Economist Predicts Slow Recovery for U.S. Construction Market
March 4, 2011

The U.S. economy and construction market have seen many changes since October 2010 when Jim Haughey, chief economist for Reed Construction Data, last provided his economic predictions for the construction market. In his latest forecast, he discussed a number of changes the market has seen since last fall.

“Contractors are operating in a different environment,” he said. “Obama’s aggressive spending has been halted by the recent election.” Other changes include deepening state budget cuts; developing-country economic booms and Arab revolutions that are increasing commodity prices; growth in consumer confidence; tighter credit for housing and looser credit for non-residential construction; as well as a significant pick up in the multi-family market.

Haughey also pointed out that gross domestic product (GDP) growth is starting to show improvement. He said the GDP should hold at a 3-percent pace from the second quarter of 2010 to the end 2012.

Taking a look at the construction environment for 2011-2012, Haughey said to expect several changes. For example, in the private building space and facility capacity this should decline from a large surplus to near normal conditions. As far as spending confidence, “it starts very depressed … but will rise rapidly back to normal as we get into 2012,” he said.

He also said credit access is still restrained, but is starting to improve.

“Public construction funds will decline even further in 2011, and then recover some in 2012,” added Haughey. “[As for] construction costs, domestic prices for materials are likely to get worse before they get better,” he added, saying they will move from 0-1 percent to 1.2 percent inflation.

“Volatile import price inflation averages about 5-6 percent,” said Haughey.

Taking a closer look at total U.S. construction spending, he said it was down 11 percent in 2010 and there will be a very little gain—2.8 percent—in 2011. For 2012 he predicts a modest double-digit gain of 12.5 percent. For non-residential specifically, this was down 23.4 percent in 2010 and is expected to be down only 3.7 percent this year and should be up 13.6 percent next year. On the residential side, the sector was down 3.2 percent last year and is expected to be up 6.0 percent this year and 23.8 in 2012.

“The housing market will start picking up this spring at a modest pace,” said Haughey.

Though non-residential continues to lag residential, Haughey said there are still opportunities, as many sectors continue to grow. These include manufacturing, libraries and museums, hospitals and military projects. On the other hand, many sectors remain down, such as offices, education and hotels.

Speaking of commercial construction, Haughey added, “Vacancy rates remain very high and rental rates are stable to slightly rising.” He also noted that the project planning phase is starting to pick up.

“Investors are slowly returning to commercial real estate,” he said.

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