Simonson Says: Second-guessing the Second-half Outlook

At the beginning of 2013, it looked as if construction would repeat the patterns of 2012: double-digit gains in both residential and nonresidential private construction, along with a modest decline in public construction, for a 5-10 percent increase in total construction spending. Midway through the year, it appears total growth will be in that range. But the components are turning out somewhat differently. Residential spending in January through May, as reported on July 1 by the Census Bureau, was up 25 percent over the same months of 2012. Multifamily construction, which leaped 48 percent in 2012, has topped that growth rate so far in 2013, rising 57 percent year-to-date. Single-family construction has accelerated from a 22 percent growth rate last year to 34 percent this year. These explosive growth rates are not likely to be sustained for the remainder of 2013. Nevertheless, new residential spending now appears likely to finish the year with a 15-20 percent increase. (The Census Bureau reported on July 19 that it had understated the third component of residential construction for 2012—improvements to existing single-and multifamily structures. The agency said it expect to issue corrected numbers on August 1.) Private nonresidential construction spending, in contrast, has cooled abruptly. Following a 16 percent gain in 2012, the sector has been flat so far in 2013. There should be enough of a rise in the second half to put the full-year total ahead of 2012 by 5-10 percent. The value of commercial construction starts (which measures the full value of a project at the time it begins) does not provide a lot of cause for optimism about second-half spending (which measures the value of work done each month on projects that have broken ground). Reed Construction Data reported a 7 percent drop in the value of commercial starts in the first half of 2013 compared with January-June 2012. McGraw Hill Construction (MHC) reported a 3 percent pickup. There are some positive signs. A survey of corporate economists released on July 22 by the National Association for Business Economics (NABE) found that on net, the 43 respondents expect their firms to increase spending on structures from last quarter to the spring of 2014. Like other recent polls, the NABE survey found respondents slightly more optimistic about the course of the economy over the coming year. As Reed’s Chief U.S. Economist Bernard Markstein put it in a July 15 release, “The outlook is for moderately improving economic growth, which will encourage nonresidential construction activity.” Public construction spending has diminished twice as fast as last year’s 2.6 percent rate of decline. If anything, the second half may be even worse. MHC reported a 13 percent year-to-date decline through June in the value of starts on institutional buildings (educational, healthcare and public buildings), most of which count as public construction, although public works (nonbuilding) construction starts rose 6 percent. Reed calculated that institutional building starts slumped 20 percent in the first half, while heavy engineering starts tumbled 33 percent. Despite these gloomy figures, public construction put in place for all of 2013 should be only 3-6 percent below the 2012 total, but spending will continue to shrink in 2014. “Assuming the downward pull from the negative sectors in this year’s first half becomes less severe in the second half, then total construction starts for all of 2013 should still be able to register growth, but at just a single-digit pace in similarity to 2012,” MHC vice president for economic affairs Robert Murray opined in a July 22 release. That’s not a lot of good news, but it suggests contractors have a little more to look forward to in the rest of this year and beginning of 2014.