Coming into 2011, the U.S. economy was flush with momentum. Certainly economic activity didn’t burst forward after the recession ended in June 2009, and the second half of 2010 was softer than the first half, but there was enough momentum to suggest the United States could muster roughly 3 percent growth in 2011. Between the middle of 2009 and 2010, the U.S. economy actually did better than that.
Given the rebound in financial markets late last year, and with the Greek debt issue in the rearview mirror, it seemed as though the U.S. economy was poised for a solid year. Even though the housing market remained limp, unemployment was still high, and wage and salary growth was expected to be moderate at best, economists such as Mark Zandi at Moody’s
Economy.com were forecasting growth of roughly 4 percent coming into 2011.
Financial markets also were expected to perform well this year given a combination of strong corporate earnings and low interest rates. And for a time, they did perform well despite a sea of unsettling events ranging from rising gasoline and food prices to an earthquake in Japan and a stalemate in Washington, D.C. Through the first half of 2011, the Dow Jones Industrial Average and Nasdaq Composite were in positive territory, but these gains were more than offset by a horrid third quarter—the worst quarter for U.S. financial markets since the end of 2008—during which the Dow Jones, S&P 500 and Nasdaq each lost more than 12 percent. This performance accelerated the loss of economic momentum the United States has experienced since March.
Moreover, rising input costs had a more profound effect on the economy than anticipated. Soaring wheat, cotton and other commodity prices cut into profit margins, diminishing the impetus to produce. First quarter 2011 gross domestic product (GDP) was particularly disappointing—but not at first. The initial government estimate indicated GDP expanded at a 1.8 percent annual rate during the first quarter—soft, but not disastrous. But after two revisions, the government concluded real GDP expanded only 0.4 percent during the first quarter, following a 2.3 percent increase in the fourth quarter of 2010.
The revised data indicate consumer spending increased 2.1 percent in the first quarter (4.7 percent in goods, 0.8 percent in services). Durable goods increased 11.7 percent and nondurable goods increased 1.6 percent. Gross domestic purchases increased 0.7 percent in the first quarter, following a 0.9 percent increase in the fourth quarter of 2010. Disposable personal income in the first quarter grew by only 0.7 percent, while personal consumption increased 2.1 percent.
Imports initially were underestimated in the first quarter, with the first three releases reporting 4.4 percent, 7.5 percent and 5.1 percent. The final revision revealed imports actually increased 8.3 percent—3.2 percentage points higher than the third estimate. These large revisions make forecasting the economy even more difficult.
Second quarter GDP was better, with the U.S. economy expanding 1.3 percent on an annualized basis, and the third quarter brought a 2.2 percent increase. Export growth remains at the heart of American expansion; however, the pace of export growth is slowing along with the global economy.
While data releases are likely to reflect an ongoing slow recovery, some decent news is buried beneath the surface. Consumption slowed because of higher food and energy prices in 2011 and businesses responded by continuing to position themselves for growth opportunities during the second quarter. Based on this corporate momentum, many economists continue to cling to the notion that the chance of a near-term recession is one in three.
Unfortunately, corporate momentum may not last. Given ongoing shakiness among consumers in light of high unemployment and lingering uncertainty in Washington, D.C., inventory investment is unlikely to pick up significantly in the near term. That will lead to weakness in orders and production. Correspondingly, weak economic activity during the second half of 2011 translated into less robust business investment, including in construction.
So many factors are at work, making it difficult to know which ones had the most impact on investor psychology and future corporate performance: political dysfunction in the United States and Europe, slowing government expenditures, an unstable U.S. dollar, housing malaise, volatile commodity prices, decelerating employment growth, high unemployment, federal budget deficits, slowing productivity, disciplined lending and weak consumer sentiment.
