The End Of One Year And The Beginning Of The Next Is Always A Good Place To Pause For Reflection.
So, With 2012 Behind Us And 2013 Just Getting Started, Where Are We As An Industry, And More
Importantly, Where Are We Headed?
By Mark S. Kuhar and Josephine Smith
Everyone will likely remember 2012 for MAP-21, the MINExpo show, the contentious election, and the year the world didn't end. What people would like to forget is the sluggish pace of economic growth, both on a national level, and more specifically, within the construction and construction-materials industries.
Most would agree that even sluggish growth is better than none, but market acceleration is needed, and needed fast. So where do we stand as 2013 begins? Let's start with aggregates production.
The third quarter of the year went poorly for aggregates producers, however the 9-month totals for production actually showed a year-over-year increase. According to the latest report just released by the U.S. Geological Survey, an estimated 580 metric tons (Mt) of total construction aggregates was produced and shipped for consumption in the United States in the third quarter of 2012, a decrease of 5 percent compared with that of the same period of 2011. However, the estimated production for consumption in the first nine months of 2012 was 1.48 billion metric tons (Gt), a slight increase compared with that of the same period of 2011.
An estimated 334 million Mt of crushed stone was produced and shipped for consumption in the United States in the third quarter of 2012, a decrease of 5 percent compared with that of the same period of 2011. However, the estimated production for consumption in the first nine months of 2012 was 867 Mt, a slight increase compared with the first nine months of 2011.
The estimated U.S. output of construction sand and gravel produced and shipped for consumption in the third quarter of 2012 was 246 Mt, a decrease of 6 percent compared with that of the same period of 2011. However the estimated production for consumption in the first nine months of 2012 was 613 Mt, a slight increase compared with that of the same period of 2011.
Estimated portland cement consumption increased slightly in the third quarter of 2012 and was up by 10 percent in the first nine months of 2012, compared with that of the same periods of 2011. This information is obtained from the USGS monthly survey of U.S. cement producers.
The estimated production-for-consumption of aggregates in the third quarter of 2012 decreased in seven of the nine geographic divisions compared with that sold or used in the third quarter of 2011. The largest decreases in percentages were recorded in the East South Central (19 percent), the Middle Atlantic (18 percent), and the East North Central (10 percent) divisions. Production-for-consumption of aggregates decreased in 31 of the 45 states that were estimated.
The five leading states, in descending order of production-for-consumption, were Texas, California, Pennsylvania, Ohio, and Illinois. Their combined total production-for-consumption was 169 Mt and represented 29 percent of the U.S. total.
The estimated production-for-consumption of crushed stone in the third quarter of 2012 decreased in all but one of the geographic divisions compared with that sold or used in the third quarter of 2011. The largest decreases were recorded in the East South Central (17 percent), the Mountain (14 percent), and the Middle Atlantic (14 percent) divisions. Production-for-consumption of crushed stone decreased in 34 of the 46 states that were estimated.
The five leading states, in descending order of production-for-consumption, were Texas, Pennsylvania, Missouri, Ohio, and Illinois. Their combined total production-for-consumption was 114 Mt and represented 34 percent of the U.S. total.
The estimated production-for-consumption of construction sand and gravel in the third quarter of 2012 decreased from the third quarter 2011 levels in seven of the nine geographic divisions. The largest decreases in percentages were recorded in the Middle Atlantic (30 percent), the East South Central (27 percent), and the Pacific (10 percent) divisions. Production-for-consumption of construction sand and gravel decreased in 31 of the 47 states that were estimated.
The five leading states, in descending order of production-for-consumption, were California, Texas, Minnesota, Michigan, and Ohio. Their combined total production-for-consumption was 83 Mt and represented 34 percent of the U.S. total.
The U.S. Census Bureau of the Department of Commerce announced that construction spending for the latest month and year-to-date were up. The one big down spot was highways, which year-over-year, were down.
During October 2012, construction spending was estimated at a seasonally adjusted annual rate of $872.1 billion, 1.4 percent (±2.0 percent) above the revised September estimate of $860.4 billion. The October figure is 9.6 percent (±2.3 percent) above the October 2011 estimate of $795.7 billion.
During the first 10 months of this year, construction spending amounted to $707.4 billion, 9.3 percent (±1.3 percent) above the $646.9 billion for the same period in 2011.
