The National Bureau of Economic Research determined recovery from the Great Recession began in June 2009. Gross Domestic Product (GDP), a key measure of an economy’s health, turned positive in 2010, but annual real GDP growth has been modest. We expect the 2013 GDP growth will be about the same as 2012, and may approach 3 percent in 2014.
Real GDP Growth
The United States (U.S.) economy shows some positive growth signs, but previous hopeful signs have failed to be sustained. On the national level, budget and financial disagreements continue to create apprehension following the recent budget cuts from sequestration. Locally, most governments continue to struggle with balancing revenue and expenditures. Global economic weakness continues, particularly with the European Union falling back into recession.
Some indicators point toward economic growth, such as stock prices, a rebound in the housing market and a strong energy sector. Some may see the unemployment rate drop as a positive, but it remains in the upper 7 percent range and employment levels remain well below pre-recession levels. Other indicators reflect uneasiness about near-term economic growth:
- Consumer spending, (70% of GDP), continues to show very modest gains. However, consumer confidence has not shown a steady upward trend.
- Conference Board Leading Economic Index® (LEI) has trended up since bottoming in March 2009.
- The Institute for Supply Management (ISM) Manufacturing and Non-Manufacturing Indices have been generally above 50, indicating expansion,
These indicators exhibited ups and downs in 2012, but the economy seems to be regaining a solid foundation for growth albeit not until after 2013.
Sustained GDP growth generally fuels construction industry growth. Construction put-in-place typically ranges from 7 to 9 percent of GDP. It has been below 6 percent for the past three years.
The recent tepid GDP growth finally produced indications of a construction industry recovery in 2012. Construction output grew 9.2 percent based on Bureau of the Census, Construction put-in-place data. The growth drivers being the residential sector, which grew 15.4 percent, and the non-residential sector grew 6.4 percent. Faithful+Gould forecasts continued yet slow non-residential sector growth in 2013.
Hopeful signs for the construction industry come from a couple of indicators produced by industry organizations, namely The Associated Builders Contractors (ABC) which surveys months of backlog among members and The Architectural Billings Index (ABI) produced by the American Institute of Architects (AIA) which measures current design activity.
The year-on-year growth in public sector construction output peaked in 2007 at about 13 percent. It has declined since, going negative in 2010. Public sector construction spending fell almost 3 percent in 2012. We expect public sector construction output to be almost unchanged in 2013, mostly from increases in state and local spending.
In the private sector, the lodging, office, educational, power, sewage and waste disposal, and manufacturing components all showed growth of more than 15 percent. Power is the largest dollar component and had the largest, nearly 30 percent, increase. This contributed about half of the non-residential private sector increase in 2012. These components will be significant in 2013, though power will be less influential in overall growth.
With rare exception, U.S. construction indices are input based so they do not capture the affects of market competition like an output (tender) based index would. In our current market, which is neither hyper-competitive nor hyper-noncompetitive, input and output based indices should track similarly.
The improving market during the past couple of years has essentially ended the fall in bid (tender) prices. On a national average basis, modest price increases began a couple of years ago. Various construction cost indices showed prices increased in 2012 between 2 and 3 percent. Nationally, construction escalation for 2013 will likely be 2 to 4 percent. There is continuing cost pressure from key materials and mostly minor increases for labor. However, 2014 and beyond may see more significant price increases.
The construction industry typically employs about 5 percent of the workforce. Construction unemployment was 13.9 percent in 2012, down from it recession high of 20.6 percent in 2010.
The good news is construction employment rose slightly in 2012, though it is still about 30 percent below the 2006 level. The bad news is a shortage of workers may be likely as the industry recovers. Skilled workers may be hard to find as many left the industry or retired. A sharp rise in demand may not allow time to attract and train new skilled workers. Some inflationary pressures may begin showing in labor costs this year and next year, but are more likely for 2015 if the recovery strengthens.
The Producer Price Index for New Construction Materials produced by the Bureau of Labor Statistics shows material prices increasing about 6 percent in 2011 and about 2 percent in 2012.
The value of imports for commodities used in construction is picking up. The U.S. continues to import portions of key materials, competing with the global demand (e.g., steel, cement, copper, lumber, gypsum). Early indications show some material prices trending upward. Energy costs are likely to remain highly variable, but rising costs seem to be more likely. Considering a continuing surge in the residential sector and a slight increase for non-residential sector, material prices are likely to trend 4 to 6 percent higher this year.