Manufacturers try to keep from stepping on the cracks as the recession recovery continues.
By Ken Simonson | Chief Economist, Associated General Contractors of America
Construction was the first industry to fall into recession and the last to emerge from it. The industry finally seems to be recovering, but there are still plenty of risks that could cut short the revival.
Census data released Dec. 3 show that construction spending in October rose for the seventh month in a row and achieved the highest level since September 2009. Total spending of $872 billion at a seasonally adjusted rate1 was up 17% from the low-water mark recorded in February 2011.
But the recovery remains very incomplete and uneven. The October total was 28% below the all-time peak in spending set seven years earlier, in March 2006. In inflation-adjusted terms, the gap was even greater. And, while private residential and nonresidential spending both reached multi-year highs, public spending has been edging lower on a year-over-year basis since early 2011.
One puzzle about the construction recovery is that it has yet to show up in hiring. Throughout the economy, output has grown much faster than employment. Nevertheless, private nonfarm payroll employment, which shrank by 8.9 million from January 2008 to February 2010, had recouped by 5.1 million jobs as of November 2012. Not so with construction: The industry shed 2.3 million jobs between April 2006 – nearly two years before overall private employment topped out – and January 2011, a year after private-sector hiring resumed. By November 2012, the industry had regained only 58,000 lost jobs.
The construction recovery is unbalanced in terms of geography as well as segments. Only 19 states and the District of Columbia had more construction employees in November 2012 than they had a year earlier, while 30 states had fewer. (Employment was unchanged in Michigan.) The one-year employment change ranged from an 8% rise in Hawaii to a 9% drop in Delaware. Throughout 2012, a few states have consistently added construction jobs – North Dakota, Texas, Indiana and, more recently, Arizona – while Florida, Georgia and Nevada, among others, have continued to lose jobs compared with year-earlier levels. But most states have fluctuated between gains and losses.
Encouraging new for contractors
Despite this very mixed record of growth, there is reason to believe 2013 will hold more optimism for contractors. First, the “shale gale” continues to spread. While the wells are considered mining, not construction, each site requires an access road, site preparation, storage facilities, pumping and processing equipment, and connections to pipelines.
Nearby communities benefit from spending by the drilling companies, their workers and landowners-turned-royalty holders. Orders flow upstream for fracking sand, pipe and machinery. The biggest impact is downstream, in the form of additional interstate pipelines, ethane crackers and petrochemical plants, liquefaction trains and export terminals, gas-fired power and steel plants, and natural gas fueling stations for trucks. All of these categories of construction should mushroom in 2013, and in a wide variety of states. For instance, Industrial Info Resources reported Dec. 14, “There are roughly $10.5 billion of infrastructure investments that are linked to further development of the Eagle Ford” shale formation in south Texas.
Second, there are multiple changes occurring in the U.S. supply chain. One of the biggest changes is actually far offshore: the widening of the Panama Canal, which in two years or less will allow passage of giant “post-Panamax” containerships capable of carrying 15,000 containers, more than triple the current maximum. East and Gulf Coast ports are dredging, raising bridge and tunnel heights, lengthening piers and wharves, and expanding storage yards. On Dec. 20, Gov. Bob McDonnell of Virginia announced his state would build a multibillion-dollar toll road to speed freight from the port of Norfolk to inland connections. Rail lines, trucking companies and warehouses on all coasts (including West Coast ports that seek to remain competitive) and along routes far inland are investing in private facilities to shorten delivery times.
Other developments as well are driving supply chain-related construction. Manufacturers are bringing plants back to the United States as labor and energy costs become more competitive. Also, more firms are seeking domestic sources of supply following interruptions in shipments caused by the volcanic eruption in Iceland in 2010, the 2011 earthquake and tsunami in Japan, and floods in Thailand. New warehouses are going up to provide faster service to customers switching from in-store to online purchases. Data centers remain a hot construction market as all types of businesses strive to process information and serve customers more quickly. Again, these developments are stimulating construction in many locations and niches.
Third, multifamily construction appears sure to keep going strong in 2013. Rising employment is enabling more first-time or returning job holders to strike out on their own, but many are unable to qualify for a mortgage or unwilling to tie themselves to a house they may not be able to sell when they want to move. And a growing number of young adults are foregoing car ownership to live near transit, bike and short-term car rental options. Such locations are largely multifamily. Meanwhile, a growing number of seniors are likely to want to move from maintenance-intensive single-family homes into multifamily housing.
Recovery question marks
What segments will lag in 2013? Office, retail and public construction appear to have the poorest chances of posting significant improvement. Despite almost three years of steady gains in employment, the private sector still has nearly four million fewer jobs than in 2008. Firms are taking up as much as 30% less office space per employee than they did five years ago as they use more temps and teleworkers, and ditch their computer and filing rooms for the “cloud.” The shift of consumers to online purchasing has left retailers closing more stores than they open.
As for the various levels of government, the federal government seems headed for years of declining employment and spending on facilities. State governments have had rising tax revenues but have had to spend more on Medicaid and other income support programs and on public employee retirement and health plans, leaving little for new construction. Local governments and school districts that depend on property tax receipts are still experiencing shrinking budgets, as the recent upturn in home prices will take a couple of years to show up in assessments.
