation at the producer level? The Producer Price Index for finished goods rose only 0.3 percent in August, seasonally adjusted, and was up 1.4 percent for the 12 months that ended in August, according to the U.S. Bureau of Labor Statistics.

“We’re seeing a little bit [of produce price inflation],” Regalia says. “But, producer price inflation is a funny thing. When demand is very, very weak, it’s hard to pass through price pressure.”

Giggard agrees. He says material cost increases “have not been alarming.”

The construction-weighted PPI—a weighted average of the selling price of all materials used in construction plus diesel fuel—climbed 1.4 percent year over year in August, according to the government. Still, August was the 16th consecutive month in which the year-over-year change in the index was 2 percent or less.

Government data also show that only three categories of construction materials have recorded PPI increases of more than 5 percent in the last 12 months: gypsum products (14 percent), lumber and plywood (9 percent) and prepared asphalt and tar roofing (5.4 percent).

Could material costs spike anytime soon? It certainly is possible, but economists say it is unlikely.

“The economy isn’t being driven that hard,” Regalia says. “When you don’t drive it hard, potential [producer] bottlenecks and backlogs never manifest themselves. So, I wouldn’t expect much producer price inflation with the demand improvement being as tepid as it is. There is an upside to a slow-growing economy. It doesn’t stress itself.”

Unemployment: Lowest Level in Years

The U.S. Bureau of Labor Statistics reported that September 2013 total non-farm payroll employment rose by 148,000 in September, and the unemployment rate was little changed at 7.2 percent. Employment in construction rose by 20,000 in September after showing little change over the prior six months, the government said. Construction unemployment was 8.5 percent in September.

Still, the Associated General Contractors of America believes hat workers are leaving the industry. The August report showed construction employment stagnating when construction unemployment hit its lowest level in five years.

“Over the past three years, the number of unemployed, experienced construction workers has dropped by half,” says Ken Simonson, AGC’s chief economist. “Unfortunately, the construction industry has been able to hire only about a third of those workers.”

AGC polled nearly 700 construction firms during July and August. In the survey, 86 percent of respondents said it will remain difficult or get harder to find qualified craft workers, and 74 percent said there are not enough qualified craft workers available to meet future demand.

AGC officials believe the potential labor shortfall is worrisome (see the “Construction Worker Shortages” chart below). It’s widespread, they say, and comes on the cusp of the current high demand for workers. The association has urged elected officials in Washington to support construction education and training programs and treat construction equitably in guest-worker provisions of immigration reform legislation.

“Labor shortages have been cropping up, especially for skilled labor,” says Bernard Markstein, U.S. chief economist for Reed Construction Data. ”Unskilled labor is less of a problem, since anyone can move into construction and learn to do the work. Skilled labor is more of a concern. It will have to be in the economic interest of builders to train workers, and the wages and salaries will have to be high enough to attract workers to the sector.”

Markstein agrees that the construction recession forced many skilled workers to seek jobs elsewhere. “Solving the skilled labor supply shortage will partially depend on our immigration policy,” he says, “at least in the short run.”

As for wages and benefits, the nation’s private industry employers in June spent an average of $29.11 per hour worked for employee compensation, according to U.S. Bureau of Labor Statistics’ “Employer Costs for Employee Compensation” report. Construction wages and salaries totaled $23.86 in June, and benefits for construction employees came in at $10.52 per hour work. Those figures have been climbing in recent years.

Lending: Rates Still Low

Economists say the financial system has weathered the storm that began in 2008. Regalia, for example, notes that large banks survived, improved their internal lending controls and cut back on speculative investments. While lending remains tight, the backdrop looks well staged to accommodate growth in mortgages and commercial lending.

“Financing is getting a little bit better,” Regalia says, speaking particularly of both consumer mortgages and commercial lending. “Rates are still relatively low. Demand is out there and is growing a bit.”

In September, the Federal Reserve announced that it would continue buying $85 billion in bonds each month in an effort to lower long-term interest rates, particularly on mortgages. At press time, the Fed plans to keep that strategy in place.

Besides Fed decisions, September and October saw other economic policy twists as President Barack Obama and Democrats squared off with congressional Republicans over forced decisions on how to fund the government in its new fiscal year and whether or not to raise the federal borrowing limit.

“A government shutdown, and perhaps even more so a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy,” said Fed Chairman Ben Bernanke in a press conference following the Fed’s September policy meeting. “The Federal Reserve’s policy is to do whatever we can to keep the economy on course.”