The good news is the most recent data indicate the economy somehow has managed to hold onto a certain degree of momentum. According to the Bureau of Labor Statistics (
BLS), the nation added 80,000 jobs in October despite an ongoing loss in government employment. Furthermore, the BLS revised July and August data upward. Initially, it estimated the nation added no jobs in August, but the monthly figure was changed to 57,000. However, during a recent three-month period, national job growth averaged around 114,000 jobs per month compared to more than 200,000 jobs per month on average earlier this year. That is not good for confidence, income growth or consumer spending.
Construction Recovery Remains in Place … for Now
Financial market performance often is viewed as a leading indicator of broader economic performance, and economic performance often leads the performance of the U.S. nonresidential construction sector. Based on that, it’s possible the current momentum in the U.S. nonresidential construction industry really reflects how strong the economy once was.
Much of the momentum in the nonresidential construction industry was predicted by Associated Builders and Contractors’ Construction Backlog Indicator (CBI), which measures the amount of construction work under contract to be completed in the future. For instance, during the second quarter of 2011, backlog rose handsomely relative to the prior quarter and the previous year. The CBI for the second quarter of 2011 averaged 8.1 months, a 10 percent increase from 7.3 months in the first quarter. Backlog remained unchanged in the third quarter, but was up 16.3 percent from the prior year.
On a year-over-year basis, backlog is higher in every region except for the Northeast. However, the Northeast rebounded slightly with an increase in backlog between the second and third quarters. The South continues to have the lengthiest backlog of any region, while third quarter backlog shrank in the middle states and West.
Only one of three major industry segments fueled the second quarter increase in backlog: the commercial/institutional sector, in which backlog rose from 7.3 months to 8.6 months. This improvement reflected the ongoing exchange of property from thinly capitalized owners to well-capitalized owners, as well as the moderate easing of lending standards. The sector took a step back in the third quarter, falling to 8.4 months.
By contrast, backlog in the infrastructure category declined for four consecutive quarters—likely the result of the steady decrease in the impact of the stimulus package passed in February 2009—before surging from 7.9 months to 9.2 months in the third quarter.
The changes in backlog are linked with construction employment data. Following a gain of 27,000 jobs in September, the industry’s unemployment rate increased to 13.7 percent in October, according to the U.S. Department of Labor. While up from 13.3 percent in September, the unemployment rate is yet much improved from 17.2 percent the same time last year.
Nonresidential building construction lost 4,500 jobs on a monthly basis, with the industry now supporting a total of 667,900 jobs. However, the sector expanded by 10,300 jobs (1.6 percent) compared to the same time last year.
Heavy and civil engineering construction employment rose by 3,700 jobs for the month, while specialty trade contractors lost 22,100 jobs in October.
Construction spending also has been edging higher, according to the U.S. Census Bureau. Nonresidential construction spending, which includes privately and publicly financed construction, was $553.1 billion in August, up 1.6 percent for the month. It then slipped 0.1 percent in September.
Private nonresidential construction spending inched up 0.3 percent in September and is 7.4 percent higher than one year ago. Public nonresidential construction spending was 3 percent in August—the largest monthly increase since February 2009—but decreased 0.4 percent in September.
Eight of 16 nonresidential construction subsectors posted increases for the month, including health care, up 2.2 percent; communication, up 2.2 percent; sewage and waste disposal, up 1.8 percent; and lodging, up 1.7 percent. Three subsectors experienced growth in construction spending from September 2010: power, up 19.3 percent; commercial, up 9.7 percent; and manufacturing, up 4.7 percent. There is momentum in the U.S. nonresidential construction sector; the question is whether and to what extent it will last.
Looking Ahead
The outlook for the U.S. economy and the nonresidential construction sector is not particularly positive. Much of the momentum that existed in early 2011 dissipated during the past three quarters, with the implication being the current pace of recovery in nonresidential construction is unlikely to last.
Given little hope for significant stimulus in the near term, the pace of increased employment in the nonresidential construction industry eventually will begin to wane in the months ahead. If the economy continues to deteriorate, the growth trend will be reversed.
