What do leading economists have to say about an economic recovery for the construction industry? The reviews are mixed, but hopeful. The following three economists recently spoke at an American Institute of Architects (AIA) sponsored webinar in which they outlined and analyzed relevant economic trends.
Kermit Baker, Chief Economist for AIA, and the originator of AIA’s Architecture Billings Index and Consensus Construction Forecast Panel, identified a “triple whammy” with regard to the housing and remodeling outlook. Baker said the trifecta of inventory overhang, weak demand, and low mobility has continued to hamper home building recovery. He also noted a current upturn in the remodeling market. In sum, housing market conditions remain weak, although it is important to note that existing sales and starts were improving in the recent quarter. Baker’s data comes from the U.S. Department of Commerce and the National Association of Realtors which tracks new home sales, existing home sales and housing starts. Years of overbuilding has generated significant oversupply of vacant homes and during the housing downturn, household growth has been well below levels of the past several decades.
However, residential home builders and construction professionals should be heartened to learn that data from the Joint Center for Housing Studies suggests that leading indicators of remodeling activity point to early stages of an economic recovery. The Mid-Atlantic region, in particular, shows signs of a remodeling rebound.
Baker was careful to point out that housing policy political concerns impact this rebound including:
- The federal government’s role in housing finance (i.e., Fannie Mae and Freddie Mac)
- Federal debt reduction initiatives such as the deductibility of home mortgage interest payments, local property taxes, and the exclusion of capital gains from the sale of a home; and
- The status of incentives to promote home ownership (e.g., Federal Housing Administration).
As referenced by other economists, Baker also noted that the Architecture Billings Index has finally edged into growth territory. In addition, all major non-residential building construction sectors are in or edging into a recovery phase.
Baker also examined the non-residential construction outlook for 2011 through 2012. He concluded that “while most firms are expecting growth in 2011, many are projecting continued decline.” Baker concluded that a construction recovery was expected in the latter half of 2011, and that 2012 should be better.
Jim Haughey, Chief Economist for Reed Construction Data, cautioned that a rise in oil prices as well as a threatened federal shutdown jeopardized recovery. Haughey pointed to recent current events since October 2010 including, but not limited to, state budget cuts deepening; President Barack Obama’s roll out agenda halted; and the developing country economic boom, as well as Arab revolutions raising commodity prices. Consumer confidence, however, according to Haughey, is jumping higher. Haughey characterized the construction environment from 2011 through 2012, as one where “private building space and facility capacity” declined from large surpluses to near normal levels. In addition, he predicted that spending confidence would start depressed, but rise rapidly to normal. He also predicted an improvement to credit access. For public construction funds, he predicted a decline deepening in 2011 then recovering partially in 2012. With regard to construction costs, Haughey noted domestic prices moving from zero to one percent inflation; volatile import price inflation averages about five to six percent. Domestic prices move from 0-1% to 1.2%.
- Growth Domestic Product, personal income: Gradual acceleration;
- Continuing problems for office, retail, warehouses;
- Loans for developers remain tight – to – unavailable;
- State/local spending infrastructure not a priority;
- Federal spending helped but may decline soon; and
- Price spikes for diesel, copper, and possibly steel.
Simonson acknowledged that federal funding sources play a major role in the construction market. For example, he noted that federal stimulus programming was at its peak currently, totaling $135 billion. The base realignment work, currently at its peak, is due to end September 30, 2011. In addition, Gulf Coast Hurricane work, also currently at its peak, is due to end June 1, 2011.
Critically, Simonson also analyzed the current economic outlook for materials, noting that the construction industry depends on specific materials that are:
- In demand worldwide;
- Have erratic supply growth; and
- Are heavy, bulky or hard to transport.
Construction, which obviously requires the physical delivery of heavy materials, is subject consequently, to price spurts, transport bottlenecks, and fuel price swings. Happily, Simonson also noted that a slight upturn has begun in the housing outlook. In particular, the rental demand should rise as more people get jobs or move to military base realignment sites. According to Simonson, the condo market continues to have large overhang. In this regard, demand for completed condominium units remains weak and, as a consequence, economic pressures on existing owners is increased when problems occur in buildings with low or partial occupancy. Additionally, financing challenges are exacerbated by low condominium occupancy. Compounding the issue, banks remain unwilling to lend to developers.
All in all, a mixed economic bag for the remainder of 2011, with good reason to hope for recovery in 2012. Of course, there are no guarantees when reading economic tea leaves. Even Baker, Haughey, and Simonson can not immediately predict the global impact of political and international issues – for example, the economic fallout from the recent earthquake, tsunami and nuclear tragedy in Japan (that occurred after the above referenced webinar was presented). Based upon the recent and past economic data; however, take heart that the construction recovery is real; albeit moving at a painfully slow pace.