At press time, the investment markets remained nervous about the government’s actions. At least Fed officials had voted to keep short-term interest rates near zero, and most Fed officials, The Wall Street Journal noted, “indicated in their latest economic projections they expect to make the first rate increase in 2015 or later.”

Construction Put in Place: Continued Growth

New-home construction picked up in 2013. The National Association of Home Builders estimates that the pace of construction of multifamily units was an additional 255,000 to 270,000, bringing the anticipated pace of total housing starts in September to between 875,000 and 900,000 units (see the “Construction Put in Place” chart below).

But, builder confidence in the market for newly built, single-family homes fell to a level of 55 on the National Association of Home Builders/Wells Fargo Housing Market Index. Even so, a score over 50, the NAHB says, indicates that more builders view conditions as good than poor.

“We are still seeing signs of pent-up demand in many markets across the country,” said NAHB Chairman Rick Judson, a home builder from Charlotte, N.C. “This slight dip in builder sentiment is the result of continuing challenges in the marketplace with regard to the cost and availability of labor and lots and uncertainty in Washington.”

Giggard forecasts single-family residential construction, put in place, increasing by 28 percent for 2013, although he expects the rate of growth to slow in 2014.

In non-residential building construction, FMI forecasts lodging construction put in place to grow 15 percent in 2013 and 9 percent in 2014. Transportation, which includes airport terminals, will be up 8 percent in 2013 and 7 percent in 2014, FMI says. Commercial construction, which includes restaurants and retail shopping structures, is expected to grow by 2 percent in 2013, 5 percent in 2014 and 8 percent in 2015, according to FMI.

“This year, lodging and transportation are doing very well,” Giggard says. “Next year, most of the non-residential segments are going to start picking up.”

He adds: “Think about New York, San Francisco and Southern California. Some of the markets that got hit the hardest have started to rebound well—Phoenix and Las Vegas, for example.”

Of course, each segment forecast has its own story. Efforts to control health-care spending, for example, have curbed hospital construction, Giggard says. A reluctance to raise taxes is keeping a lid on spending for infrastructure, schools and other public buildings, he notes. One bright spot expected to continue: the energy sector. “It has shown a robust need for projects in recent years, driven by expanded drilling for natural gas and oil as well as the construction of wind turbines,” Giggard says.

“[Walls and ceilings] will benefit from the continued recovery of residential construction,” says Reed Construction Data’s Markstein. “Other areas that will do well are office construction and retail construction. In about a year, look for more opportunities in health care construction. In about two to three years, education construction should turn around.”

Moderate Growth Despite Storm Clouds

Five years after the financial crisis of 2008, the housing market is recovering, unemployment is down and the biggest problem affecting future building may be finding qualified workers. A happy problem, if you will.

“We’re seeing slow, steady, protracted improvement,” Giggard says. “If you look at past recoveries, you would see a drop-off and within two to three years, we’d be back. In this case, we think it will be 2017 or 2018 before we get back to the kind of peaks we had in 2008.”

Yes, reading the tea leaves isn’t so easy this time around.

“In almost 20 years of writing about the U.S. economy, I’ve rarely seen [the economy] send such confusing signals,” says John Cassidy, a Fortune contributor and New Yorker staff writer. “No wonder Ben Bernanke and his colleagues at the Fed seem a bit confused about what to do.”

U.S. economic recoveries, Regalia says, are normally more dynamic. He says they usually generate a net gain of between 2.5 million to 3 million jobs. This recovery, he says, is averaging only 2 million new jobs, and it is doing so at a very slow rate of growth in jobs.

“It’s one of the weakest [recoveries], if not the weakest, on record. It’s pathetic,” Regalia says. “We’ve averaged 2.2 percent growth over four years. It’s not strong enough to re-employ people. It’s not generating a big job churn.”

What about the future? The potential for war in the Middle East and interest rates rising faster than expectations could turn the economy for the worse. The October government shutdown and debt ceiling impasse sure was troubling and may have taken some steam out of the economy.

“Unless there’s a long-term, grand resolution, business will be reluctant to invest and will do the bare minimum,” Markstein says. “It’s bad for construction and bad for the U.S. economy.”

Says Giggard: “There are real storm clouds with the potential to cause problems, but we think we’re going to be looking at 5, 6, 7 percent growth in construction [put in place] for the next several years.”

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

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