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Stalled Recovery Ready To Rev Up
Some markets turn the corner with double~digit gains, but real recovery waits for 2012
By Tim Grogan, Bruce Buckleyand Tom Ichniowski
[Page 1 of 2]
This year started out well, with a stimulus jolt to the depressed homebuilding and public—works
markets. But it ended badly when the tax credits to home buyers expired, federal stimulus spending
fell short of expectations, and the non—residential building market tanked all on its own. As a result,
2010 will probably become known in the economic lexicon as “the stalled recovery. “
In a word, what stalled is housing, which
traditionally leads the construction industry out
of a recession. A year ago economists were
predicting 30% increases in the housing
market, but that turned into a mere 6% gain,
,_ not enough to carry a recovery, especially with
: ‘"' - - ~‘ ll‘ _ _ _ - the non—residential market posting double—digit
-- lliillll lIJIll. 'a. ll, .5. , N , , ll declines and massive federal stimulus funding
T o . ' managing to boost public works by only 2%,
. . . '«~ i , according to McGraw—Hill Construction’s
estimates for 2010.
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However, there are several signs that markets
may be turning and that 2011 will be a
transition year leading to a real recovery by
2012, according to an industry forecast
produced by ENR. Unfortunately, there are just 0
as many warning signs that a stalled recovery
could become a prolonged recession. Among
% the warning signs are persistent high unemployment, tight credit and the potential of political
:1 gridlock, with a resurgent Republican Party showing little interest in further stimulus funding.
McGraw—Hill Construction has attempted to sort out these mixed signals and believes that markets
0 will prevail over politics. MHC is forecasting the dollar value of total US. construction starts in 2011
will increase 8% to $445.5 billion, following an estimated 2% decline this year and an actual 24%
drop in 2009.
i Again, most of next year's increase will come from a predicted 27% increase in single-family
housing. In addition, MHC believes that market fundamentals will lead to some solid rebounds,
1 including a 13% increase in ofﬁce building work, which declined 23% this year. Other big
5 turnarounds are a projected 13% increase in hotel and motel work, after falling 31% this year; a 25%
increase in commercial building, following a 10% decline in 2009; and a 14% increase in stores and
2 shopping centers, following a 7% decline this year.
“Its easy to get double~digit increases off of such low numbers, ” says Robert Murray, MHC’s chief
economist. "In volume terms, some of these markets are simply moving up from their worst year to ,
their second-worst year we have seen since 1960," Murray says. While severely depressed markets :
are starting to turn back up, the economy is still a long way from its previous peaks. 1
Ofﬁce, retail, warehouses and hotels all are following a similar pattern with double-digit increases in
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construction starts in 2011. But after three years of massive declines, next year’s increases appear
on the charts more as a blip than a surge.
For example, Murray predicts that office building starts will increase 13% next year to 59 million sq
ft. But in 2007 the market was around 225 million sq ft. , and in 2001 it was more than 300 million sq
The impact of the recent elections is a concern, says Murray. “The odds of political gridlock have
increased, and that increases the downside risk of the forecast, ” he says. “ its critical that Congress
addresses the 2011 fiscal appropriations and the multiyear transportation bill, it is not a question of
stimulus anymore but getting ongoing regular ﬁnancing for the coming year, " Murray says.
Gridlock and Funding
Uncertainty again characterizes federal spending. Congress failed to pass any of the 12 individual
appropriations bills for ﬁscal year 2011 before Oct. 1, the start of that year. Before recessing for the
November elections, Congress approved a stopgap continuing resolution (CR) that will keep federal
agencies operating through Dec. 3.
Congress is scheduled to return for a postelection lame-duck session, during which it will have to
pass a further extension to avoid a shutdown of federal programs. How long that extension will be
and what funding levels it will contain are unclear.
, Complicating the spending picture is the power shift in Congress, with Republicans’ gaining control
, of the House, thanks to their victories in the Nov. 2 elections. lt’s uncertain whether Democrats will
1 seek—or Republicans will accept—a CR that carries through Sept. 30, the end of ﬁscal 2011.
