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Construction Market Forecast: Slow and Steady For 2014

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It has been a long time coming, but the construction recovery seems to be almost here. The housing market has been keeping up construction growth, which is rebounding from record lows, but now many of the non-residential building markets are starting to turn the corner, making for many optimistic forecasts for 2014. The remaining drag on construction growth for next year is the public sector, which continues to be squeezed by the battle over the federal deficit.

Some economists, however, see a silver lining even there. "The recession pushed millions of workers out of the industry, and it is not going to be easy to get them back, so a slow but steady recovery might be the best thing for helping to control inflation," says Randy Giggard, chief economist for FMI, Raleigh, N.C. "You could make a similar argument for some of the materials markets."

Construction market fundamentals are there for even stronger growth, but markets are hobbled by political uncertainty generated by chronic budget battles between Democrats and Republicans. All the forecasts collected by ENR take into consideration this political uncertainty, but if politics spins out of control again, the rather optimistic consensus among economists for 2014 could suddenly turn less sunny. For now, all the forecasts suggest the industry can look, as the Monty Python song says, "on the bright side of life."

The McGraw Hill Construction forecast for 2014 is certainly on the bright side, calling for a 9% increase in construction starts next year. It also predicts strong double-digit growth in the dollar value of single-family housing, multifamily housing and commercial buildings. MHC also is forecasting that a three-year decline in institutional buildings will be checked in 2014 with a modest 2% gain next year. Manufacturing work is forecaste to increase 8% next year, following a 6% increase this year. MHC expects public works to fall another 5% next year, while the power market drops 33%.

"Our outlook is positive, with a few caveats," says Robert Murray, MHC chief economist. "This is another step on the way to a more full-fledged expansion," he adds. "Because this is a measured expansion, there is a very good chance this forecast will play out."

Murray cautions the industry not to get too excited about percent changes. While MHC is seeing good growth in the residential and commercial markets and many non-residential building markets are starting to turn the corner, most are still below peak levels, Murray says.

Murray puts himself in the "slow-and- steady is not a bad thing" camp. "The way the recovery is unfolding is beneficial for two reasons: It lessens the chance of another boom-then-bust cycle, and it allows for labor constraints to be not as severe," he says.

Robert Denk of the National Association of Home Builders, Washington, D.C., agrees that slower is better and don't get too excited about percent changes. "We are seeing some great percent increases, but we are still short of where we would like to be," he says. For Denk, a "normal" market would be about 1.3 million housing starts a year. NAHB estimates that total housing starts will increase a healthy 18%, to 924,000, this year. NAHB predicts the market will approach "normal" next year, with 1.15 million starts.

While double-digit increases in housing are driving overall construction growth, economists are just as excited about some broad swings in the non-residential markets that they see coming next year. Murray predicts that Dodge starts for educational buildings will swing from a negative 3.4% this year to a positive 3.0% in 2014. He also sees health care going from a minus 2.8% this year to a plus 2.0% next year. "The key for 2014 is institutional buildings. Can [that market]stabilize, or is there room for further declines?" he asks. Murray's forecast calls for the institutional building market to bounce back 2% next year, after falling 4.4% in 2013.

Similar Swings

FMI's Randy Giggard predicts similar swings. FMI's forecast calls for the office market to go from a minus 2% to a plus 4%, for school building to go from a 4% decline to a 4% increase, and health-care work from down 1% to up 6%. "Health care follows a natural cycle, and it is just time to start building more hospitals," Giggard says. "And people keep voting for school building bonds, so that market is looking good, too," he adds.

The Portland Cement Association, Skokie, Ill., is predicting an 8% increase in construction put-in-place next year, compared to an estimated increase of just 1.3% this year. The PCA forecast is a little more bullish on public construction than other forecasts. PCA predicts growth in the overall public market will swing from a negative 5.2% this year to a positive 3.4% in 2014.

The Associated Builders and Contractors, Washington, D.C., is forecasting a 6% increase in construction next year. "Our model shows next year's growth of 5% for commercial construction, 7% for health care, 8% for lodging and 6% for communications," says Anirban Basu, ABC's chief economist.

The forecast for highway paving and bridge work by the American Road & Transportation Builders Association, Washington, D.C., is mixed, with tepid growth for paving work but relatively strong growth for bridge construction. "The 1.9% increase in paving work we are forecasting for next year barely even qualifies as a rebound," says Alison Black, ARTBA's chief economist. She estimates the paving market fell 11.4% this year, following a 3.3% decline in 2012. "The pavement market looks pretty sluggish over the next few years," she adds.

Bridge work, on the other hand, is growing at a steady pace. ARTBA predicts the dollar value for bridge work in 2014 will increase another 5.6%, after increasing 7.1% this year and 5.1% in 2012.

"We have seen a big divergence between the highway and bridge markets," says Black. "On the pavement side, we have seen a significant pullback in state and local spending. But what is really holding down our forecast is the questions over the Highway Trust Fund," she adds. "There is very little money going into new construction."

Indeed, federal government funding is a key issue for many construction markets next year because of its uncertainty. A congressional budget standoff caused a 16-day shutdown of much of the federal government in October, further unsettling the companies that pursue federal construction projects.

During the shutdown, many agencies did not award new contracts, and there also was a temporary halt in the Corps of Engineers' processing of permits to build in and around wetlands.

Finally, on Oct. 16, congressional leaders reached an agreement to extend funding through Jan. 15 and brought federal workers back on the job. The measure also averted a government default by raising the debt ceiling through Feb. 7.

In addition, the deal called for members of the House and Senate budget committees to begin negotiations toward a budget blueprint for fiscal year 2014. If enacted, it would be the first budget resolution to become law since 2009. The joint House-Senate budget conference committee held its first meeting on Oct. 30 and met again on Nov. 13 but did not reach an agreement.

The conferees, led by House Budget Committee Chairman Paul Ryan (R-Wis.) and Senate budget panel Chairman Patty Murray (D-Wash.), face a Dec. 13 deadline to produce a deal.

Murray said the minimum goal would be to set an overall discretionary-spending cap for 2014. While the House approved a $966-billion limit, and the Senate passed a $1.058-trillion cap.

If the budget conferees can agree on a compromise "top line" spending figure, the House and Senate appropriations committees would set to work to determine 2014 funding levels for each line-item account, including construction programs. Another open question is whether the budget conferees will replace the mandatory budget sequester's wide-ranging spending reductions with some alternate formula for reductions. The 2013 sequester round cut construction spending by $4 billion, according to ENR's estimate.

To see the full report, including analysis and data in PDF format, click here. (Subscription required.)

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