Does recent economic data signal a return to weakness in the economy or even the beginning of another downturn, before we’ve had much of an uptick? To read what ABC’s economist, Anirban Basu, has to say, keep reading….

Despite a decline in the nation’s gross domestic product (GDP) in the last quarter of 2012, the Bureau of Economic Analysis Jan. 30 reported nonresidential fixed investment increased 8.4 percent for the fourth quarter as investment in equipment and software jumped 12.4 percent, which outweighed a 1.1 percent decline in investment in structures. For the year, nonresidential fixed investment increased 7.7 percent, with investment in structures up 9.6 percent and investment in equipment and software up 6.9 percent. Residential fixed investment increased 15.3 percent in the fourth quarter following a 13.5 percent increase in the third quarter. Annually, residential fixed investment increased 11.9 percent over 2011.

“Fourth quarter GDP is not only disappointing, it reveals how much damage was done to the economy by the ongoing slowing of much of the balance of the global economy and fiscal cliff fears,” said Associated Builders and Contractors Chief Economist Anirban Basu.

“Much of the economic momentum generated during the initial nine months of the year dissipated during the fourth quarter as investors, business decision-makers, consumers and others paused in anticipation of a resolution to fiscal issues such as automatic sequestration, the scheduled expiration of the Bush tax cuts and the fate of the payroll tax cut,” Basu said.

“While some of this uncertainty is behind us, confidence among key economic decision-makers continues to be compromised by impending federal spending cuts associated with automatic sequestration, a scheduled end to the federal budget continuing resolution in late March, and debt ceiling discussions to take place later this year,” remarked Basu. “For construction contractors and others, this means that the first several months of 2013 will remain too soft to produce an environment consistent with more robust nonresidential construction recovery.

“Based on the clues supplied in today’s GDP release, construction industry stakeholders can expect construction spending data to also reflect ongoing weakness in momentum,” said Basu. Stakeholders also can expect plentiful discussion in the days to come regarding whether or not last year’s fourth quarter represents the beginning of the next economic downturn.”

For those of you too busy looking for or doing work, here’s a quick review of what the state’s quarterly report from the Economic and Revenue Forecast Council has to say about the construction economy:
Our housing sector continues to strengthen, mainly in multifamily housing. Through August multi-family permits are averaging 11,500 (SAAR), or 265% higher than the 4,000 for all of 2009, the housing low point. For single-family permits, there was only a 26% increase from 2009 levels. Combined multi- and single-family permits are 74% higher than 2009. While that increase is somewhat encouraging, it is off the very low base number in 2009. Permits are still 48% below the hay day of 2005. With rents rising and home affordability improving, the single-family numbers are expected to improve. Contract data, indicating the next six months of activity have stabilized and are starting to rise.
On the flip side, nonresidential contracts have not turned around. They started to move up, but then stumbled to a new all-time low in March, but ticked up after the March low. The three-month moving average remains below the 2011 mark, indicating continued weakness in nonresidential construction.
Construction employment is expected to remain moderate for the rest of this year, slowing picking up on 2013. Construction employment has climbed out of the trough and is expected to post its first gain in five years, but only 1.1%. Again, residential outperforms nonresidential with a slight 3.4% increase for the home builders, while nonresidential continues to decline 0.8%. Overall construction employment is expected to increase just 1.2% in 2013 and 2014, and only 0.8% in 2015, before it turns negative in 2016 and 2017.
Those relatively bleak employment numbers for the next five years present a challenge for the industry. How do we attract, train and retain the best and the brightest when we can’t offer them much stability in future employment? And that just isn’t just in the skilled craft worker, but project managers, estimators, safety professionals and the other non-field staff needed to get jobs and make them profitable. No easy answers when construction didn’t have the greatest career reputation going into the recession. But as our industry becomes more complex and sophisticated, we need to make sure we have the human capital to build America. Good thing I am only in charge of the questions, not the answers! I think we are all in charge of the answers. We’d better get busy.

