Economist Forecasts What’s in Store for 2010, 2011
October 25, 2010

What can the construction industry expect to see in the coming months? According to Ken Simonson, chief economist for the Associated General Contractors of America (AGC), “less-than-trend growth--and that is bad news for construction.” Simonson spoke recently about some of the current economic influences on the construction market and provided a bit of insight into what we can expect for the future.

Simonson talked some about the impact of the Stimulus, which he said, has provided a lot of money for construction.

“By AGC's count $135 billion of the Recovery Act is going to construction or related activity,” he said. “The question is, why hasn’t more of it shown up?” He gave several reasons. For example, new programs, such as high-speed rail and smart grid, had to be defined.

“States or other agencies had to be given time to prepare their bids and then the federal agency responsible had to evaluate those bids and figure out who to award the money to,” said Simonson.

Likewise, he said there were agencies given a lot more money than they’d ever had before, now they’re ramping up and getting that money out the door.

“Also, the Buy-American provision held up waste-water treatment projects, but now there have been more than 50 specific waivers to get those going,” said Simonson. “So I do think the Stimulus is helping now and will help more over the next year.”

However, Simonson added, “As good as the Stimulus has been it has not been enough to keep spending level.”
He said total construction spending has been tailing off since early 2006 and in last 12 months (August 2009-2010) it’s down 10 percent.

“Private nonresidential held up great until the economic and financial miseries of late 2008 and since then it has been sagging,” he said. “Private residential started falling in early  2006, tumbled all the way until the housing tax credit took effect in early 2009 and then rose until the tax credit went away and is now tailing off again. In the last 12 months it’s down 2 percent.”

As far as public construction, Simonson said it has been rising since the beginning of 2010 and in the last 12 months is down just 1 percent.

Single family, which has been down since 2006 to early 2009, is now up 4 percent from August 2009-2010. Multi-family was down 52 percent, while improvements, additions and renovations to existing single- and multi-family are up 4 percent.

As far as permits, Simonson said while single family permits dropped in the past months, it now looks as though the downturn may be over. He said multi-family appears to be bobbing up and down and is now up over the past 12 months. It, however, took another dive in September.

“I think where we’re headed over the next year or so is the single-family market will finally start a steady, upward trend, though much more modest than what has historically been the case,” said Simonson. On the multi-family side, he said we’re starting to see markets where affected rents are rising and vacancies are dropping … “eventually we’ll see developers of apartments back on the market; the condo market will remain depressed until 2011, and maybe beyond.”

On the jobs side, Simonson said contractors have been shedding employees since the middle of 2006—a year and a half before the rest of the economy.

“This year they are finally adding workers some months, though not consistently,” he said, adding that construction unemployment in September was 17.2 percent—the highest ever for September and about double the national average.

“I worry about the long-term consequences; when demand picks up it will be even harder than before to find workers,” he said.

Looking ahead to the rest of 2010, Simonson predicts nonresidential spending will be down 15 to 20 percent and residential will be +5 to -5 percent. Total construction spending will be down 10 to 15 percent and material costs may be up by about 4 percent; labor costs will increase 2 percent or less.

As far as 2011, he expects nonresidential will finally hit bottom in most categories. And both single- and multi-family should be positive, bringing total construction spending up between 3 and 7 percent. Materials costs will also rise at about the same rate while labor costs will stay pretty mild, up 2.5 percent or less.

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