Construction Industry Forecast for 2010

Wed December 30, 2009 - National Edition
Pete Sigmund


Sizable growth in new construction of single-family homes and a high level of construction of roads and bridges are positive expectations for 2010 as the industry and the nation hope for a stronger economic recovery from high unemployment, foreclosures, bankruptcies and other continuing myriad problems.

Economists interviewed by Construction Equipment Guide (CEG) are anything but sanguine but they see rays of light amid the encircling gloom.

“We expect about 610,000 single-family housing starts in 2010, compared with about 443,000 starts in 2009,” said Bernard Markstein, vice president, economic analysis and forecasting of the National Association of Home Builders (NAHB) in Washington, D.C. “We will see definite improvement in the first and third quarters and then again by year-end. I predict a slow recovery back to normalcy, which is 1.5-million starts per year, over the next 10 years.”

Markstein said the homeowner tax credit for consumers “adds close to 200,000 additional sales.” This credit is $8,000 for a first-time homebuyer and $6,500 for a repeat homebuyer. It was to have ended with Nov. 30 settlements but has been extended to June 30.

Single-family housing starts are a very-important leading indicator for the national economy.

“We think we saw the bottom of the curve in the first quarter of 2009, and then sales started to slowly improve,” Markstein said. “In March, we hit 332,000 sales of single-family homes. In October, however, new housing starts were up 5.1 percent over 2008 and 6.2 percent over September. As the upturn continues, it will help pull the national economy out of recession. Residential construction accounts for about 15 percent or 16 percent of gross domestic product [GDP] — about 3 percent from direct construction and the rest from housing-related services like appliances. Though the improvement in starts is relatively slow compared with previous recoveries because of obstacles like tight financing, we see the economy, including construction and employment, turning around during the second or third quarter of 2010.”

Another bright spot was that sales of existing homes in October were 23.5 percent higher than October 2008, and 10.1 percent higher than in September 2009. (Note: this is for all existing sales, single-family and condo. Comparable single-family sales numbers were 21.4 percent and 9.7 percent, respectively. The median price of a single family home was $173,100 in October, down 6.8 percent than the year before.)

The National Association of Realtors reported on Dec. 22 that sales of existing homes in November were 44.1 percent higher than in November 2008, and 7.4 percent above October 2009.

Other building areas aren’t coming back as fast as the single-family area. Multi-family starts fell 54 percent in 2009 but are expected to improve 16 percent in dollars and 14 percent in units in 2010, according to the 2010 Construction Outlook from McGraw-Hill Construction in New York. “This still leaves activity about even with the bottom of the early 1990’s recession,” the Outlook said. Construction of nonresidential buildings has been much weaker through most of 2009, though it climbed 19 percent in October to $177.9 billion (annual rate).

“For nonresidential building, much of 2009 has been characterized by a steep loss of momentum, so October’s gain represents a departure from recent experience,” the Outlook added, saying commercial building starts dropped 43 percent during 2009 and are expected to drop another 4 percent in dollar terms in 2010.

Reed Construction Data reported in early December, however, that the value of nonresidential construction starts in November was “more than a 20 percent increase after seasonal adjustment” from the October total, with nonresidential starts increasing 16 percent.

Ken Simonson, chief economist of the Associated General Contractors of America (AGC) in Arlington, Va., said that single-family housing construction spending “will be up 20 percent to 30 percent in 2010 off a very-low base [compared with 2009] while multi-family construction spending will probably be down 20 to 30 percent.”

Simonson thus saw a mixed picture for the residential construction industry at present, rather than a full-fledged recovery.

“Family homebuilding, helped selectively by stimulus legislation, is on the cusp of a strong comeback in percentage terms,” he said, “but this will not be enough to offset the continuing drop in multi-family and private non-residential work. I think we are in for a gradual improvement in economic conditions overall in 2010 bit by bit, but it will be very uneven and I think construction will be far behind. I think we will see more construction of universities and hospitals during the second half of 2010, but most segments will not improve until 2011. The construction industry isn’t in recovery yet.”

Robert A. Murray, vice president of economics of McGraw-Hill Construction, said in a telephone interview with CEG: “To say construction is in recovery is premature. It depends on whether you’re looking at construction spending vs. starts, on the type of projects and on the timeframe, such as year over year, or month over month. Our forecast calls for a 25 percent decline in the dollar value of construction starts in 2009. Construction spending is down 13 percent through the first 10 months of 2009. Given the leading relation of starts to spending, it suggests that spending will continue to weaken into 2010. At the same time, we’re also looking at an 11 percent improvement in starts, to $466.2 billion in 2010.”

