NPCA Staff Report
It’s that time when NPCA rubs its crystal ball to predict where the precast concrete industry is headed this year. Our prediction is based on a holistic look at the construction industry, what leading economists are seeing in the data and hearing from those in the trenches.
The construction industry as a whole for 2020 is a bit of a mixed bag. However, we expect the precast industry to not only maintain, but even experience some growth. Lingering concerns of a coming recession are valid; however, we don’t think it’s likely to occur in 2020. Instead, indicators point to a slowing pace of growth with some sectors of construction plateauing or experiencing decreases.
Slowing, not shrinking
No two economic forecasts are the same, and this year is no different. Although construction-sector economic predictions are a bit scattered, one thing most economists agree on is that a recession this year is highly unlikely, but a slowdown has arrived. Thus, while overall growth no doubt will slow, it will continue nonetheless.
Anirban Basu, chief economist for Associated Builders and Contractors (ABC), stated that momentum appears to be poised to continue into next year, with public spending categories remaining a bright spot. His assessment is in line with his counterpart at Associated General Contractors of America (AGC), chief economist Ken Simonson, who predicts construction spending will increase 1% to 5% in 2020. This trend contrasts with a decline of 2% in the first three quarters of 2019 compared with 2018. From AGC’s survey with contractors, there’s no indication contractors expect anything drastic to occur this year.
“Contractors remain busy and upbeat about 2020, in spite of the overall economy moving into lower gear,” Simonson shared with NPCA on a recent call. “Looking at a survey we conducted, for every category of construction, more contractors expect more growth and business opportunities in 2020 than in 2019.”
Richard Branch, chief economist for Dodge Data & Analytics, highlighted some of the same highs during the group’s annual Construction Outlook conference in October. He cited job growth, consumer spending and low interest rates as positives, but listed trade tensions, skilled labor shortages, weaker global growth, the budget deficit and the pending election as credible threats to the economy. Branch said demand for construction loans is decreasing with lenders tightening credit.
Many of the construction segments that Dodge tracks either peaked in 2018 or have peaked in 2019, with slight pullbacks in 2020 predicted. However, there is good news for the precast concrete industry. Branch noted cement and concrete sales are rising faster than the economy. The Portland Cement Association (PCA) predicted moderate growth for cement consumption through 2019 and into 2020 in its annual fall forecast.
Ed Sullivan, PCA’s senior vice president and chief economist, stated that public construction is still benefitting from the 2018 federal budget’s allocation for roads, bridges, water, and rail projects over 2018 and 2019.
In other good news for precasters, much of what occurs in the non-building sector, particularly in infrastructure and public works, is on the healthier end of the spectrum. Dodge expects public works construction starts will revive 4% in 2020 after a 4% dip in 2019, and that highways and bridges will see moderate growth in 2020. Simonson saw the same sentiment among its survey respondents.
“They are particularly optimistic about water and sewer construction,” he said. “Specifically, 36% of respondents expect the dollar value of projects they compete for in water and sewer to be greater in 2020 than in 2019. Only 11% expect the market to be smaller for a net positive reading of 25 percentage points.
“Bridge and highway construction have a net positive reading of 20 percentage points and that is matched by the broad transportation category, which takes in everything from transit to truck terminals to airports, and also hospital and K-12 school construction.”
Government inaction instead of in action
While the continued growth is good news, the reality is that there is even more capacity for growth and an enormous need for investment. Cris deRitis, deputy chief economist with Moody’s Analytics, noted infrastructure spending as a total percentage of GDP continues to fall and is at an all-time low of 1.5%. Paired with languishing action at the federal level and the state of U.S. infrastructure noted by The American Society of Civil Engineers in its American Infrastructure Report Card, this paints a picture of a sector that could be thriving but continues to be stifled.
“Precast producers and products are ready, willing and able to fulfill our nation’s infrastructure needs,” said NPCA President Fred Grubbe. “Washington needs to focus its attention on what makes our economy run – the smooth delivery of goods and services across a reliable, state-of-the-art national infrastructure network.”