Spending on private construction was at a seasonally adjusted annual rate of $592.1 billion, 1.6 percent (±1.5 percent) above the revised September estimate of $582.7 billion. Residential construction was at a seasonally adjusted annual rate of $294.2 billion in October, 3.0 percent (±1.3 percent) above the revised September estimate of $285.7 billion. Nonresidential construction was at a seasonally adjusted annual rate of $297.9 billion in October, 0.3 percent (±1.5 percent) above the revised September estimate of $297.0 billion.
In October, the estimated seasonally adjusted annual rate of public construction spending was $280.1 billion, 0.8 percent (±3.1 percent) above the revised September estimate of $277.7 billion. Educational construction was at a seasonally adjusted annual rate of $69.3 billion, 0.9 percent (±5.6 percent) above the revised September estimate of $68.6 billion. Highway construction was at a seasonally adjusted annual rate of $76.7 billion, 2.4 percent (±7.2 percent) below the revised September estimate of $78.6 billion.
New Construction Starts
New construction starts during the first 11 months of 2012 on an unadjusted basis were reported at $424.4 billion, up 3 percent compared to the same period a year ago, according to McGraw-Hill Construction, a division of The McGraw-Hill Companies. Again, one of the down areas was in the highway construction sector, which was down 9 percent.
Over the first 11 months of 2012, the Dodge Index averaged 97. "The current year has seen an up-and-down pattern for construction starts, and November qualifies as one of this year's weaker months," stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. "Much of the recent variation has been related to unusually large projects in a given month, and the absence of such projects in November for public works and electric utilities contributed to the slowdown for overall construction. At the same time, nonresidential building in November showed improvement after its loss of momentum during the prior two months, and housing continues to strengthen."
Nonbuilding construction – During the first 11 months of 2012, nonbuilding construction was up 1 percent from the same period a year ago. While public works construction year-to-date was down 1 percent, it was offset by a 4 percent gain for electric utilities. Four of the six public works categories showed year-to-date declines – bridge construction, down 3 percent; sewer construction, down 12 percent; and river/harbor development, down 21 percent. The two public works categories reporting year-to-date increases were water supply systems, up 7 percent; and miscellaneous public works, up 41 percent. The large gain for miscellaneous public works reflected a sharp rise in the amount of pipeline and rail-related work.
Nonresidential building – For the January-November period of 2012, nonresidential building was down 13 percent relative to the same period a year ago. The institutional sector fell 14 percent, as weaker activity was reported for its two largest categories – educational buildings, down 15 percent; and healthcare facilities, down 12 percent. Other institutional declines on a year-to-date basis were the following – public buildings, down 10 percent; churches, down 23 percent; and amusement-related projects, down 24 percent. The manufacturing plant category year-to-date plummeted 45 percent, reflecting the comparison to 2011, which included a $3.0 billion coal-to-gasoline plant and two large semiconductor plants. The commercial sector year-to-date managed to increase 2 percent, lifted by increases for stores, up 8 percent; warehouses, up 9 percent; and hotels, up 20 percent. Office construction year-to-date was down 14 percent, due in part to the comparison to 2011, which included the start of a $1.1 billion government data center in Utah. While the dollar amount for nonresidential building was down 13 percent for the first 11 months of 2012, square footage for nonresidential building was up 2 percent during this time.
Residential building – During the first 11 months of 2012, residential building advanced 28 percent compared to the same period a year ago. Single family housing climbed 29 percent, as the result of this year-to-date performance by geography – the West, up 41 percent; the Midwest, up 30 percent; the South Atlantic, up 27 percent; the South Central, up 23 percent; and the Northeast, up 14 percent.
Multifamily housing rose a similar 27 percent, as the result of this year-to-date performance by geography – the West, up 40 percent; the South Atlantic, up 31 percent; the South Central, up 26 percent; the Northeast, up 25 percent; and the Midwest, up 12 percent. The top five metropolitan areas in terms of the dollar amount of multifamily starts were – New York, up 33 percent; Washington, D.C., up 6 percent; Miami, up 144 percent; Los Angeles, up 29 percent; and Boston, up 21 percent. The large increase for multifamily housing in the West was helped by the 29 percent gain for Los Angeles, as well as growth in such metropolitan areas as Seattle, up 51 percent; San Francisco, up 23 percent; Denver, up 114 percent; and Portland, up 79 percent.
