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Construction Confidence

As we head into a new year, everyone starts to look ahead for what to expect in terms of economic and construction forecasts. The few that have come out so far generally predict stability and growth for the construction industry in 2018.

Anirban Basu, chief economist at Associated Builders and Contractors, is predicting stability for the construction industry’s economy and expanding nonresidential construction spending this year. He noted that even though the construction project backlog and contractor confidence remains high, there are risks to the 2018 outlook as a number of potential cost increases could come into play. These include wages, health care costs and fuel prices, making inflation more apparent. “That could translate into some meaningful interest rate increases in 2018, which all things being equal is not good for construction spending,” Basu said. “The stock market’s performance has been simply brilliant. But what goes up can go down.”

Basu also noted that asset prices, such as commercial real estate prices, may be headed in a different direction this year, with hotels, office buildings and apartments helping to fuel construction spending in recent years. If the values of properties begin to stagnate or worsen, Basu says construction spending momentum will eventually wind down. While the impact of this may not be felt this year, it will in coming years.

“For now, there is plentiful momentum,” said Basu. “A recent reading of the Conference Board’s Index of Leading Economic Indicators suggests that the U.S. economy will enter 2018 with substantial momentum. Corporate earnings remain healthy. Global growth is accelerating. Consumers are upbeat. Tax cuts could fuel faster business spending. All of this suggests that the construction recovery that began in earnest in 2011 may have a few more birthdays ahead.”

Similarly, Dodge Data & Analytics is reporting in its 2018 Dodge Construction Outlook that the total U.S. construction starts for 2018 will climb 3 percent to $765 billion. Robert Murray, chief economist for Dodge Data & Analytics, notes that the U.S. construction industry has moved into a mature stage of expansion. “After rising 11 percent to 13 percent per year from 2012 through 2015, total construction starts advanced a more subdued 5 percent in 2016,” he said. “An important question entering 2017 was whether the construction industry had the potential for further expansion. Several project types, including multifamily housing and hotels, have pulled back from their 2016 levels, but the current year has seen continued growth by single-family housing, office buildings and warehouses. In addition, the institutional segment of nonresidential building has been quite strong, led especially by transportation terminal projects in combination with gains for schools and health care facilities.”

“For 2018, there are several positive factors which suggest that the construction expansion has further room to proceed,” Murray continued. “The U.S. economy next year is anticipated to see moderate job growth. Long-term interest rates may see some upward movement but not substantially. While market fundamentals for commercial real estate won’t be quite as strong as this year, funding support for construction will continue to come from state and local bond measures. Two areas of uncertainty relate to whether tax reform and a federal infrastructure program get passed, with their potential to lift investment. Overall, the year 2018 is likely to show some construction project types register gains while other project types settle back, with the end result being a 3 percent increase for total construction starts. By major sector, gains are predicted for residential building, up 4 percent; and nonresidential building, up 2 percent; while non-building construction stabilizes after two years of decline.”

The evidence of a bustling construction economy is all around us, as there are new buildings popping up and expansion projects going on all of the time. Hopefully this brings a good 2018 for all.

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