2014 Forecasts for the Construction Industry

As with the beginning of every new year, the prognosticators put on their thinking caps and give their forecasts for the coming year. Iv'e read a couple of good articles (links provided below), but I'll summarize them as to make your life easier. Keep in mind these forecasts are for the United State as a whole. They may not directly represent regions or specific cities (San Francisco, for example, is marching to its own beat).

Here's my very basic summary of both articles:

2013: decent year, particularly since we’re still climbing out of the crater of the Great Recession, but most of the growth was in private residential. 2014: expected to be better, with the growth more evenly spread throughout construction sectors, except public infrastructure, which will continue to struggle due to a lack of investment.

2014 Construction Outlook (by EC&M Magazine)

(The link above is behind a registration wall and is a long read)

The nuts and bolts:

• Consensus among industry analysts is that 2014 will see modest growth; mid- to high-single digit growth rates for spending and square footage in 2014.
• The good news: construction volume and backlogs are improving, signs of growth in terms of GDP, employment and lending activity, and prospects of cheaper energy due to increasing U.S. production
• Bad news: still a lot of uncertainty in the market, including overall high unemployment, chance of higher interest rates, unresolved fiscal policy, lower GDP growth, dysfunctional government, unwinding of Federal Reserve stimulus (meant to keep interest rates low), etc.
• AIA's ABI is holding steady above the threshold "50" mark for 12 out of the past 13 months (ABI is a 9 to 12 month leading indicator):

• The Dodge Construction Outlook expects U.S. construction starts increasing 9%:

• Non-residential (meaning single-family housing) is seeing modest but broad improvement:

• 2014 growth will be more evenly distributed between residential and non-residential that in the past, but all sectors are volatile.
• Non-residential picking up (per AIA ABI), but is still weak, particularly institutional construction, which declined in 2013.
• With state and local government financial strength improving (California now have a surplus), there may be a boost in institutional construction spending in schools and public structures.
• Commercial building is expected to increase (CPIC up 17% per Dodge projections; up 12% per AIA projections), in spite of slow employment growth.
• Commercial growth lags residential growth by 18- to 24-months
• Favorable trends in capacity utilization, international trade and confidence in long-term economic trends suggest manufacturing construction should improve in 2014.
• Unfortunately, Dodge sees public works spending declining by 8%, reversing an upward trend since 2011. (JR note: public works spending has been weak, despite recent fleeting improvements, for some time, as the figure below demonstrates. Electrical utility spending is expected to drop 33% according to Dodge.

Simonson Says: For Now, 2014 Looks Fortunate for Many (published by AGC)

(Link above is a short read and requires no registration to read)

The gist:

• More work to bid
• Material prices are in check
• Labor shortage may be the complicating factor

What happened in 2013:

• Construction spending rose 5% for the first 11 months of 2013, but the growth was unevenly spread and dominated by private residential.
• Institutional construction was hurt by an 8% decrease in spending on public education projects in 2013.
• 2013’s top performer in private nonresidential sector was lodging/hotel construction (up 26%). Worst performers were communications construction (down 13%) and power construction (down 11%, but only after a huge surge in wind facilities in 2012 to beat a tax credit that ended at the end of the year).

What to expect in 2014 in terms of construction by market:

• In 2014, power and manufacturing are expected to improve the most, with lodging and warehouse construction also showing strength (double-digit growth expected).
• 2014 should see modest growth in office and retail construction.
• Hospitals and educations construction is expected to remain weak in 2014.
• Overall non-residential construction should grow by 5-10% in 2014, with private residential expected to grow by 10% or more, goosed by double-digit growth in apartments in the near term and single-family housing later in the year.
• Public construction is expected to drop again, but less than the 3% drop in 2013.

What to expect in 2014 in terms of material prices:

• Bureau of Labor Statistics (BLS) reported that producer price indexes (PPI, or the measure of what contractors would charge to construct industrial, warehouse, school, office and healthcare buildings) increased 3-4% from November 2012 to November 2013. That increase in PPI is moderate but higher than those of the most recent years.
• Material index rose 1% over the past year.
• Modest (3%) increases in material prices are expected (no wild price spikes like in 2004-2008) and plenty of supply.

What to expect in 2014 in terms of labor:

• A lot of skilled labor ditched the construction industry during the Great Recession and have not (yet?) returned.
• To entice skilled workers to return or to enter the construction industry, employers will have to pay higher wages, benefits and bonuses. If new workers are not coaxed into the industry, employers will have to pay increasing amounts of overtime.
• Compensation is expected to increase 3-4% in 2014.