The 3 percent pickup for total construction starts at the national level during the first 11 months of 2012 was the result of a mixed performance at the five-region level. Leading the way was the South Atlantic, up 20 percent, with much of the upward push coming from the start of two massive nuclear power projects in Georgia and South Carolina. If these two projects are excluded, then total construction in the South Atlantic would be down 1 percent. Year-to-date gains for total construction were also reported for the South Central and the Midwest, each up 7 percent. Year-to-date declines for total construction were reported for the Northeast, down 5 percent; and the West, down 10 percent.
Looking Ahead to 2013
The U.S. transportation construction infrastructure market is expected to show modest growth in 2013, increasing 3 percent from $126.5 billion to $130.3 billion, according to the American Road and Transportation Builders Association's (ARTBA) annual forecast. The association's chief economist, Dr. Alison Premo Black, released her findings during a November 30 webinar for Wall Street analysts and construction industry executives.
Growth is expected in highway and street pavements, private work for driveways and parking lots, airport terminal and runway work, railroads, and port and waterway construction. ARTBA predicts the bridge market, which has shown substantial growth over the last 10 years, to remain flat next year.
The federal surface transportation program, combined with state and local government transportation investments, are the most significant drivers of the national transportation infrastructure construction market.
According to Black, the pavements market will be sluggish in 2013, growing 2.8 percent to $58.4 billion. This includes $47.7 billion in public and private investment in highways, roads and streets, and $10.7 billion in largely private investments in parking lots, driveways and related structures. With no new real federal money in the 2012 MAP-21 surface transportation law, still recovering state and local tax collections and modest new housing starts, the pavements market will be uneven across the nation. Pavement work is anticipated to be down in 25 states. Growth above a 5 percent range is expected in 19 states.
However, there are at least two developments related to MAP-21 that could lead to additional market activity in the short term and strengthen the market in 2013 and 2014, Black says.
First, the law's restructuring of the federal highway program offers state transportation departments more flexibility in their use of federal funds. This could lead to slightly increased investment in highway, bridge and pavement work above the forecast in some states. Second, MAP-21's expanded federal Transportation Infrastructure Finance & Innovation Act (TIFIA) loan program should also increase construction activity in some states.
Black also notes that major reconstruction work along the East Coast in states that were affected by Hurricane Sandy could also be a market factor in 2013 across all modes. Additional federal, state and local emergency funds for rebuilding this infrastructure could be a boost as projects get underway.
A major wild card in the forecast, Black says, is the so-called "fiscal cliff" – the dire financial situation set to occur at the beginning of 2013 if Congress and the President can't agree on tax and spending reforms. Although the "fiscal cliff" would not directly impact federal highway investment to the states, it could affect state and local finances, and thereby cause governments to pull back or delay projects. Such action in turn would have negative consequences on the highway construction market. Individual businesses may also delay capital and hiring decisions amid the uncertainty.
ARTBA breaks down specific transportation construction categories in its report:
Bridges and Tunnels – After a four-year run of significant market growth – reaching a record high $28.5 billion in 2012 – the bridge and tunnel construction market will cool off in 2013, likely remaining flat at about $28.2 billion. The ARTBA forecast shows projects in eight states – California, Florida, Illinois, New Jersey, New York, Pennsylvania, Texas and Washington – will continue to account for about half of the U.S. market activity in this sector. With a number of major bridge projects on the horizon, however, the bridge and tunnel sector should rebound smartly in 2014.
Ports and Waterways – Driven by expanded sea trade expected with completion of the Panama Canal expansion project in 2015, U.S. ports and waterway construction is expected to skyrocket nearly 25 percent to $2.65 billion. Increased market activity is anticipated in California, Florida, Kentucky, Maryland, Massachusetts, Mississippi, New Jersey, New Hampshire, New York, Texas, Virginia and Washington.
Airport Runways and Terminals – Airport runway and terminal construction is expected to show growth in 28 states, with sector growth overall of 4.5 percent, reaching $12.5 billion. Market-driving states include: Alaska, Arizona, California, Florida, Illinois, New York, Ohio, Tennessee and Texas. Funding for airport projects is anticipated to increase over the next five years, largely tracking growth in passenger enplanements.
Light Rail and Subways – The uncertainty caused by the 33-month long delay in passage of MAP-21 will be felt in the subway and light rail markets. Construction activity is projected to be down by eight percent overall. There will be some bright spots, however. Based on recent contract awards, these states will be moving forward on key transit projects: California, Florida, Georgia, Hawaii, Illinois, Kansas, Massachusetts, New York, Oregon, Pennsylvania, Texas and Washington.