With infighting running rampant and the 2020 election cycle heating up, an already tenuous situation in Washington has been made worse. As such, major legislation for the industry faces extra hurdles. The expiration of the Fixing America’s Surface Transportation (FAST) Act in 2020 and the status of its replacement, America’s Transportation Infrastructure Act (ATIA) is hanging in limbo. While ATIA passed the U.S. Senate Committee on Environment and Public Works with unanimous bipartisan support, it has been placed on the backburner like many other pieces of legislation.
On the bright side, last August, Congress passed legislation that raised discretionary spending caps for 2020 and 2021, a critical step to avoid sequestration. In addition, the House passed the Water Quality Protection and Job Creation Act of 2019, which allocates approximately $110 million for resilient infrastructure, and the Harbor Maintenance Trust Fund Act. Also, the United States-Mexico-Canada Agreement (USMCA), the replacement for the North American Free Trade Agreement (NAFTA), has been signed by President Trump and ratified by Mexico. Ratification in Canada has been delayed, but the deal is expected to be approved. All this is good news for the industry.
Other factors include the passage of America’s Water Infrastructure Act (AWIA) in 2018 and reauthorization of the Water Infrastructure Finance and Innovation Act (WIFIA) in 2017, which have bolstered the industry.
Many state and municipal governments also have made a dent, finding ways to fund infrastructure improvements through various means.
“Indeed, one of the sources of strength for the U.S. economy over the last year has been a pickup in infrastructure spending,” said ABC’s Basu. “While the federal government has yet to fashion a full-fledged infrastructure plan for the nation and the Highway Trust Fund is set for insolvency by 2021 absent congressional action, infrastructure-related outlays remain a good news story. So far, state and local governments have come to the rescue, supported by rising collections of income, sales and property taxes. Several key construction segments have benefitted as a result, including water/sewer, transportation and highway/street.”
According to ABC, the backlog for infrastructure work is rising and the need is clear. However, one factor that will continue to play a role beyond funding is the ability of companies to actually complete the work.
Be”labor”ing the point
Those working in the construction industry don’t need to read or hear about labor shortages because they are living them. Difficulty finding qualified candidates to meet current needs has become the rule rather than the exception. Dodge Data’s Branch noted skilled labor is the biggest concern among contractors, stating they have the work, but do not have enough help to do it all.
This trend is not going to ease anytime soon as efforts to get more young people interested in trades will take years to reach any sort of fruition. In addition, with baby-boomers retiring at a high rate and the workers who didn’t return to the industry after the Great Recession factored in, there simply are not enough candidates to fill the gap.
The U.S. Bureau of Labor Statistics reported more job openings in construction in 2019 than at any other time since tracking began in 2000.
“With the labor market so tight – we’re at a 50-year low in the overall unemployment rate at 3.5% – more and more businesses are finding it tough to fill positions or to achieve the productivity they once had because they’re having to take on people with little-to-no experience whereas before they could be much choosier about job candidates,” Simonson said. “On the contrary, we also asked about hiring plans, and 75% expect their firms will be increasing their headcounts in 2020. Only 5% expect a decrease with the remaining 20% expecting no change.
“As we’ve heard for many years, most contractors say they’re having a hard time filling positions. On our survey, 81% of firms were having a hard time filling some or all salary and hourly positions. Only 8% said they are having no difficulty filling positions. The remaining 11% said they had no openings.”
The consensus of construction-industry economists is slowing growth in 2020 with good news for many sectors vital to the precast concrete industry. Due to these factors, NPCA predicts 3% growth in 2020, consistent with its 2019 prediction.
At this point, most economists are hesitant to make predictions much further than one year. Branch said the construction economy is likely sitting at the peak of the cycle with a 69% increase since the trough, but the start of a recession is notoriously difficult to nail down.
Moody’s deRitis said consumer behaviors, business investments and myriad other factors will determine the timeline. However, Moody’s modeling, which tracks recessions back to 1948, predicts it will be a fairly short recession when it comes. Households overall are in better shape than prior to 2008, although deRitis noted business leverage has gone up and loans have gotten riskier as investors have chased higher yields.
For precasters, fixating on what the future holds won’t change it, but preparing for it certainly helps. This will be a key to the industry’s success in the coming years.
“Precasters can’t stand still, especially during good times when resources are available to invest in new equipment and product lines,” Grubbe said. “It’s always a good idea to be prepared for what may be just beyond the horizon.”