Construction Industry Uncertain Amid High Prices, Unexpected Shortages, Experts Report
May 23, 2012

by Erica Terrini,

The construction industry has arrived at a point of uncertainty, according to three experts who provided predictions for what to expect for the rest of this year during a webinar, "The Outlook for Materials, Equipment & Labor Costs," held yesterday.

Tom Kloza, chief oil analyst at the Oil Price Information Service, Kathryn Thompson, co-founder and senior research analyst of the Thompson Research Group (TRG), and Ken Simonson, chief economist at the Associated General Contractors (AGC) of America, addressed major concerns of the construction industry.

Economic and Construction Outlook, Round One

Thompson says in the overall economy it has been a slow recovery and while this is not the first recession in the U.S. (there have been 10 recessions from 1946 to 2006) it will continue to be tough.

"For good or for ill, a lot of trends in the construction sector are influenced by fluctuations in energy prices," Thompson says, "be it affecting the consumer sentiment and their willingness to buy and build or the actual price or cost of products and how that has a residual impact on the overall construction industry."

She says this is the primary reason for the rough patch, citing the U.S. Gross Domestic Product (GPD) that has only grown 0.8 percent over the last four years. The European debt crises, the presidential election, higher taxes, regulatory, weak state finances, persistent unemployment, rising healthcare costs, raw material increases and China's economic slowdown are all contributing to the lack of construction projects.

But Thompson says there are positive signs emerging. Bidding activity is picking up based on construction activity increasing - however, margins are down significantly from peak years.

"While we are seeing incremental improvement in construction, the big caveat is that performance is region and sector specific," Thompson says. "Better performing areas include the following: energy, data centers, healthcare, multi-family, repair and remodel, Gulf Coast, Texas and North Dakota while areas of weakness include public construction such as highways, water, transportation and conservation development."

She adds that the hardest hit states include California, Nevada, Arizona and Florida. Additionally, despite the incremental improvement in demand, contractors' balance sheets remain depressed, the credit environment is still tight, and bonding requirements are more stringent.

"There are fewer contractor failures than anticipated thus far," Thompson says. "But we continue to hear feedback that contractor failures are expected in the near-term." She adds that contractors are also renting more.

Ultimately, Thompson says the key components of the revenue outlook include lower federal and state spending, muted recovery in residential and non-residential construction and a general lack of visibility of industry parties. This all leads to a continued tepid recovery.

Economic and Construction Outlook, Round Two

Simonson says the current state of the economy and construction industry has some general highlights. He says the GDP, personal income, and jobs are growing though slowly. There are also continuing problems for office and retail industries.

"However, power, manufacturing, warehouse or distribution, and hospital sectors will grow in addition to apartments," he says. "But single-family construction remains a mystery and federal, state, and local cuts will continue." He adds that material costs will not be extreme.

Simonson says the construction industry also depends on specific materials that are in demand worldwide, have erratic supply growth and are heavy, bulky or hard to transport.

"Construction requires physical delivery," he says. "Thus, industry is subject to price spurts, transport bottlenecks, and fuel price swings. Expect a 4 to 5 percent December to December Producer Price Index (PPI) increase with periods of 6 to 9 percent increases."

Simonson says as far as a yearly summary - private nonresidential spending will increase 10 to 15 percent in the following sectors: power, pipeline, manufacturing, warehouse, hospitals, and possibly higher education.

He adds that public spending will flat line or decrease 5 percent with less investment in highways, other transportation, and preK-12 education. Additionally, there will be weak state and local spending.

Residential spending will increase 5 to 15 percent and construction spending will increase 5 to 12 percent. Simonson says material costs will increase 4 to 9 percent and labor costs will increase 1.5 to 2.5 percent. The trends for 2013 to 2012 include increase in construction spending, material costs, labor costs and bid prices.

Navigating Through the "Oil Patch"

According to Kloza, his research of factors being seen in the global and U.S. markets for oil has allowed him to indicate what causes prices to move versus what is not as well as what is likely to shape costs for the next seven months.

"There's a part of me that believes anything beyond the 90-day outlook smacks of witchcraft in oil price prediction," Kloza says. "But I do believe there are a few trends that one can identify for the second half of the year and certainly for the next couple of months or so."

The short-term forecast for the rest of this quarter is lower. Kloza says diesel prices are the prices to watch.

"I think if there's global economic growth and I think most people would put this something on the order of 3 percent across the world," he says. "There will probably be more upside for crude and it will be diesel that takes off as opposed to gasoline - gasoline will take off next year."

"We'll see gasoline slump after Labor Day because it's so much easier to make it," he says. "It won't fetch much of a price as the crude oil price."

In regards to consumption of gasoline, Kloza says current numbers indicate people are driving about as much this week as they were the same week in 2011 and this trend will continue.

"These are expensive prices but people got used to it - they were thinking they were going to see $5 and $6 per gallon so it's not too bad," he says. "Again, I think you have to throw out those cheap 2000 to 2009 crude or gasoline numbers. That would require the deleveraging of all of the financial interest in the future market or technological advance such as hydrogen-fuel cell - those don't look likely."

Kloza adds it would be smart to watch diesel closely in the second half of this year, saying it could be the product that hits $5 per gallon first.

"I hate to throw that number out there because that's a scary number, but I do think that it's the product with the most upside," he says.

This story is an original story by USGlass magazine/USGNN™. Subscribe to USGlass magazine.
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