A look ahead – Construction & Demolition Recycling

0
93


chaisiri | Adobe Stock

The construction sector is a worthy barometer for measuring the strength of the economy. It is also a worthy indicator of potential demolition and recycling opportunities on the horizon. While the building sector has enjoyed record growth since rebounding from the Great Recession, questions abound as to whether the construction market can keep its momentum as we move into 2019 and beyond.

Where we’ve been

Construction spending and employment are among two key benchmarks economists utilize to gauge industry strength. Looking at separate graphs from the U.S. Bureau of Labor Statistics (BLS) of both construction spending and construction employment dating from pre-Recession levels in 2006 to October 2018, one can see an unmistakable pattern prevailing. The booming spending and high employment numbers enjoyed before the Recession are followed by a precipitous and steep decline on both graphs, eventually bottoming out around 2011, followed by a steady and consistent climb up to the peaks the industry is presently enjoying.

According to this data, construction employment was at a 10-year high as of Oct. 2018, with 7.3 million workers employed. Using data comparing Oct. 2017 and Oct. 2018, employment in the nonresidential space increased by 4.4 percent, while residential employment increased by 5.3 percent year-over-year.

According to Associated General Contractors of America Chief Economist Ken Simonson, the robust contractor employment numbers are a byproduct of a decade of economic prosperity, and worker pay is reflecting this demand.

“After nearly 10 years of economic growth, most sectors of the economy need and can afford more construction,” he says. “With the U.S. unemployment rate at a 50-year low of 3.7 percent, it is not surprising that unemployment is also low among construction workers—they get jobs elsewhere if they don’t get snapped up by a contractor. Therefore, contractors are raising pay to compete.”

Associated Builders and Contractors (ABC) Chief Economist Anirban Basu echoes Simonson’s sentiment in a December 2018 article he authored in Construction Executive, saying that high worker demand is fueling increases in compensation.

“The ongoing growth in demand for construction workers is rendered apparent in data characterizing industry job openings,” he says. “According to the Bureau of Labor Statistics, a decade ago, the number of job openings for construction workers was roughly a third of what it is today. … Associated Builders and Contractors cites an estimated 500,000 open construction positions in the United States. There is only one thing that can happen when an abundance of job openings meets an inadequate supply of workers: Compensation costs must rise, and they are doing just that.”

Coinciding with near-record employment numbers, construction spending was at an all-time high of $1.31 trillion as of Oct. 2018, which is 9 percent above the previous peak in 2006. Using data comparing Oct. 2017 to Oct. 2018, total construction spending increased 4.9 percent year-over-year, with private residential spending increasing 1.8 percent, private nonresidential increasing by 6.4 percent and public construction spending increasing by 8.5 percent.

According to Simonson, this growth is indicative of strong nationwide construction activity across sectors, not just certain geographic hot spots that are enjoying success.

“Construction is growing at a moderate pace and is unusually well-balanced both geographically and by segment,” he says. “From October 2017 to October 2018, construction employment increased in 44 states and [Washington], D.C., according to the Bureau of Labor Statistics. Construction spending put in place increased at a 5 percent rate in the first 10 months of 2018 combined, compared to the same period in 2017, with nearly identical growth rates for residential, private nonresidential and public construction, according to the U.S. Census Bureau.”

Basu says that, among other factors, increases in state tax revenue are helping fuel increased construction activity, as states are allocating more of these dollars to help fix roads, bridges and highways.

“Another set of public policies are helping strengthen construction activity and the broader economy: public works. It used to be that the country’s infrastructure largely depended on what spending bills came out of Washington, D.C., but that’s no longer the case,” he says. “While a much-discussed federal infrastructure package has taken a legislative backseat, the recent economic expansion has helped pad state coffers. According to the Pew Research Center, 34 states are taking in more tax revenue than they were prior to the Great Recession, even after accounting for inflation. … These surpluses have caused some states to reinvest in their own roads and highways.”

ilkercelik | Adobe Stock

What to watch for

Changes in legislation and regulation are key influencers that affect how the construction market responds.

Basu notes that the Tax Cuts and Jobs Act, passed in Dec. 2017, appears to have been positive for the industry. He cites the increase in the amount that can be immediately expensed for certain types of purchases under the law, including equipment, from $500,000 to $1 million, as a driver of more activity.

“While it still might be too early to see the impact of the tax law in any data released by official government agencies, other sources provide some insight. For example, as of this writing, year-to-date sales of Ford’s F-series of trucks, commonly used in the construction industry, were higher in 2018 compared to the same time period in 2017. This likely is a result of the overall strength of the economy coupled with advantageous changes built into the new tax code.”