Murray added: “Single-family housing has reached bottom and has begun to edge upward. Highway and bridge work has improved in 2009 and this should continue in 2010, supported by the Federal Stimulus Act. Environmental public works has yet to see much improvement in 2009, but, supported by the stimulus act, should strengthen in 2010. Courthouse projects have picked up, thanks to the stimulus, and the benefits to a broader range of institutional types, including health care projects, should continue. We see modest support for multi-family housing as the result of funding from Housing and Urban Development. In contrast, commercial building is looking at a difficult year in 2010 following a steep decline in 2009. Bank lending standards remain very tight. Even if bank lending shows some improvement in 2010, weak employment means that the market fundamentals for commercial building will continue to deteriorate, with rising vacancies.”

Stimulus Act Aids Highway Construction

Record infrastructure spending on highways and bridges will provide more work in 2010.

The $787 billion American Recovery and Reinvestment Act (ARRA) included $27.5 billion for this sector, which currently accounts for about 12 percent of the construction market. This is in addition to an estimated $41.2 billion in Fiscal 2010 appropriations for the highway program.

(As CEG went to press, the House of Representatives in late December passed another jobs creation stimulus bill, which includes an additional $27.5 billion for highways and bridges.)

“This is a record level of federal investment through the federal aid program and the extra stimulus funds,” said Alison Premo Black, vice president of policy and economist of the American Road & Transportation Builders Association (ARTBA) in Washington, D.C. “We expect that the value of highway, street and bridge construction put in place during 2010 will reach 90.5 billion. The real value of construction put in place has also increased in 2009, to $83 billion or maybe a little higher, due to a combined easing of material prices and the extra spending from the stimulus program. The highway construction market should grow eight percent next year, aided by extra money from federal investment and by easing of material prices.”

Black is worried, however, about a possible contraction of the market in 2011.

“The stimulus was a one-time injection,” she told CEG. “It helped this year and certainly will help the market next year, but because it’s not a sustained increase in funding you will have some market contraction, which could be a status quo year [in 2011]. Our model is forecasting a contraction in 2011 absent increased funding from either federal, state or local governments, as the stimulus spending works its way through the market. Our model indicates that a robust federal investment would create a ’soft landing,’ or even some growth, in 2011.”

“The stimulus kept 2009 from being a disaster,” said Ken Simonson, the AGC economist. “State DOTs were busy reducing their planned lettings, but once the President signed the stimulus bill, they were able to restore a lot of projects. We estimate the recovery act included $135 billion for construction, of which $27.5 billion was for highways. The highway money was awarded quite promptly. The rest has not yet been awarded or spent, so I think in 2010 you will see more and more stimulus money showing up in other areas.”

The American Association of State Highway and Transportation Officials (AASHTO) in Washington, D.C., reported that, as of Nov. 20, 2009, a total of 10,600 transportation projects worth more than $30 billion have been approved for funding under ARRA.

“Of the 9,300 highway construction projects authorized to date, more than half — 5,458 projects — were either under construction or had already been completed,” AASHTO said, also reporting 355 airport projects worth $1.08 billion and 690 transit grants worth $7.19 billion have been approved. It also told Congress that state transportation departments have identified 9,500 highway, bridge, port, rail and aviation projects worth more than $69 billion that, if funded, “can be used to create hundreds of thousands of jobs across the country.” It said most of these projects were “ready to go,” meaning they can move through the federal approval process within 120 days of authorizing legislation. The report was based on responses from 50 states and the District of Columbia.

ARTBA’s Black reported in a Dec. 7 release that “another indicator of work to come is the high level of obligations for ARRA funding — over 77 percent of stimulus funds have been obligated, but only $4 billion, or 16 percent of the total funding available, has been paid to contractors.”

“When you add it all up, there is a lot of work to be completed in the coming year,” she said.

Reauthorizing the Highway Bill

The SAFETEA-LU transportation bill, enacted in 2005, provided more than $286 billion for highways, bridge and transit. It expired Sept. 30, 2009. Since then, continuing resolutions in Congress, and the new ARRA money, have funded continued work.

President Obama has suggested an 18-month extension of SAFETEA-LU.

“It’s a very-fluid situation with differences between the House, Senate and the Obama resolution,” said ARTBA’s Black.

Black said that “industry does not like short-term extensions because money is given out in dribs and drabs; states might hold out on spending that money until they are more confident on what that spending stream will be for the year.

“At ARTBA we will advocate a six-year bill,” Black added. “A longer period helps contractors plan their capital spending on project equipment because they know they will have a certain stream of revenue from the federal aid program, which is about 34 percent of the [highway and bridge] market and really helps create stability in this market. You don’t see this stability in other construction sectors. The stimulus is not a substitute for a sustained, increased, federal investment in highways and bridges. Federal investment is approximately 40 to 45 percent of total capital outlays for highways and bridges in the United States.”

