This year started out well, with a stimulus jolt to the depressed homebuilding and public-works markets. But it ended badly when the tax credits to home buyers expired, federal stimulus spending fell short of expectations, and the non-residential building market tanked all on its own. As a result, 2010 will probably become known in the economic lexicon as “the stalled recovery.”
In a word, what stalled is housing, which traditionally leads the construction industry out of a recession. A year ago economists were predicting 30% increases in the housing market, but that turned into a mere 6% gain, not enough to carry a recovery, especially with the non-residential market posting double-digit declines and massive federal stimulus funding managing to boost public works by only 2%, according to McGraw-Hill Construction’s estimates for 2010.
However, there are several signs that markets may be turning and that 2011 will be a transition year leading to a real recovery by 2012, according to an industry forecast produced by ENR. Unfortunately, there are just as many warning signs that a stalled recovery could become a prolonged recession. Among the warning signs are persistent high unemployment, tight credit and the potential of political gridlock, with a resurgent Republican Party showing little interest in further stimulus funding.
McGraw-Hill Construction has attempted to sort out these mixed signals and believes that markets will prevail over politics. MHC is forecasting the dollar value of total U.S. construction starts in 2011 will increase 8% to $445.5 billion, following an estimated 2% decline this year and an actual 24% drop in 2009.
Again, most of next year’s increase will come from a predicted 27% increase in single-family housing. In addition, MHC believes that market fundamentals will lead to some solid rebounds, including a 13% increase in office building work, which declined 23% this year. Other big turnarounds are a projected 13% increase in hotel and motel work, after falling 31% this year; a 25% increase in commercial building, following a 10% decline in 2009; and a 14% increase in stores and shopping centers, following a 7% decline this year.
“It’s easy to get double-digit increases off of such low numbers,” says Robert Murray, MHC’s chief economist. “In volume terms, some of these markets are simply moving up from their worst year to their second-worst year we have seen since 1960,” Murray says. While severely depressed markets are starting to turn back up, the economy is still a long way from its previous peaks.
Office, retail, warehouses and hotels all are following a similar pattern with double-digit increases in construction starts in 2011. But after three years of massive declines, next year’s increases appear on the charts more as a blip than a surge.
For example, Murray predicts that office building starts will increase 13% next year to 59 million sq ft. But in 2007 the market was around 225 million sq ft., and in 2001 it was more than 300 million sq ft.
The impact of the recent elections is a concern, says Murray. “The odds of political gridlock have increased, and that increases the downside risk of the forecast,” he says. “ It’s critical that Congress addresses the 2011 fiscal appropriations and the multiyear transportation bill. It is not a question of stimulus anymore but getting ongoing regular financing for the coming year,” Murray says.
Gridlock and Funding
Uncertainty again characterizes federal spending. Congress failed to pass any of the 12 individual appropriations bills for fiscal year 2011 before Oct. 1, the start of that year. Before recessing for the November elections, Congress approved a stopgap continuing resolution (CR) that will keep federal agencies operating through Dec. 3.
Congress is scheduled to return for a postelection lame-duck session, during which it will have to pass a further extension to avoid a shutdown of federal programs. How long that extension will be and what funding levels it will contain are unclear.
Complicating the spending picture is the power shift in Congress, with Republicans’ gaining control of the House, thanks to their victories in the Nov. 2 elections. It’s uncertain whether Democrats will seek—or Republicans will accept—a CR that carries through Sept. 30, the end of fiscal 2011.
The current stopgap funds most federal programs, including those dealing with construction, at their fiscal 2010 levels. The major construction exception is the Dept. of Defense’s Base Realignment and Closure (BRAC) program. The current CR funds BRAC at the annual rate of $2.35 billion. That amount is what President Obama requested for fiscal 2011, but it represents a 68% reduction from the 2010 total, reflecting the scheduled phasing down of work.
Devil in the Details
“It is important to differentiate between starts, which are forward-looking, and construction put-in-place spending numbers,” says Murray. “While starts may be up next year, we expect spending numbers will have another negative year in 2011.”
And a big negative in this year’s report is that the U.S. Dept. of Commerce has discontinued its forecast of construction put-in-place data, which had been a cornerstone of ENR’s forecast for decades. Commerce is switching its focus to “import/export issues,” says Pat MacAuley, who compiled the Commerce forecast.
Fortunately, the Raleigh, N.C.-based FMI Corp. continues to forecast Commerce’s put-in-place construction data. FMI predicts that total construction put-in-place will increase 5% next year after falling 7% in 2010 and 15% in 2009. The FMI forecast sees residential markets increasing 11% next year, while the nonresidential market slips another 1%.
“The upturn should be viewed more as a turning point than a dramatic rebound,” says Randy Jiggard, managing director of research services at FMI. “This is not the kind of recovery that will come bouncing back. It may be five years before the market breaks the trillion-dollar mark again,” he says. For 2011, FMI predicts total construction put-in-place will be $881 billion.
A forecast by the Associated Builders & Contractors, Washington, D.C., is a bit more pessimistic. “ABC forecasts that total nonresidential construction spending next year will be 0.1% less than 2010’s level,” says ABC’s chief economist Anirban Basu. “Privately financed construction levels are projected to decline 0.2%, while publicly financed construction levels are projected to be virtually flat,” he says.
The Portland Cement Association, Skokie, Ill., also is looking for construction spending to be flat next year. “My gut feeling is that there is still a lot of risk out there,...