While the Tax Cuts and Jobs Act appears to have been a net positive for the industry heading into 2019, questions loom as to how recently enacted legislation and prospective regulations may influence the construction sector in the near future.

Chief among the regulatory concerns industry participants are watching are how the 25 percent tariffs on steel and 10 percent tariffs on aluminum will affect prices and demand.

“U.S. tariffs and retaliatory actions by trading partners are already raising costs and uncertainty for contractors and also jeopardizing demand from a variety of customers that are exposed to higher input costs or have been shut out of foreign markets,” Simonson says. “These effects may be magnified in 2019 as contractors buy more materials that were previously free from tariffs because they were already in inventory or had been pre-ordered.”

Simonson says that uncertainty on how these tariffs may be adjusted in the future makes it difficult to guess how contractors will react in the coming year.

“Tariffs on steel and, to a lesser extent, aluminum are likely to push up costs. But the uncertainty about whether tariffs will be increased, frozen or removed makes estimating even harder than usual,” he says. “Some firms are likely to increase contingencies in their bids; others may try to get owners to share the risk of unanticipated price increases.”

Basu says that despite the fears that initially persisted regarding how these tariffs would impact U.S. relations abroad, the ramifications on trade haven’t been as pronounced as some anticipated.

“Despite a narrative fixated on tariffs and trade wars, global economic performance remains decent, which, all things being equal, is supportive of U.S. economic growth,” he says. “The most recent forecast from the International Monetary Fund indicates that global economic growth in 2018 will be 3.7 percent—about the same as last year. While there are signs of growing stress in countries such as Argentina and Turkey, nations such as Canada, India, Australia and Germany continue to report acceptable economic performances.

“Earlier this year, it looked like America versus the world. But since that time, trade agreements have been signed with Mexico, South Korea and Canada. Discussions with the European Union are ongoing. The situation with China remains unsettled, but at least fears of a global trade war have abated.”

In addition to recently passed regulations, political power shifts brought about by the midterm elections could affect what new legislation is enacted in 2019 as the Democratic Party takes control of the House of Representatives. However, Simonson cautions that contractors shouldn’t expect widespread changes to the status quo.

“It is possible that the change in control of the House of Representatives will facilitate a compromise on a federal infrastructure bill. The next Congress must also renew the federal highway and transit funding bill that expires in late 2020. But little legislation of importance to construction appears likely to reach the president or get his signature in the next two years,” Simonson says.

Looking ahead

No crystal ball exists to forecast how 2019 and beyond will play out for contractors, but current leading indicators show “few signs indicat[ing] a looming recession,” Basu says.

Basu points to the Conference Board’s Leading Economic Index, which he says has been a historically good indicator of future downturns over the last 50 years, to forecast that “economic momentum will persist for at least another two to three quarters.”

He also notes that ABC’s Construction Backlog Indicator, which is an index used to show work that is under contract but not yet completed, is trending in a positive direction, portending a backlog of work in the pipeline for contractors across the country for much of 2019.

Simonson says that he expects economic tailwinds to continue to propel the construction sector for the foreseeable future, leading to growth in spending and employment, although potentially at a less robust clip than in 2018 thanks to factors such as rising interest rates and elevated building costs.

“I expect 2019 to be another year of moderate growth for construction. However, contractors should expect continuing uncertainty and probably higher costs relating to tariffs, even tighter labor markets and a possible downturn in orders from interest-sensitive owners, such as hotel developers and municipal-bond issuers,” he says.

Although Basu is optimistic that the industry will continue in a positive direction in 2019, he cautions that recessions are historically inevitable after prolonged periods of prosperity. He notes that contractors would be wise to keep this top of mind as the year progresses.

“Contractors should be aware that recessions often follow within two years of the peak in confidence. In 1999, the U.S. economy was booming,” Basu says. “That year, the economy expanded 4.8 percent. Within two years, the nation was in recession after the dot-com bust of 2000.

“Similarly, the economy was humming in 2005, thanks largely to a red-hot housing market. That year, the U.S. economy expanded 3.5 percent, the last time it achieved the 3 percent threshold. The housing bubble burst in earnest during 2006’s first half, and by late 2007, the nation found itself in a very deep recession.

“This is not to suggest that recession is necessarily coming in 2020 or 2021. But, contractors should be wary and remain vigilant with respect to cash flow management and balance sheet health during the year ahead. The average contractor is likely to be quite busy in 2019, but beyond that the economic outlook is decidedly murky.”

The author is the editor for Construction & Demolition Recycling magazine and can be contacted at aredling@gie.net.



Original Source

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.