Just when we think we’ve turned the corner, do we have to now beware the upturn? According to the fall issue of the FMI Management Letter, yes. We aren’t out of the woods yet. The third quarter results of their Nonresidential Construction Index are five points lower than second quarter. Construction and project management fees are lower. There are some economists who fear we are in danger of entering a second recession. There are still plenty of bidders on every project, so there is continued downward pressure on profit margins. From what I hear and see, work is picking up and some contractors are quite busy. But because there still isn’t any or much backlog, contractors are holding off hiring, or hiring as few people as possible. Many contractors have gone out of business, left the business or left town, but now is also the time when there are new unknown and untried contractors hoping to catch the wave as things improve. So as generals bid, they are getting numbers from subs they don’t know, increasing their risk. Banks still aren’t loaning as much as we’d all like, so contractors are asked to become project partners, assuming risk beyond just the normal risk of being a contractor, as if that’s not bad enough. There is incredible uncertainty in the government arena, although we should have answers there in a little more than a month. The good news (there had to be some!), is that many forecasters think that this area is in better shape than most, that we have pent up demand, we just need to get the economic and market conditions right and we’ll see more holes in the ground and more cranes in the sky. Let’s hold on to that thought!

Associated Builders and Contractors (ABC) today released its newest construction industry economic measure, the Construction Confidence Index (CCI). The CCI is a diffusion index that reflects three aspects of the U.S. nonresidential construction industry – sales prospects, staffing levels, and profit.

During the second quarter of 2012, all three indices declined, undoing much of the first quarter’s progress and indicating that nonresidential construction momentum is waning. However, index values remain above 50, indicating that construction spending is still poised to expand, just at a slower pace.

Sales expectations fell from 68.3 to 62.3
Profit margins fell from 57.9 to 53.5
Staffing levels fell from 64.3 to 59.8

“Despite data indicating that the nation is now in its fourth year of economic expansion, the nonresidential construction industry continues to struggle to establish sustained momentum,” said ABC Chief Economist Anirban Basu. “In recent months, nonresidential construction spending levels have barely managed to edge higher, disappointing many contractors.”

“Nonresidential construction firms have become unnerved by the possibility of the nation falling off a fiscal cliff—due to a number of tax increases and spending cuts that take effect at the end of the year—leading the economy back into recession in 2013,” Basu said. “This would limit private nonresidential construction, which is among the nation’s most cyclical industries.

“A recession also would hammer away at already weak federal, state and local government finances, likely leading to further declines in public spending,” said Basu. “For contractor attitudes to improve further, it likely will take some resolution of the fiscal cliff and positive economic data,” Basu said.

Among the most interesting findings is that the proportion of contractors expecting substantial deterioration in business performance has risen from just 2 percent during the first quarter to nearly 13 percent in the second quarter.

CCI is a diffusion index. Like many of these indices, readings above 50 are favorable and indicate growth, while readings below 50 are unfavorable.

A recently released report from FMI shows the Nonresidential Construction Index up 7.8 points to 58.1. (50 is neutral.) More companies plan to hire, albeit only up to 5%, than lay off. This is up five percentage points from last year this same time. The prediction for construction put in place is a meager .5 to 2.5%, but at least it’s more not less. The FMI report goes on, “For some indication of what is holding these expectations back, we also asked panelists for their observations on what owners are doing to control project costs. It is clear that low, low price and high competition are still the driving factors. Savvy owners are also focusing on involving CMs and contractors in the pre-construction phase of the project as well as taking advantage of more sophisticated construction delivery methods and technologies like building information modeling (BIM). It is good to see there are signs that at least pockets of the country are beginning to build again, but the economy is still at the mercy of an uncertain global economy and a world that seems to be changing rapidly in many directions.”

Associated Builders and Contractors (ABC) just released its Construction Backlog Indicator (CBI) for the fourth quarter of 2011. CBI declined 3.2 percent from the previous quarter from 8.1 months to 7.8 months, but is still up 10.9 percent compared to the fourth quarter of 2010. CBI is a forward-looking economic indicator that measures the amount of nonresidential construction work under contract to be completed in the future.

“Overall, the latest CBI numbers indicate a degree of stalling in the recovery of the nation’s nonresidential construction industry, likely due to a combination of the soft patch that developed in the broader economy early last year, a number of seasonal factors and the winding down of federal stimulus projects,” said ABC Chief Economist Anirban Basu. “But the good news is that given the recent acceleration in economic and employment growth, CBI is positioned to rebound more forcefully during the quarters ahead.