I The current stopgap funds most federal programs, including those dealing with construction, at their
1 fiscal 2010 levels. The major construction exception is the Dept. of Defense’s Base Realignment and
Closure (BRAC) program. The current CR funds BRAC at the annual rate of $2.35 billion. That 6
amount is what President Obama requested for fiscal 2011, but it represents a 68% reduction from
_' the 2010 total, reﬂecting the scheduled phasing down of work.
. Devil in the Details
3 “It is important to differentiate between starts, which are forvvard—looking, and construction put-in-
i place spending numbers, " says Murray. “While starts may be up next year, we expect spending
.1 numbers will have another negative year in 201 1
And a big negative in this year's report is that the U. S. Dept. of Commerce has discontinued its
forecast of construction put-in-place data, which had been a cornerstone of ENR’s forecast for
2 decades. Commerce is switching its focus to “import/ export issues, " says Pat MacAuley, who
compiled the Commerce forecast.
Fortunately, the Raleigh, N. C.—based FMl Corp. continues to forecast Commerce's put—in-place
construction data. FMI predicts that total construction put-in-place will increase 5% next year after
falling 7% in 2010 and 15% in 2009. The FMl forecast sees residential markets increasing 11% next
year, while the nonresidential market slips another 1%.
“The upturn should be viewed more as a turning point than a dramatic rebound, ” says Randy
Jiggard, managing director of research services at FMl. “This is not the kind of recovery that will
come bouncing back. It may be five years before the market breaks the trillion-dollar mark again, ” he
says. For 2011, FMl predicts total construction put-in-place will be $881 billion.
A forecast by the Associated Builders & Contractors. Washington, DC. is a bit more pessimistic.
0 “ABC forecasts that total nonresidential construction spending next year will be 0.1% less than
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2010’s level, ” says ABC's chief economist Anirban Basu. “Privately financed construction levels are
projected to decline 0.2%, while publicly ﬁnanced construction levels are projected to be virtually
ﬂat, ” he says.
The Portland Cement Association, Skokie, lll. , also is looking for construction spending to be ﬂat
next year. “My gut feeling is that there is still a lot of risk out there, ...
[Page 1 of2j v NEXT)»
A Stalled Recovery Ready To Rev Up
Some markets turn the corner with double-digit gains, but real recovery waits for 2012
By Tim Grogan Bruce Buckley and Tom lchniowski
. ..and I don’t see anything on the horizon that is going to give us that big lift, " says Ed Sullivan,
PCA's chief economist.
After adjusting for inflation, the PCA expects
total construction put-in-place to increase just 0.1% next year, after falling 7.1% in 2010. PCA
agrees with most other forecasts that the non-residential building market will still be down next year,
calling for another 4% decline in that market following this year’s 33% decline. PCA is a bit more
pessimistic in its public construction and housing forecasts.
With stimulus funds fading and state and municipal governments struggling, PCA expects total
public construction to fall 1.2% in 2011, after inching up just 0.1% this year. “Given the ﬁscal
problems with most states, we can't expect them to extend their construction activity in 201 1 says
1 Sullivan. “And with the political changes, we don't see a new highway spending bill until 2013, which
i leaves us at last year's level or worse, “ he adds.
‘ In the homebuilding market, PCA predicts only a 3.8% increase next year. ‘‘It is true that there is
; pent—up demand and the prices are becoming more affordable, but that will be offset by foreclosure
i activity, " Sullivan says. "We see slower economic growth, and that means job creation will be slower
i and the potential for defaults remains high. "
The Housing Question
After modest improvement in single-family housing starts this year, the sector could make significant
~ gains in the coming years, according to the National Association of Home Builders. NAHB chief
economist David Crowe estimates 2010 will close with an 8% increase in single-family home
, construction starts to 479,000 units, less than originally forecast for the year. “The [economic] lull in
the middle of the year took a lot more wind out of the sails than expected, ” he adds.
9 Crowe notes that many potential buyers remain on the sideline because of concerns about their
, financial situation and because they can’t sell their own homes. Between hesitant owners and a
i tough lending climate, existing inventory of new unsold homes is at its lowest level since 1968.
3 However, improved employment numbers and looser lending could help spark a rebound. Crowe
; sees a significant pickup in activity in single-family housing starts, with 655,000 in 2011 and 970,000
2, in 2012—a nearly 100% jump from 2010 ﬁgures.