The forecast uses an ARTBA econometric model that takes into account a number of economic variables at the federal, state and local level. It is measuring the public and private value of construction put in place, published by the U.S. Census Bureau. The ARTBA estimate of the private driveway and parking lot construction market is based on data from the U.S. Census Bureau's "Economic Business Census."
Construction Put-In-Place to Expand
Management consulting and investment banking firm FMI predicts that construction-put-in-place (CPIP) at the end of 2012 will be between $826-$884 billion. FMI researchers also predict CPIP growth rates to be slightly ahead of GDP in 2013 and 2014. This would place the CPIP at more than $1 trillion by the end of 2014, nearly 6 percent of GDP.
The predictions are included in the new report "U.S. Markets Construction Overview" published annually by FMI. Other predictions include:
- Power CPIP will cross the $100 billion mark in 2013.
- Residential CPIP will be back to double-digit growth in 2013.
- Transportation and healthcare CPIP will reach record levels by 2013.
- Education CPIP will continue to rise achieving 2008 numbers by 2016.
However, in 2013 commercial buildings, offices, manufacturing facilities, communications systems and lodging CPIP are expected to continue to underperform at an average of 60 percent of 2008 levels, off by more than $115 billion. By 2016 these sectors are predicted to only reach 70 percent of 2008 CPIP. In addition, excitement over the double-digit growth in residential construction is also balanced with the disappointment that by 2016 residential CPIP will still only be at 65 percent ($200 billion behind) the record high in 2006.
This year the overview includes a synopsis of the key trends and discussions of important issues facing nine of the non-residential construction sectors. Highlights include:
- The uncertainty stemming from the two diverse approaches to economic recovery presented by the U.S. presidential candidates.
- How information technology is driving innovation in the energy services market.
- The challenge of recruiting, managing and retaining talent.
- Concerns over succession planning as industry leaders look toward retirement.
- The increasingly vital role of modularization and prefabrication.
|Monthly Construction Starts
(Unadjusted Totals, In Millions of Dollars)
|11 Mos. 2012||11 Mos. 2011||% Change|
Nonresidential Construction Prediction
In a 2013 construction forecast released Dec. 4, Associated Builders and Contractors (ABC) Chief Economist Anirban Basu predicted nonresidential construction spending to expand 5.2 percent next year, with much of the expansion coming from privately financed projects.
"With the elections now behind us, the hope is the White House and Congress will be able to successfully navigate the nation past its fiscal cliff," Basu said. "If that happens, the latter half of 2013 could be surprisingly good for nonresidential activity given the large volume of construction projects that were put on hold during the course of 2012. However, the baseline forecast calls for only moderate expansion in nonresidential construction spending next year."
According to Basu, rising consumer confidence will lead to a 10 percent expansion in total commercial construction. He also noted the fastest growing major U.S. industry during the last year in terms of absolute job creation was professional and business services and because many firms in this category use office space, office-related construction spending is expected to rise 10 percent. In addition, power is likely to increase 10 percent, lodging 8 percent, health care 5 percent, and manufacturing 5 percent.
In terms of jobs, Basu expects nonresidential building construction employment to expand 2.1 percent in 2013 – only slightly better than the 1 percent performance estimated for 2012. Basu also expects construction materials prices to rise a bit more rapidly in 2013 than they did in 2012, with substantially more volatility to be experienced from month to month next year.
New Home Construction
Upward trends in recent months among a number of housing indicators point to a slow and steady growth in the nation's housing market in 2013, but several challenges remain, according to the latest economic and housing forecast by David Crowe, chief economist for the National Association of Home Builders (NAHB).
"Consistent, positive reports on housing starts, permits, prices, new-home sales and builder confidence in recent months provide further confirmation that a gradual but steady housing recovery is underway across much of the nation," said Crowe. "However, stubbornly tight lending standards for home buyers and builders, inaccurate appraisals and proposals by policymakers to tamper with the mortgage interest deduction could dampen future housing demand."
Stating there is no consistent national trend, Crowe noted the housing recovery is local but spreading.
"We are transitioning from a very low demand level, where most people hold themselves out of the marketplace, to a case where supply will start being the problem," he said. "As we begin to build more homes to address that supply, the new home stock will be a much more important element of the recovery."
Setting the 2000-2002 period as a baseline benchmark for normal housing activity, Crowe said that owner-occupied remodeling has returned to previously normal levels.
