Despite a series of recent reports that the U.S. economy finally seems to be on firm ground and trending upward, the 2014 outlook for the construction sector remains mixed and riddled with questions.
An early December report from the U.S. Labor Dept. showed that the nation's gross domestic product rose 3.6% in the third quarter, unemployment dropped to 7%—the lowest point in five years—and the country created 203,000 jobs in November. The growth in GDP was well above the 2.8% increase that had been anticipated by analysts.
Other pluses for the national economy include a booming stock market, solid growth in auto and new home sales, and continuing good news for low interest rates and the health of banks and mortgage providers.
But the impact that these promising developments will have on the construction sector is uncertain, say industry insiders like Steve Sandherr, CEO of the Associated General Contractors of America. All are positive signs in the face of ongoing deficit spending, faltering consumer confidence and political gridlock in the nation's capital.
"We're optimistic about construction for next year," Sandherr told an industry group at a December outlook event in Denver. "But Washington is dysfunctional, and there's not a lot of optimism that anything comprehensive is going to get done [in the political arena]."
He said the construction industry has been forced "to play defense" on several regulatory issues, and there are big questions about the fate of the immigration bill and tax reform in Congress. "We'd like to see more balance in the tax code," he said. "But we're not holding our breath."
"The national economic news is mostly positive for now," says McGraw Hill Construction (MHC) Dodge economist Cliff Brewis. "But that hasn't translated into consistent growth for the construction industry."
Brewis says that financially driven recessions like the most recent one usually "result in huge losses of wealth, and the recovery process is longer. We are well into the recovery, but it will be slow and sluggish for some parts of the country."
Brewis says McGraw Hill Construction Dodge, which presented its annual industry outlook in October, anticipates 2.7% overall GDP growth for the U.S. in 2014 but cautions "that may be on the conservative side. We are targeting sequestration at 100% next year, but recent signs indicate it may not be that deep." Brewis says MHC estimated that federal government dysfunction cost a half a point in GDP growth in 2013.
Brewis points out that the strength of the recovery will continue to depend largely upon the private sector, as government funding for projects remains uncertain. "The government is not helping much this time," he says. "And if the private sector senses problems, it will not invest. Any uncertainty makes it more cautious, and that's why we're seeing these starts and stops. That's typical of private-sector recoveries, and it will continue."
Ken Simonson, chief economist at AGC of America, agrees. The decline in government spending will continue for the foreseeable future, he says, and that will help keep industry growth "at a not-very-steady rate" next year. Simonson also predicts that the retail building market will take a hit next year as consumers buy more goods online, reducing the need for brick-and-mortar retail outlets. He sees a similar trend for office construction, as employers continue to shrink the amount of office space allotted per person. The demand for more mobility and flexibility in office configurations will continue, Simonson adds. That likely means more of a market for office renovations and additions rather than new construction.
Both Brewis and Simonson, along many other industry economists such as Anirban Basu with the Associated Builders and Contractors, say that the key to a more consistent recovery, both for construction and the country as a whole, will be employment growth.
ABC reported that construction gained 17,000 jobs in November, with 7,700 of those on the nonresidential side. "Despite the increase in November, labor force participation is still down compared to before the government shutdown," Basu says. ABC reported the national construction unemployment rate was at 8.6% in November on a non-seasonally adjusted basis, down from 9% in October and 12.2% a year ago.
But industry job growth has not been consistent across market sectors or in all sections of the U.S. "The middle of the country—from Texas north through the Dakotas—has done remarkably well, as have many metro areas on the coasts," Brewis says. "But there are still some areas, such as the Southeast, where things are slow. We will need at least 160,000 new jobs per month across all sectors or the economy will soften again."
Work Force Shortage
"Although many indicators are positive, locally and nationally, I still sense a fragility around this recovery, and any significant, unforeseen factors could easily halt the progress in its tracks," says Brandon Berumen, president and CEO of LEI Cos., Denver, and the 2014 chair of the ABC Rocky Mountain Chapter.