State of the construction industry

The construction sector is a worthy barometer for measuring the strength of the economy. While the building sector has enjoyed record growth since rebounding from the Great Recession, questions abound as to whether the construction market can keep its momentum as we move into 2019 and beyond.

Where we’ve been

Construction spending and employment are among two key benchmarks economists utilize to gauge industry strength. Looking at separate graphs from the U.S. Bureau of Labor Statistics (BLS) of both construction spending and construction employment dating from pre-Recession levels in 2006 to October 2018, one can see an unmistakable pattern prevailing. The booming spending and high employment numbers enjoyed before the Recession are followed by a steep decline on both graphs, eventually bottoming out around 2011, followed by a steady and consistent climb up to the peaks the industry is presently enjoying.

According to this data, construction employment was at a 10-year high as of Oct. 2018, with 7.3 million workers employed. Using data comparing Oct. 2017 and Oct. 2018, employment in the nonresidential space increased by 4.4 percent, while residential employment increased by 5.3 percent year-over-year.

Coinciding with near-record employment numbers, construction spending was at an all-time high of $1.31 trillion as of Oct. 2018, which is 9 percent above the previous peak in 2006. Using data comparing Oct. 2017 to Oct. 2018, total construction spending increased 4.9 percent year-over-year, with private residential spending increasing 1.8 percent, private nonresidential increasing by 6.4 percent and public construction spending increasing by 8.5 percent.

According to Associated General Contractors of America Chief Economist Ken Simonson, this growth is indicative of strong nationwide construction activity across sectors, not just certain geographic hot spots that are enjoying success.

“Construction is growing at a moderate pace and is unusually well-balanced both geographically and by segment,” he says. “From October 2017 to October 2018, construction employment increased in 44 states and [Washington], D.C., according to the Bureau of Labor Statistics. Construction spending put in place increased at a 5 percent rate in the first 10 months of 2018 combined, compared to the same period in 2017, with nearly identical growth rates for residential, private nonresidential and public construction, according to the U.S. Census Bureau.”

What to watch for

Changes in legislation and regulation are key influencers that affect how the construction market responds.

Associated Builders and Contractors (ABC) Chief Economist Anirban Basu notes that the Tax Cuts and Jobs Act, passed in Dec. 2017, appears to have been positive for the industry. He cites the increase in the amount that can be immediately expensed for certain types of purchases under the law, including equipment, from $500,000 to $1 million, as a driver of more activity.

“While it still might be too early to see the impact of the tax law in any data released by official government agencies, other sources provide some insight. For example, as of this writing, year-to-date sales of Ford’s F-series of trucks, commonly used in the construction industry, were higher in 2018 compared to the same time period in 2017. This likely is a result of the overall strength of the economy coupled with advantageous changes built into the new tax code.”

While the Tax Cuts and Jobs Act appears to have been a net positive for the industry heading into 2019, questions loom as to how recently enacted legislation and prospective regulations may influence the construction sector in the near future.

No crystal ball exists to forecast how 2019 and beyond will play out for the construction industry, but current leading indicators show “few signs indicat[ing] a looming recession.” – Anirban Basu

Looking ahead

No crystal ball exists to forecast how 2019 and beyond will play out for the construction industry, but current leading indicators show “few signs indicat[ing] a looming recession,” Basu says.

Basu points to the Conference Board’s Leading Economic Index, which he says has been a historically good indicator of future downturns over the last 50 years, to forecast that “economic momentum will persist for at least another two to three quarters.”

He also notes that ABC’s Construction Backlog Indicator, which is an index used to show work that is under contract but not yet completed, is trending in a positive direction, portending a backlog of work in the pipeline for contractors across the country for much of 2019.

Simonson says that he expects economic tailwinds to continue to propel the construction sector for the foreseeable future, leading to growth in spending and employment, although potentially at a less robust clip than in 2018 thanks to factors such as rising interest rates and elevated building costs.

“I expect 2019 to be another year of moderate growth for construction. However, contractors should expect continuing uncertainty and probably higher costs relating to tariffs, even tighter labor markets and a possible downturn in orders from interest-sensitive owners, such as hotel developers and municipal-bond issuers,” he says.

Although Basu is optimistic that the industry will continue in a positive direction in 2019, he cautions that recessions are historically inevitable after prolonged periods of prosperity. He notes that contractors would be wise to keep this top of mind as the year progresses.

“... recessions often follow within two years of the peak in confidence. In 1999, the U.S. economy was booming,” Basu says. “That year, the economy expanded 4.8 percent. Within two years, the nation was in recession after the dot-com bust of 2000.

“Similarly, the economy was humming in 2005, thanks largely to a red-hot housing market. That year, the U.S. economy expanded 3.5 percent, the last time it achieved the 3 percent threshold. The housing bubble burst in earnest during 2006’s first half, and by late 2007, the nation found itself in a very deep recession.

“This is not to suggest that recession is necessarily coming in 2020 or 2021. But, contractors should be wary and remain vigilant with respect to cash flow management and balance sheet health during the year ahead. The average contractor is likely to be quite busy in 2019, but beyond that the economic outlook is decidedly murky.”