Additionally, consumer spending patterns remain tenuous. While consumers are likely to continue to spend at a reasonable pace during the holiday season, there could be a meaningful pullback in spending thereafter. That would impact industrial production, wholesale activity and job growth.
The chance of a near-term recession is now in the range of 40 percent. If the economy avoids a recession, it will be because financial markets rebound swiftly, buoying confidence in the process. This in turn may generate sufficient sales momentum to lift orders and industrial production.
If the economy weakens further, construction spending will be negatively impacted. Demand for construction services is not expected to be particularly strong in 2012, but an economy that circumvents a recession will help.
A number of factors will shape construction firm performance in the year ahead. Among these will be capital availability and materials prices. Additionally, decisions made by the banking and insurance communities will continue to impact the construction industry. With confidence in the economic outlook softening, many bankers and insurers may respond by becoming even more cautious. This would result in diminished access to credit and bonding—hardly what the U.S. nonresidential construction market needs.
Presidential election years are often good for the economy as policymakers identify ways to keep the electorate happy. But 2012 is likely to be different given the deep divides in Washington, D.C., and an overwhelming focus on dealing with the nation’s debt and deficits.
Total Nonresidential Construction Spending | 2010 | 2011* | 2012* | % Change 2011-2012 |
Millions, seasonally adjusted annual rate | | | | |
| Lodging | $11,329 | $8,514 | $9,025 | 6% |
| Office | $37,573 | $34,181 | $36,505 | 6.8% |
| Commercial | $40,522 | $43,447 | $46,575 | 7.2% |
| Health Care | $39,897 | $40,621 | $43,871 | 8% |
| Educational | $88,227 | $85,359 | $81,945 | -4% |
| Power | $78,540 | $87,519 | $95,396 | 9% |
| Manufacturing | $38,106 | $35,636 | $38,487 | 8% |
| Total - All Industries | $554,915 | $541,5999 | $554,414 | 2.4% |
* Data predictions by ABC Chief Economist
Growth patterns across the United States continue to vary substantially, with states in the heartland generally outperforming their coastal counterparts. U.S. gross domestic product is expected to expand roughly 1.5 percent in 2011, with many state and local economies expanding below this already low threshold.
States that specialize in energy production, commodities and food tend to be the best performers. Through October, North Dakota boasted the nation’s lowest unemployment rate at 3.5 percent. Nebraska and South Dakota ranked second and third, respectively. With the exception of a handful of New England states (New Hampshire, Vermont, Massachusetts and Maine) and states heavily influenced by federal spending (Maryland, Virginia and New Mexico), virtually all of the states with lower rates of unemployment are natural resource intensive, including Wyoming (5.7 percent unemployment), Iowa (6 percent), Oklahoma (6.1 percent), Kansas (6.7 percent) and Louisiana (6.7 percent). One exception is Hawaii, which tends to have low unemployment because of slow labor force formation.
By contrast, states that either participated heavily in the nation’s housing market boom or are manufacturing intensive generally suffer the highest unemployment rates. As of October, the highest unemployment rate was in Nevada (13.4 percent), followed by California (11.7 percent), the District of Columbia (11 percent), and Mississippi and Michigan (both 10.6 percent).
The differences in unemployment rates mask some key similarities among the performances of regional economies across the nation. According to Moody’s
Economy.com, “never in modern history have the performances of the regional economies mirrored one another so closely.” This is true in several cases, including lackluster job growth in the South, West and other major regions during the past year, as well as slow growth in real per capita wage and salary income and falling home prices throughout much of the nation.
Associated Builders and Contractors’ Construction Backlog Indicator (
CBI) reflects these regional similarities. For instance, during the second quarter, all regions experienced backlog growth with the exception of the Northeast. (The CBI remained unchanged in the third quarter.) During the past year for which data are available, backlog expanded in every region until the third quarter, when the middle states and West began to experience retraction.
