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The recovery from the Great Recession that ended in June 2009 has been ponderously slow. Yet, evidence is accumulating to show that the U.S. economy is on solid footing and gaining strength despite various challenges, most notably from outside the country. This improvement is also occurring in construction, which has struggled throughout the recovery. Just when it looked like the industry’s worst problems were over, periods of growth gave way to periods of weakness.

Now, like the general economy, construction is clearly moving in the right direction. As with all recoveries, some parts of the country are rebounding faster than others.

One of the major forces that has helped the country during the past few years is the boom in the energy sector. Advancements in fracking technology made previously uneconomical projects profitable. States such as North Dakota, Wyoming, Texas, Oklahoma and Pennsylvania have benefited from their shale oil fields. Construction has thrived as these new operations and their surrounding areas needed construction workers to build everything from roads to housing. The challenge has come in the form of higher prices in many small towns due to increased demand and a realization that the energy boom would ultimately abate and leave these towns with facilities, such as housing, that were no longer needed.

The energy boom led to a sharp increase in supply that sent energy prices spiraling downward. Lower energy prices hurt states with a heavy dependence on the energy sector. North Dakota and Texas are among the states that have taken the heaviest hit. As was feared, parts of North Dakota already are feeling the adverse effects of excess infrastructure (most notably housing). The Houston office market is another victim of lower energy prices. As long as energy prices remain low, the Houston office market will remain static. Office construction projects under way will be completed, but few, if any, new ones will be started any time soon.

On the other hand, lower energy prices aid the U.S. economy in general and net energy-using states in particular. Lower energy prices help keep construction costs down. Heavy equipment users benefit greatly from lower diesel prices. Heavy manufacturing, which generally is energy intensive, benefits as well. This is one reason for the upsurge in manufacturing plant construction.

The parts of the country that have ready access to cheaper energy sources and are welcoming to industry already have seen an uptick in manufacturing construction and will see further gains in 2016. These include Gulf Coast states such as Alabama, Louisiana, Mississippi and parts of Texas. Their neighbor to the north, Oklahoma, also is gaining from the investment in manufacturing facilities due to its easy access to low-cost energy. For states such as Louisiana and Texas, whose energy sector is contracting, the expansion in manufacturing softens the blow to their economies.

Meanwhile, states with less dependence on energy production, but heavier reliance on manufacturing, are aided by lower energy prices. This has helped states as diverse as Indiana, Kansas, Michigan, New Hampshire, New York, Pennsylvania and Tennessee. Pennsylvania has profited from fracking, but still has a significant manufacturing base.

As the economy has improved, so has travel for business and pleasure, spurring investment in lodging. Lodging construction will continue to post respectable gains in 2016. Travel destinations in the western United States—Denver, Las Vegas, San Diego, San Francisco and Seattle—can look forward to further gains in lodging construction. States with a significant travel industry—Colorado, Florida, Hawaii, Utah and Wyoming—will benefit as well.

Investment in lodging and related establishments will continue in locations that thrive from both pleasure and business travel: Atlanta, Chicago, Los Angeles, Miami and New York, as well as some of the aforementioned cities.

Booming local economies spur residential construction. Most areas of the country will see further increases in residential construction as employment continues to rise, spurring household formation and demand for both single-family and multifamily units. Most of the larger multifamily projects will be in the major metro areas, such as Boston, Los Angeles, Miami, New York, Philadelphia, San Francisco and Washington, D.C.

The single-family housing market has been slower to recover. Construction of new units remains well below any reasonable estimate of the nation’s long-term needs. As long as employment continues to expand at a reasonable rate, demand for single family housing units, and therefore construction of those units, will grow as well.

The Northeast builds the fewest single-family homes. The area should see a modest increase, as most of the growth in housing for the region is in multifamily units. The South builds the largest number of single-family homes in the country and is on track for solid growth in 2016. The West is another strong region for single-family housing, while the numbers for the region are dominated by California. Lack of water may prove to be a significant impediment to new home construction for the state and the region at large.

Bernard M. Markstein is president and chief economist of Markstein Advisors, and a contributing economist for Associated Builders and Contractors. For more information, email bmarkstein@verizon.net.

Read '2016 Economic Outlook' for a big-picture analysis of the construction economy.


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