Two big mysteries for 2013 are single-family housing and hospital construction. While homebuilding has clearly moved off its low point, it is not clear that further increases lie ahead. Hospital construction has remained in the doldrums even though private university construction, which similarly relies in part on private donations and endowments, has resumed double-digit growth. It may take more time to sort out the impact of the Affordable Care Act on demand and funding for hospitals.
Contractors should have better luck in ’13 on materials costs. The producer price index for inputs to construction – a weighted average of the cost of all materials plus items consumed by contractors, such as diesel fuel – rose sharply at the beginning of 2012 but was tame in the second half of the year. Diesel fuel prices hit a four-year high in October but ended the year close to late-2011 levels. Cement and concrete prices were well-behaved all year, and steel prices were actually lower in most of 2012 than in the same months of 2011. With spotty growth in the U.S. economy, recession in much of Europe and a slowdown in China, 2013 should start out with continuing moderation in most materials costs.
The fate of many contractors and other businesses also will depend on how Congress and the White House resolve their differences over expiring tax provisions, spending programs and the debt ceiling. As always, economic, political and military developments in other parts of the world can have major implications for U.S. growth rates and materials costs. In short, ’13 will be a lucky year for many contractors but holds an uncertain fate for others.
Ken Simonson has been the chief economist of the Associated General Contractors of America, the leading trade association for the construction industry, since 2001. He is also the 2012-2013 president of the National Association for Business Economics, the professional organization for individuals who use economics in their work. He has 40 years of experience analyzing, advocating and communicating about economic and tax issues.
1 Seasonal adjustment is a statistical method to remove variation due to normal weather and holiday patterns. Annual rate means a monthly total is multiplied by 12 to allow ready comparison to full-year figures.
Precast Forecast 2013
Slow growth with signs of better times ahead.
By Robert Whitmore
Every recession brings a shake-out. Companies that are poorly managed, or are on the fringes of the industry, go out of business. Viable companies that can’t hang on through extended downturns are sold off to bigger companies. The culling of the herd results in an industry that is leaner and better managed when the dust settles and the market again turns upward. While it looks like the construction industry may have made the turn, 2013 looks like a year in which the precast sector is headed in the right direction but still in transition.
While most construction economists predict growth in the 4 to 6% range this year, NPCA is forecasting more tepid growth in the precast sector. The precast industry should gain about 2% in 2013, to about $15.4 billion in precast sales and $17.5 billion in total volume, which includes resale items.
“The indicators for precast are mostly positive, but the key sectors where precast is heavily invested are expected to remain flat in 2013,” said Ty E. Gable, NPCA president. Public works, a key sector for the precast industry that includes highways, bridges, environmental and other infrastructure work is expected to shrink by 1% in 2013 after a decline of 10% in 2012, according to the 2013 Dodge Construction Outlook. The passage of the MAP-21 (Moving Ahead for Progress in the 21st Century) transportation bill provided some stability in funding but no increases. The utility sector, which includes precast concrete utility vaults, utility buildings and other products that protect electrical equipment and other infrastructure, is expected to decline in 2013 after a record year in 2012.
“It’s really a mixed bag for the precast sector,” Gable said. “If your area of the country is coming back from the recession, chances are you’ll do pretty well this year. If your region has been a little slower to rebound, you may have another flat year.”
Another reason for the conservative estimate for the precast sector is the uncertainty that continues to keep private money on the sidelines and government projects on hold. Congress averted the fiscal cliff at the start of the year. But now the country is facing the specter of automatic across-the-board government spending cuts known as sequestration. It is unclear how sequestration would impact government-funded – and especially military – construction, but it likely means less available work for precasters who supply to the government and the Corps of Engineers.
Even with the paralysis in Washington, D.C., and the slow response of the private sector, Gable remains optimistic for the precast sector in the coming years. The 2012-2013 rebound of single-family housing will positively impact most of the other sectors in the coming years, leading to solid growth in the precast sector in 2014 and beyond. “There is still a tremendous amount of opportunity out there,” he said. “Concrete is the most versatile, longest-lasting, most economical building material in the history of the world, and the precast sector is well-positioned for the post-recession era of construction,” Gable said. “Project owners want sustainable, resilient construction. They want a smaller footprint, less clutter, less noise and less labor costs on site. Those are all benefits of precast concrete products,” he added. “We are well-positioned for the future.”
Robert Whitmore is NPCA’s vice president of Communication.
Forecast By Sector
NPCA’s 2013 forecast by product line includes the five major sectors of the precast concrete industry and an “other” category that encompasses a wide variety of products. These figures are based on the annual Precast Industry Benchmarking Report published by NPCA. Compiled by Industry Insights, an independent manufacturing research firm, the NPCA Benchmarking Report is based on a survey of precast concrete manufacturers in North America.
Building and Landscaping Products
Includes architectural wall panels, architectural building components, prestressed structural building elements, basement/wall foundation panels, steps and basement entries, burial vaults and other related landscaping and building products
Sanitary and Stormwater Products
Includes manholes, concrete pipe, stormwater management and retention structures, curb inlets, catch basins and other related products
Transportation Products $2.58 billion
Includes box culverts, 3-sided structures, highway and traffic barrier, retaining wall systems, sound wall/barrier, prestressed bridge elements and other related products
Utility and Industrial Products $4.53 billion
Includes utility vaults, utility buildings and other related products
Water and onsite wastewater products $1.03 billion
Includes septic tanks, grease interceptors and other related products
All Other Precast Concrete Products
Total Precast Sales Volume
Total Volume Including