Construction was the first industry to fall into recession and the last to emerge from it. The industry finally seems to be recovering, but there are still plenty of risks that could cut short the revival.
Census data released Dec. 3 show that construction spending in October rose for the seventh month in a row and achieved the highest level since September 2009. Total spending of $872 billion at a seasonally adjusted rate was up 17% from the low-water mark recorded in February 2011.
But the recovery remains very incomplete and uneven. The October total was 28% below the all-time peak in spending set more than six years earlier, in March 2006. In inflation-adjusted terms, the gap was even greater. And, while private residential and nonresidential spending both reached multi-year highs, public spending has been edging lower on a year-over-year basis since early 2011.
One puzzle about the construction recovery is that it has yet to show up in hiring. Throughout the economy, output has grown much faster than employment. Nevertheless, private nonfarm payroll employment, which shrank by 8.9 million from January 2008 to February 2010, had recouped by 5.1 million jobs as of November 2012. Not so with construction: The industry shed 2.3 million jobs between April 2006 – nearly two years before overall private employment topped out – and January 2011, a year after private-sector hiring resumed. By November 2012, the industry had regained only 58,000 lost jobs.
The construction recovery is unbalanced in terms of geography as well as segments. Only 19 states and the District of Columbia had more construction employees in November 2012 than they had a year earlier, while 30 states had fewer. (Employment was unchanged in Michigan.) The one-year employment change ranged from an 8% rise in Hawaii to a 9% drop in Delaware. Throughout 2012, a few states have consistently added construction jobs – North Dakota, Texas, Indiana and, more recently, Arizona – while Florida, Georgia and Nevada, among others, have continued to lose jobs compared with year-earlier levels. But most states have fluctuated between gains and losses.
Encouraging news for contractors
Despite this very mixed record of growth, there is reason to believe 2013 will hold more optimism for contractors. First, the “shale gale” continues to spread. While the wells are considered mining, not construction, each site requires an access road, site preparation, storage facilities, pumping and processing equipment, and connections to pipelines. Nearby communities benefit from spending by the drilling companies, their workers and landowners-turned-royalty holders. Orders flow upstream for fracking sand, pipe and machinery. The biggest impact is downstream, in the form of additional interstate pipelines, ethane crackers and petrochemical plants, liquefaction trains and export terminals, gas-fired power and steel plants, and natural gas fueling stations for trucks. All of these categories of construction should mushroom in 2013, and in a wide variety of states. For instance, Industrial Info Resources reported Dec. 14, “There are roughly $10.5 billion of infrastructure investments that are linked to further development of the Eagle Ford” shale formation in south Texas.
Second, there are multiple changes occurring in the U.S. supply chain. One of the biggest changes is actually far offshore: the widening of the Panama Canal, which in two years or less will allow passage of giant “post-Panamax” containerships capable of carrying 15,000 containers, more than triple the current maximum. East and Gulf Coast ports are dredging, raising bridge and tunnel heights, lengthening piers and wharves, and expanding storage yards. On Dec. 20, Gov. Bob McDonnell of Virginia announced his state would build a multibillion-dollar toll road to speed freight from the port of Norfolk to inland connections. Rail lines, trucking companies and warehouses on all coasts (including West Coast ports that seek to remain competitive) and along routes far inland are investing in private facilities to shorten delivery times.
Other developments as well are driving supply chain-related construction. Manufacturers are bringing plants back to the United States as labor and energy costs become more competitive. Also, more firms are seeking domestic sources of supply following interruptions in shipments caused by the volcanic eruption in Iceland in 2010, the 2011 earthquake and tsunami in Japan, and floods in Thailand. New warehouses are going up to provide faster service to customers switching from in-store to online purchases. Data centers remain a hot construction market as all types of businesses strive to process information and serve customers more quickly. Again, these developments are stimulating construction in many locations and niches.
Third, multifamily construction appears sure to keep going strong in 2013. Rising employment is enabling more first-time or returning job holders to strike out on their own, but many are unable to qualify for a mortgage or unwilling to tie themselves to a house they may not be able to sell when they want to move. And a growing number of young adults are foregoing car ownership to live near transit, bike and short-term car rental options. Such locations are largely multifamily. Meanwhile, a growing number of seniors are likely to want to move from maintenance-intensive single-family homes into multifamily housing.