“In addition, the most recent data reflect the ongoing expansion in privately funded construction activity as opposed to the contraction of publicly funded construction,” Basu said. “The nation’s smaller construction firms are gaining an advantage from this shift, in contrast to the decreased construction activity among the larger firms that had benefited from earlier federal stimulus projects and military base realignment-related construction.”
Construction backlog expanded in the Northeast, but declined in the South and West, and was essentially unchanged in the Middle States. Backlog is higher in every region compared to a year ago.

“The disparity between regional construction activity is on the rise,” said Basu. “One year ago, the difference in backlog between the South region, with the lengthiest backlog, and the West region, with the shortest backlog, was 1.98 months. During the fourth quarter of 2011, this gap rose to 2.81 months, with the South reporting a backlog of 8.92 months and the West at 6.11 months.

All industry segments monitored by ABC’s CBI declined in average construction backlog from the third quarter to the fourth quarter, but backlog is up on a year-over-year basis in both the commercial/institutional and infrastructure categories.
Construction backlog in the commercial/institutional segment fell from 8.4 months in the third quarter of 2011 to 7.8 months in the fourth quarter, but remains 11.4 percent above the level reported one year ago.

Heavy industrial is the only segment in which construction backlog declined from the same time one year ago. Backlog for this segment fell from 6.6 months in the fourth quarter of 2010 to 5.7 months in the fourth quarter of 2011.

“The most important finding in this quarter’s report is the growing construction activity taking place among smaller firms,” Basu said. “Early in the recovery, the lion’s share of construction work seemed to favor firms with annual revenues in excess of $50 million. This had much to do with federal infrastructure spending. As the economic recovery has broadened to encompass more construction segments, work has steadily spread to smaller firms – a trend that is likely to continue.”

ABC’s Chief Economist Anirban Basu recently issued a statement regarding 3rd quarter GDP that is a bit more hopeful than previous news. The 2nd quarter was also revised upwards. “What the United States is now experiencing is acceleration in capital formation,” Basu said. His full report follows:

Putting fears of a looming recession at rest for now, nonresidential fixed investment jumped 16.3 percent in the third quarter of 2011 following a revised 9.2 percent increase in the previous quarter of this year, according to the October 27 Gross Domestic Report (GDP) report by the Department of Commerce. Nonresidential fixed investment in structures increased for the second straight quarter this year, up 13.3 percent in the third quarter following a 22.6 percent increase in the second quarter. Fixed investment in equipment and software expanded 17.4 percent last quarter following a 6.2 percent increase in the second quarter.

Residential fixed investment grew 2.4 percent in the third quarter after a 4.2 percent loss in the second quarter. Exports grew 4 percent in the third quarter as exports of goods were up 4.7 percent and exports of services increased by 2.4 percent. Imports were up 1.9 percent for the quarter as imports of goods increased by 1.8 percent and imports of services increased 2.4 percent.

Personal consumption expenditures increased 2.4 percent in the third quarter as expenditures of services were up 3.2 percent and expenditures in goods increased 1.4 percent. Changes in real private inventories subtracted 1.1 percent to the third-quarter change in real GDP. Private businesses increased inventories by $5.4 billion for the quarter. Real final sales of domestic product – GDP less change in private inventories – increased 3.2 percent for the quarter following a 1.3 percent increase in the second quarter.

Federal government spending increased 2 percent in the third quarter as national defense spending rose 4.8 percent and nondefense spending decreased 3.7 percent. State and local governments decreased spending for the fifth consecutive quarter, down by 1.3 percent in the third quarter.

Gross domestic purchases – purchases by U.S. residents of goods and services wherever produced – increased 2.2 percent in the third quarter following a 1 percent increase in the second quarter. Overall, real gross domestic product (GDP) increased 2.5 percent in the third quarter following a revised 1.3 percent increase in the second quarter.

Analysis

“Today’s third quarter GDP report puts any talk of an imminent recession to rest for now,” said Associated Builders and Contractors Chief Economist Anirban Basu. “Indeed, economic data released over the past month have been surprisingly good.

“Today’s report shows that a growing share of American corporations are willing to spend money to spur top-line and bottom-line expansion,” Basu said. “However, this does not signify that the nonresidential construction industry is set to boom.

“Public sector support for construction services is likely to be flat at best, and job growth remains halted and lending disciplined,” said Basu. “But the overall economic outlook for the nonresidential construction industry has improved materially over the past several weeks.

