Although the
U.S. Federal Reserve recently signaled its intention to take action should the economy/recovery continue to sputter, the outcome cannot be predicted. Coming out of a three-year period of tremendous government intervention, the construction industry remains mired in recession and many of the federal stimulus-funded projects are coming to a close.
The question now is, “Can construction companies breathe on their own?”
Publicly funded construction projects play a vital role in the overall health and stability of the industry. With the collapse of the residential sector followed by the crises in the financial and banking sectors, the publicly funded construction marketplace provided a lifeline (and in some cases, opportunities for growth) to many businesses in the construction community. But as the economy improves and the government tightens spending, many of the programs enacted in the past few years—including military base realignments, federal stimulus projects and previously funded public works projects—are coming to a close. How could this pullback impact the struggling construction industry?
According to the
U.S. Census Bureau, construction spending during March was estimated at a seasonally adjusted annual rate of nearly $770 billion, slightly above the February estimate. This figure was split roughly 60 percent private construction and 40 percent public construction. In May, total nonresidential construction spending was $516.1 billion, up 0.1 percent compared to April but down 6.9 percent from May 2010. Meanwhile, public nonresidential spending slipped 0.8 percent in May 2011.
Looking back at similar data from the heady days of 2006 reveals the seasonally adjusted annual rate (on a monthly basis) averaged roughly $1.2 trillion. This figure, unlike the current picture, reflected a split of 80 percent private work and 20 percent public work.
Private construction put-in-place output is down roughly 50 percent. And even with the "extra" stimulus funding, the public output has increased by just 20 percent. Put in that context, while the percentage from the publicly funded arena is much higher in terms of overall industry output, the increase has been modest in monetary terms.
While the pullback in public works funding certainly would put additional strain on the construction industry, history suggests the most significant impact—whether positive or negative—will stem from the actions of the private sector.