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Last winter was brutal. Construction starts were delayed. Merchandise sat idly at ports. Consumers stayed indoors, and local government budgets were hammered by snow removal costs. 

For roughly three months, forward economic momentum was stymied. According to the preliminary estimate from the Bureau of Economic Analysis, the U.S. economy expanded at a 0.1 percent pace during the first quarter of 2014. That estimate is subject to revision and could conceivably be moved into negative territory. Fortunately, most economic indicators suggest both spending and production already have rebounded from their sluggish first quarter pace. 

For a time, economists debated whether first quarter weakness was attributable to the weather or to economic fundamentals. It can now be said with some degree of confidence that atmospheric conditions were largely to blame. 

Consumer spending began to trend higher as early as March. According to the Bureau of Labor Statistics, the nation added 288,000 jobs in April and another 217,000 jobs in May. While the quality of jobs being added to the economy is generally considered poor, more Americans enjoy employment opportunities, and unemployment is now closer to 6 percent than 7 percent.

Though U.S. equity markets essentially traded sideways for the first several months of 2014, the massive gains produced in 2013 have been preserved. More capital is flowing through the economy, including private capital available to finance construction.

Pension, endowment, life insurance and other funding sources are now flush with capital.  Many have increased their real estate allocations given incredibly low interest rates and stock prices that appear expensive. In turn, this is translating into new apartment buildings, office space, hotels, casinos, fulfillment centers, factories, power plants, shopping centers and data centers. Shifts in public policy also are producing additional opportunities in the health care and mass transit sectors.

Spending Set to Accelerate After Slow Start
It has been five years since the end of the Great Recession, and a sustained, broad-based nonresidential construction market recovery has yet to materialize. Even the most recent data indicate a decided lack of momentum. Nonresidential construction spending contracted in March (albeit only by 0.1 percent), followed by a 0.4 percent increase in April. On a seasonally adjusted, annualized basis, nonresidential construction spending totaled $570.6 billion in April, down about 18 percent from the peak level registered in December 2008. On a year-over-year basis, however, nonresidential spending is up 3.9 percent.

With banks generally lending more freely and developers ready to deploy their accumulated equity more aggressively, construction firm backlogs are poised to expand now that the harsh winter weather is over—signaling meaningful acceleration in spending. Associated Builders and Contractors continues to expect nonresidential construction spending to expand 6.9 percent in 2014 despite the year’s slow start. However, public spending in various categories, including public safety and education, will continue to be soft.

Materials Prices Unlikely to Become Problematic
After many years of volatile construction materials prices, the last 18 months have been remarkably stable. For example, between May 2013 and December 2013, the monthly change in construction input prices was less than 0.5 percent in either direction. Volatility became a bit more apparent during the initial four months of 2014, with materials prices expanding 0.6 percent, 0.7 percent, 0.5 percent and 0.4 percent, respectively. Weather, the Ukrainian dilemma and a stabilizing global economy all played a part.

The materials price increases observed during the first quarter are unlikely to foreshadow damaging price volatility for the balance of 2014. While the global economy is stabilizing, the pace of growth remains roughly average, and it is not enough to produce sharp increases in worldwide material demand. In fact, evidence indicates the Chinese economy is actually slowing.

Moreover, the recent uptick in prices has been driven by only a handful of categories. For example, prices in only four of 11 major materials categories actually rose in May, with the most significant increases registered in natural gas and crude petroleum prices. For now, the expectation is that materials prices will expand only a bit faster than they did in 2013, though sociopolitical dynamics in Ukraine, Iran and elsewhere could alter this trajectory.

Regional Outlook
Two types of states are poised to expand most rapidly. The first group is obvious: states disproportionately participating in the nation’s energy production renaissance. At the vanguard of this group is Texas, where rapid population and employment growth is taking place in both Houston and Dallas. In terms of percentage growth, the leader remains North Dakota, which boasts both the nation’s fastest rate of job growth and the lowest unemployment rate.

The other type of state is the comeback kid. States such as Florida, Georgia, Nevada, Arizona and California that suffered mightily during the downturn are now coming back with a vengeance. During a recent 12-month period, Nevada ranked second in percentage job growth nationally, followed by Florida (third), California (eighth), Arizona (11th) and Georgia (13th).

By contrast, states with heavy reliance on federal government spending, troubled government fiscal situations or slow population growth are producing the softest recoveries. This group includes New Mexico, Virginia, New Jersey, Pennsylvania and Maryland, although construction spending continues to be robust in a number of associated communities, including in the Washington, D.C., and Baltimore metropolitan areas.

Looking Ahead
In July, the nation will begin its sixth year of economic recovery. At long last, it appears the United States is positioned for a pace of recovery that is more typical of previous cycles. Private nonresidential construction is on track to improve during the balance of 2014.

Anirban Basu is chief economist of Associated Builders and Contractors. For more information, visit www.abc.org.

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