“Eventually, the investment in equipment software and structures will trend late into expanded hiring. Capital and labor go together and what the United States is now experiencing is acceleration in capital formation,” said Basu.

“That, in turn, will help trigger more demand for construction services, whether in the form of office buildings, apartments, or shopping centers. In short, the improved outlook for the broader economy in 2012 signals more recovery for construction activities in 2013 than were contemplated just a few weeks earlier,” Basu said.

Photo by Benjamin Benschneider, courtesy NBBJ

The DJC is publishing a special section today on the Bill & Melinda Gates Foundation campus in Seattle. It was quite an accomplishment — just ask the team that designed and built it. Better yet, learn firsthand from the contractor, architects and engineers about how the campus came together by reading the special.

Want to get an idea of how local construction companies are riding out the economy, post-recession? Or how about a few tips on how to save gas with your construction fleet? Maybe you want to see some award-winning construction projects?

Those and other pertinent issues to the construction industry can be found in the DJC’s Construction & Equipment special section. Check it out!

We all know that while the recession officially ended in June 2009, the construction industry has continued to suffer from job losses and ever-tighter margins. At the start of 2011, the industry’s unemployment rate was 20.7 percent, roughly twice the overall unemployment rate.  Washington State’s construction industry shed seven percent of its workforce in the last year alone.

While it seems there’s not much to do but sit and wait for the overall economy to turn around, there actually are specific, proactive policy steps we could take to reenergize the construction industry.  AGC of America put all of these ideas into a single document and is working Congress to get as many of them enacted as possible.  Click Building a Stronger Future: A Blueprint for Economic Growth for details of the 36 recommendations.  Here’s a few:

Convert Commercial Building Energy Efficiency Tax Deductions into Tax Credits. In addition to boosting the deduction amount for efficiency upgrades to commercial buildings, Congress should convert the tax benefit into a tax credit. In an environment where many commercial building owners are likely to experience losses in 2010 and 2011, tax deductions will have limited to no impact. Converting deductions into credits will provide a significant financial incentive for property owners to improve the efficiency of commercial buildings.

Incentivize New Equity for Existing Real Estate Projects. As property values fall and lenders adopt more restrictive standards, new sources of equity capital will be needed. Congress should provide temporary tax incentives to attract new equity for existing projects. The incentives would provide bonus depreciation on the new investment equity and deduction of losses that are not subject to passive loss limits. At least 80 percent of the invested capital must be directed to reducing the outstanding balance of the commercial mortgage debt with the remainder going to capital improvement to qualify for the incentive. This will ease debt market concerns and boost the broader economy.

Encourage States to Enact Permissive Public Private Partnership Laws. All earmarked transportation funds that have been unused for at least 10 years, worth over $620 million, should be consolidated into a single Public Private Partnership Innovation Fund. The Department of Transportation would use this fund to encourage states to enact new, or revise existing, public private partnership legislation to encourage greater private-sector funding for transportation infrastructure projects. States will be able to win competitive grants from this fund based on their success in enacting permissive legislation and entering into viable public private partnerships.

Streamline Environmental Reviews for Infrastructure Projects. The current federal environmental review process for federally-funded infrastructure projects is unnecessarily slow and expensive. For example, it takes an average of 13 years for highway and 12 years for transit projects to receive federal approval. As a result, every effort should be made to streamline the environmental review process while protecting the environment by designating lead federal agencies, establishing and meeting clear timelines, simplifying analysis requirements and placing a statute of limitations on claims.

No doubt some will argue that new measures and regulatory reforms aren’t needed and that the construction industry will recover on its own. But just looking at the construction industry’s performance in the year and a half since the official end of the recession, it should be pretty clear that the sector’s revival is anything but guaranteed. Allowing this industry to continue to stagnate will have significant long-term impacts both on the strength of the domestic labor market and on the quality of America’s public and private infrastructure and buildings.

On the other hand, a resurgence in private and public sector construction will boost our global economic competitiveness. It will allow our businesses to operate more efficiently and improve their productivity. It will lower shipping costs, helping farmers earn more for what they grow and shoppers to spend less of what they earn. It will improve quality of life for all Americans, better safeguard our environment and reduce the amount of water, energy and fuel we consume each year.

Check it out: Building a Stronger Future: A Blueprint for Economic Growth.