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2013 Nonresidential Construction Recovery Slows Down
As the economy continues to expand, next year is looking brighter
By Kermit Baker, Hon. AIA
AIA Chief Economist
Nonresidential construction activity has gotten off to a slow start this year. Overall spending in the nonresidential sector barely budged between January and May, once seasonal adjustments are made. There have been declines in key building types over this period, including manufacturing facilities (down 7.4 percent), offices (4.7 percent), amusement and recreation (3.9 percent), and education (3.4 percent).
On the positive side, spending on lodging facilities is expanding rapidly (up almost 20 percent between January and May), with more modest growth in public safety facilities and transportation. Other major building sectors—retail, healthcare, and religious—haven’t moved much in either direction since the beginning of the year.
As a result, members of the AIA’s Consensus Construction Forecast Panel have on average lowered their projections for growth in construction spending for 2013. As of last December, overall gains were projected at 5.0 percent for 2013 and 7.2 percent for 2014. With the current report, 2013 consensus forecasts were lowered to a 2.3 percent increase, with next year’s predictions raised a modest 7.6 percent. Commercial construction forecasts for 2013 were largely unchanged from those at the beginning of the year, while institutional building forecasts have been marked down on average from a 1.2 percent gain as of December to a 1.8 percent decrease at present.
The AIA’s Architecture Billings index points to a stronger second half of the year for building construction, with strength continuing into 2014. Through midyear, the ABI had shown growth in design activity for 10 of the past 11 months, with strong growth in inquiries for new project activity over the past several months. With design activity leading construction activity by an average of nine to 12 months, the recent growth in design billings points to healthy gains in future construction levels.
Billings at commercial/industrial firms have begun to accelerate recently after a soft spot in late winter. Billings at institutional firms have increased every month for the past 11 months, a very encouraging sign for construction in these categories. Even multifamily construction, which is not covered in the AIA Consensus Construction Forecast, looks to see more gains given the strong numbers in the ABI for residential firms.
Housing, energy, employment helping economy
The recovery of the U.S. economy continues to disappoint. Economic growth as measured by gross domestic product has averaged about 2.2 percent per year since the economy emerged from the Great Recession in mid-2009. The economy hasn’t seen annual GDP growth exceed 3 percent since 2005. And with GDP growth for the first quarter coming in at just 1.8 percent (when seasonally adjusted and annualized), 2013 doesn’t look a lot better.
However, several factors should push up growth in excess of 2.5 percent for the second half of this year and keep it in that range for most of 2014. Near the top of the list of favorable trends is the recent increase in domestic energy production. Hydraulic fracturing (fracking) remains extremely controversial, but has produced dramatic changes in the domestic natural gas and oil outlook. A 2012 report from the International Energy Agency predicts that the U.S. will become the largest global oil producer by around 2020, become self-sufficient in net energy later that decade, and evolve into net oil exporter by 2030.
Greater energy availability is expected to stabilize production costs and provide a boost to the manufacturing sector. U.S. manufacturers can then become more competitive internationally, and the manufacturing job flow to less developed countries may begin to reverse, bringing some of these jobs back to the United States. Less well-studied is the likely impact of this development on domestic energy efficiency investments, the development of alternative energy sources, and ultimately, the level of greenhouse gas emissions both domestically and internationally.
Additionally, the housing recovery is helping boost the broader economy. Housing starts nationally increased 28 percent in 2012 and are expected to grow at a similar pace this year. This turnaround means that homebuilding went from being a major drag on economic growth for six straight years to accounting for nearly 15 percent of the growth in the economy last year. This sector is likely to make a similar contribution to growth this year.
Finally, the employment situation is gradually beginning to improve. There has been reasonably healthy job growth each month this year, with the net addition of over 1.2 million payroll positions through the first six months of 2013. If this pace continues, 2013 will be the best year for job growth since 2005. Employment gains, coupled with a healthy upturn in the stock market, have helped improve the outlook for both consumers and businesses. Consumer sentiment and business confidence scores are both at post-recession highs, and should encourage a return to more normal spending and investments levels.
But the economy is not without its challenges. International economic conditions continue to be a concern, as many European economies are still struggling, and the prospects for other countries have deteriorated in recent months. A recent World Economic Outlook report issued by the International Monetary Fund reflected a lower forecast for international growth: 0.2 percentage points below its April projections for both 2013 and 2014. Currently, world output is projected to grow by 3.1 percent in 2013 (the same pace of growth as in 2012) and 3.8 percent in 2014.
The implementation of the federal government budget sequester also is having a dampening effect on the economy. The Congressional Budget Office estimates that the sequester will shave nearly half a percentage point from U.S. economic growth this year. About half of the burden of the sequester (or $42 billion) is falling on the Department of Defense. These cuts fall unequally across the country. For example, more than 10 percent of the state GDP for Kansas comes from the defense industry, with almost the same level of exposure in Washington State. Arizona and Connecticut also rely heavily on defense spending, with 6 percent of those states’ economies coming from this sector.
Nonresidential construction still growing slowly
Overall, this year is shaping up as a bit of a pause in the broader pattern of the construction recovery. Spending on the construction of nonresidential buildings increased almost 6 percent last year, and the consensus panel sees that growth rate getting cut in half for 2013. Next year is expected to produce another acceleration in spending growth, with construction spending gains in excess of 7 percent.
The commercial/industrial sector is projected to continue to lead the upturn. After increasing by almost 8 percent last year, spending is expected to match that pace of growth this year. In 2014, the forecast panel predicts activity accelerating in the low double-digit range. The hotel sector, decimated during the downturn, is projected to pace this growth, with a 15 percent increase in 2014 forecast on top of a 17 percent gain this year. The larger office and retail construction sectors are projected to see strong, but less robust, growth than the hotel sector in 2014, on top of generally healthy gains this year. Construction spending for manufacturing facilities saw growth approaching 20 percent last year, but much more modest gains are projected for this year and next.
Spending on institutional facilities has been the stumbling block for a full-blown nonresidential building construction recovery. However, the recent gains in the institutional component of the ABI hold out the promise of improvement in this sector. Spending last year was essentially flat, and this year should see more of the same. Next year, the forecast panel is finally expecting some improvement. The sharpest gains are expected in the healthcare sector, with spending projected to increase almost 8 percent. Much of these anticipated gains are likely the result of the ongoing implementation of the Affordable Care Act and the increased coverage provided under that program.
The largest nonresidential building sector is education facilities. With fiscal problems facing state and local governments, and fairly weak demographic growth in the student population, spending on education facilities was essentially flat last year. Conditions are not expected to improve this year, with spending projected to take a modest decline. Next year, as employment picks up and pushes up tax revenue for municipal governments, spending on education facilities is expected to increase by almost 5 percent. The other major institutional sectors—religious, public safety, and amusement/recreation—also are expected to see reasonably healthy gains next year.