The past several months saw a diminishing performance gap between the Midwest and the rest of the nation. During a recent 15-month period beginning in early 2010, the Midwest’s unemployment rate began to fall far more quickly than the rest of the nation, declining nearly 2 percentage points. But in recent months, unemployment in the Midwest has been trending higher.
The implication of equalizing regional economic growth is construction spending levels across the nation may not be as different as in recent years. The nation’s regions are now expanding slowly together. Should there be another recession, few regional economies would be unaffected. Still, states focused on energy production will continue to perform well.
—Anirban Basu Sometimes economics is confounding. Despite an ongoing lack of demand for construction services, materials prices have been rising for much of the past year. Although federal data shows construction materials prices declined 0.6 percent in October, they were still up nearly 7 percent from a year ago.
All things being equal, input prices should decline when demand falls. But clearly, all things are not equal. While American demand may be stagnant, demand for construction materials from other parts of the world is surging. Many people are aware of the economic upswings occurring in China, India and Brazil, but few know seven of the world’s fastest growing economies are in Africa. As these nations continue to build infrastructure, from airports and highways to broadband and water systems, demand for materials remains higher than is perceived by an analysis of American and European circumstances.
That said, there is evidence that the global economy is slowing, including the Chinese economy. The
International Monetary Fund recently downgraded its global growth outlook for both 2011 and 2012. That should imply falling materials prices going forward, but that’s not necessarily the case. When the global economy slows, certain investors adopt the position that central banks around the world will step in by creating additional money supply to reduce the risk of a downturn. The creation of money supply tends to reduce the attractiveness of holding certain investments, including paper assets like stocks and bonds. When these investors sell some portion of their paper assets, the money must land somewhere. Often, it lands in commodities, which drives up commodity prices even in the absence of underlying economic demand. This occurred in early 2008, when oil prices surged even as the global economy weakened.
All this makes for a nebulous 2012 outlook for materials prices. Based on the most recent data, it is possible materials prices will fall for much of next year as global growth decelerates. That would be a baseline forecast. However, much will depend on the role of speculators and their willingness to hold paper assets next year.
—Anirban Basu
How would you sum up the outlook for nonresidential construction in 2012?
Construction spending for nonresidential buildings is currently down about 40 percent from its 2008 peak. Hopefully, the market will finally recover next year. The AIA’s Architecture Billings Index, which tracks design activity at U.S. architecture firms, provided some early evidence that workloads are beginning to pick up. Because this index leads construction activity by nine to 12 months, a recovery in the second half of 2012 is likely as long as the economy cooperates.
What construction subsectors will offer the most opportunities?
First out of the chute will be commercial construction. As job growth increases and incomes finally begin to grow, private construction is expected to rebound before public activity. Expect offices, retail space, hotels and multifamily residential projects to pace the turnaround. Institutional facilities—education, health care and government buildings—should follow suit about six months later.
Where will nonresidential construction growth be the strongest/weakest?
The central portion of the country—from Texas to the Dakotas—should see the upturn before other areas because of its resource-based economies of oil and agricultural products. The Northeast corridor and Pacific coastal areas should not be far behind. Last to respond are likely to be overbuilt areas in the Southwest and Southeast, as well as some Midwest economies that rely on a still-weak traditional manufacturing base.
What’s in store for home prices in 2012?
The NAHB expects national house prices to begin a slow rise in late 2011, continuing through 2012. We expect a 1.7 percent annual increase in 2012. The national annual change will mask more robust house prices in markets that experienced improvement throughout 2011, as well as continued house price softness in areas with high foreclosures and excess inventory.
What’s your outlook for single-family housing starts?
The NAHB expects single-family housing starts to be 500,000 in 2012, which would be about 17 percent above the expected 2011 total of 426,000. At one-half million, single-family starts will still represent about one-third of the underlying demographically driven need.
What will be the top five states/regions for residential market growth?
Texas, Oklahoma, the Dakotas, Louisiana, Wyoming and Montana—mostly due to energy and agriculture.