"Multifamily production is also well on its way, back to 69 percent of normal," he said. "It's the single-family market that has the farthest to go, standing at only 40 percent of what is considered a typical market." Meanwhile, the number of improving housing markets across the nation continues to show considerable advancement. When the NAHB/First American Improving Markets Index (IMI) was launched in September of 2011, only 12 metropolitan areas out of 360 were on the list. As of December 2012, the list stands at more than 200 metro areas. The index is based on a six-month upswing in housing permits, employment and house prices.
"One reason we have seen such a significant jump in the IMI is because house prices are beginning to recover," said Crowe. "House prices bottomed out early in 2011 and since early 2012 we've seen a 6 percent increase on a national basis."
Another factor spurring the recovery is that household formations are on the rise. In the early part of the decade, the nation was generating 1.4 million new households each year. This collapsed to 500,000 annually during the housing downturn and currently new households are being formed at close to a 900,000 clip per annum.
"We're not up to normal, but this is adding to demand for housing," Crowe said.
As new households form at a growing rate, so too does builder confidence. The NAHB/Wells Fargo Housing Market Index, which measures builder confidence in the single-family housing market, has posted gains for eight consecutive months and now stands at a level of 47. This is very close to the critical midpoint of 50, where equal numbers of builders view the market as good or bad. The HMI has not been above 50 since April of 2006.
Single-family home starts are projected to climb to 534,000 units this year, up 23 percent from 2011. NAHB is forecasting that single-family new-home production will post a healthy 21 percent gain in 2013 to 647,000 units. Starts will continue their upward climb in 2014, posting a further 29 percent rise to 837,000 units.
Multifamily production is expected to rise 31 percent in 2012, reaching the 233,000 level, and posting a solid 16 percent gain in 2013 to 270,000 units. Multifamily starts are anticipated to rise an additional 9 percent in 2014 to 294,000 units.
Meanwhile, new single-family home sales are expected to rise from 307,000 last year to 367,000 this year, a 20 percent rise. Sales are anticipated to climb to 447,000 next year, up 22 percent from 2012 and jump to 607,000 in 2014, a 36 percent increase over 2013 levels.
Management consulting and investment banking firm FMI reports that its forecast for 2013 construction put-in-place calls for an 8 percent increase to $892 billion – the largest percentage increase since 2005 but only just returning to 2003 levels of construction in current dollars.
"More positively, we expect that rate of increase to grow to 9 percent in 2014 and continue at 8 percent through 2016," said J. Randall (Randy) Giggard, managing director research services. "That growth is largely based on a significant, double-digit rebound in residential construction, but we expect other sectors like office and commercial construction to finally pull out of the doldrums as well. Even though we expect a growth rate for residential construction to reach 14 percent in 2013 and 15 percent in 2014, total residential construction won't return to 2002/2003 levels until 2016. While slow, these may be more sustainable levels, avoiding high run-ups in costs and significant drops in affordability. Nonetheless, as we reach higher levels of growth, mortgage rates and prices in hotter markets will very likely go up, thus slowing the rate of growth and speculation. These improvements in the markets will both help keep unemployment down and spur further job creation in other areas of the economy."
Giggard said that one of the many potential wild cards that could either improve the construction forecast or hold it back is infrastructure construction. State and federal governments will continue to struggle with deficits and improving revenue while infrastructure, including highways, bridges, water and wastewater systems, and a number of other areas requiring modernization or replacement continue to need attention and funds.
The American Society of Civil Engineers is now going beyond creating the Report Card for American Infrastructure to publishing a report called "Failure To Act: The Economic Impact Of Current Investment Trends In Surface Transportation Infrastructure." In this report, the focus is on both the economic benefit of improving infrastructure and the consequences of not acting. It is a tough case to make in a struggling economy, and it will require many voices and data to make it. If it gains traction, we could be looking at a considerable rise in infrastructure construction in the next decade.
Highway and Street Funds from the MAP-21 and TIGER grants make up a large percentage of construction put in place included in FMI's 2013 forecast of $84.7 billion for highways and streets. The federal funds will also bolster transportation spending from state and private sources.
While the new transportation bill encourages funding from public-private partnerships (P3), the concept of P3 projects continues to generate more talk than action, although six projects totaling $8.6 billion appear ready to reach financial close in 2012. One potential fly in the ointment is that continually passing continuing resolutions to keep the government in operation is expected to reduce funding for the new transportation program. Also, the new program is only for three years, so we expect the battle for funding to return.