1 Meanwhile, multifamily housing has already started to recover. NAHB forecasts that 2010 will end
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with a 12% rise to 125,000 units and could rise another 19% to 149,000 units in 2011. Crowe says
demand in the rental sector has helped drive the increase, as many who struggle to get loans are
forced to rent rather than buy.
As the last of the stimulus funds moves through state departments of transportation, highway and
bridge budgets are about to reach a harsh reality. With much of the stimulus funding directed toward
shovel—ready projects, paving work could see the biggest correction, according to the American
Road & Transportation Builders Association. ARTBA estimates that spending on paving work will
drop 17% this year to $47 billion, and it will drop an additional 5% in 2011 to $44.5 billion.
Bridge funding remains relatively flat. After rising 1% to $23.7 billion this year, it is expected to drop
to $22.7 billion in 2011. ARTBA senior economist Alison Premo Black says that, even in the face of
the recession, bridge work remains stable because projects tend to pay out over longer periods of
time. Plus, bridge work didn't receive the same big spike from the stimulus that was seen with
Other transportation-related projects, such as sidewalks, lighting systems and toll facilities, are
expected to drop from $6.4 billion this year to $6 billion in 2011, ARTBA predicts.
Black says the forecast assumes 2011 federal transportation spending will come in at around $43.5
billion, which is based on levels previously discussed in Congress this year. State and local
spending, which has been hampered by drops in tax revenue, also is uncertain but could improve
7 next year, she says. Black notes that nearly half the states have shown increases in contract awards 7
‘‘It’s a conservative forecast, but if the economy improves, perhaps we could see increased spending
at the state and local levels, " she says. “Some states are already seeing growth, so there are some
positive signs. Will it be enough? We don‘t know. ”
MCGRAW-HILL CONSTRUCTlON STARTS
(CURRENT $ M| LLlONS)
ACTUAL ESTIMATE FORCAST CHANGE
CONTSYTPREEEION 2009 2010 2011 09-10 10-11
g TOTAL CONSTRUCTION 420,691 411,275 445,525 -2.2 +8.0
7 RESIDENTIAL 111,755 119,100 150,375 +6.6 +26.0
Single—Family Housing 94,341 100,025 126,725 +71 +27.0
Multifamily Housing 17,414 19,075 23,650 +95 +240
NON-RESIDENTIAL 167,537 150,875 156,850 -10.0 +4.0
_ Office Buildings 19,954 15,375 17,300 -23.0 +130
‘ Hotels and Motels 4.587 3,150 3.575 ~31.3 +130
1 Stores and Shopping Centers 13,219 12,250 13.925 7.3 +140
Other Commercial 8,965 8,050 10,100 -10.2 +25.0
, Manufacturing 9662 8,475 9,250 -12.3 +9.0
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Other Institutional Buildings
Highways and Bridges
Environmental Public Works
Other Public Works
‘ total RESIDENTIAL
Amusements and Recreation
Public Safety, Administrative
- NON-BUILDING STRUCTURES
: Conservation and Development
Highways and Streets
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43,575 -8.4 -1.0
22,900 +4.5 +9.0
36,225 -10.4 -6.0
138,300 .0.1 -2.0
57,600 +4.9 -4.0
37,200 +1.7 +1.0
27,500 -5.1 +2.0
16,000 —10.5 -10.0
SOURCE: |z1CGRA/ ‘/ -HILL CONSTRUCTION
FIGURES FOR 2011 ARE ESTIMATED
FMI: CONSTRUCTION PUT-IN-PLACE
(CURRENT $ MILLIONS)
2011 09-10 10-11
881,070 -7.0 +5.0
297,382 +6.0 +11.0
148,109 +15.0 +200
19,270 -35.0 -8.0
130,504 +9.0 +5.0
357,102 -18.0 -1.0
14,018 -45.0 0.0
35,425 -30.0 -4.0
15,809 -18.0 +2.0
5,507 -13.0 +2.0
95,395 -10.0 +3.0
43,104 -9.0 +5.0
35.700 -31.0 -6.0
33,703 -28.0 -20.0
14,086 -3.0 +3.0
45,659 +12.0 +6.0
226,035 -2.0 *6.0
7,167 +18.0 +8.0
85,394 #0 +4.0
25,894 +2.0 +4.0
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