William R. Buechner, ARTBA’s vice president of economics and research, said that, without a long-term surface transportation investment bill, “conditions are again lined up to kill job growth in the construction sector and related industries” Warning that without such a bill, “we’re looking at a constricting or flat market for the next several years,” he said surveys found that 15 states cut transportation program funding in 2009 and 19 states were planning to cut such funding in 2010.

“I think Congress will keep passing short-term extensions at current levels, and then some one-shot funding, as they did in the stimulus bill,” said AGC’s Simonson.

The House Transportation and Infrastructure Committee has proposed a $500-billion six-year bill, called the Surface Transportation Authorization Act of 2009.

Christian Klein, vice president, government affairs, and Washington Counsel for the Associated Equipment Distributors (AED) Washington, D.C., office, commented to CEG: “The most important thing we’re working on is the highway bill because the uncertainty surrounding the highway reauthorization has caused chaos in the equipment market. Contractors are sitting on their hands. They’re not buying equipment because they have no idea how much money is coming down the pike. They don’t know if highway funding is going to increase, decrease or stay the same. A robust multi-year highway bill is the single most important thing Congress can do to introduce stability in construction.”

Klein also asserted: “Stimulus money has helped and has saved jobs, but it has often gone out to small projects like repaving, not on big capital projects that will be a long-term infrastructure approach. It’s a short burst, not a long-term recovery plan. The better way to do it is to have a multi-year investment plan over the next six year, providing in the area of 100 percent more than we’ve spent over the last six years. What part of job creation don’t they [Congress] understand?”

Dealers Voice

Serious Concerns

Toby Mack, president and chief executive officer of the Associated Equipment Distributors (AED) in Oak Brook, Ill., said in a telephone interview with CEG the construction industry “remains at or near the bottom of the [business] cycle,” with much uncertainty among equipment dealers.

AED’s Klein told CEG: “AED and the Association of Equipment Manufacturers [AEM] have concluded in a report on the economic health of our industry that, since 2006, equipment manufacturers and distributors have collectively laid off 37 percent of their workforce.”

Klein said the loss includes 257,000 direct jobs in the equipment industry plus another 274,000 indirect jobs like people servicing beverage machines at distributor and manufacturer locations.

“We conclude that two out of every 25 jobs lost since the recession began in 2006 can be linked the downturn in our industry,” he said, adding: “Another big thing is tight credit. The entire supply chain is affected. Developers can’t get credit to build projects. Contractors can’t get credit to buy equipment. Distributors can’t get credit to run their companies. Manufacturers can’t get credit to run their businesses. The credit chaos is throughout construction.”

Worries Continue About Highway

Trust Fund.

“It is clear that there is not enough revenue going into the Highway Trust Fund [HTF] to support the level of investment needed to maintain or improve the existing transportation network,” ARTBA’s Black told CEG. “There is a cumulative $90.4 billion dollar gap for Fiscal Year 2010 through 2015 between the current baseline of funding under the existing law and what the HTF can support absent new revenues.”

Easing Unemployment

The increased single-family housing and highway work are seen as hopeful signs for easing high unemployment in construction. The Bureau of Labor Statistics reported on Dec. 4 that the unemployment rate in construction rose to 19.4 percent in November, the highest of any industry, with the loss of 3,200 construction jobs.

Nationally, the rate for all industries fell from 10.2 percent to 10 percent.

McGraw-Hill’s Robert Murray commented to CEG: “Some improvement may be possible by the end of 2010 but more substantial gains in construction industry employment will probably have to wait until 2011.”

Materials Costs

The costs of many construction materials are edging upwards. The BLS said the producer price index (PPI) for finished goods “spurted 1.8 percent in November,” including a 7 percent jump in crude petroleum prices.

“Even aside from the oil-price leap, construction materials costs appear to have ended their slide, as shown by recent three-month trends,” the BLS added.

AGC’s Ken Simonson told CEG: “I think materials costs have probably bottomed out and at best will hold level in 2010, but there’s a risk that they will jump again. Steel has the greatest chance of showing a price increase.”

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AED: Working to Create a Better 2010

In the following interview with Construction Equipment Guide (CEG), Toby Mack, president and chief executive officer of the Associated Equipment Distributors (AED) in Oak Brook, Ill., assessed the economic challenges facing dealers.

Could you assess the current status of the equipment distributor business?

There’s not much good news. Our industry remains at or near the bottom of the [business] cycle. If you talk to most equipment dealers you’ll find that they are not sure if they have even hit bottom yet. There still could be some further weakness in the first or second quarter of 2010 beyond where we are right now. That’s not very encouraging.

What are the positives in the current market?

One of the most hopeful things, which also will be very difficult to materialize, is government accelerating their passage of a multi-year highway bill, which is the thing, which a lot of contractors are going to need to see before they are going to be willing to invest in a long-term asset. They will do that when they see a long-term utilization prospect. A multi-year highway bill will do that for many categories of equipment. A dependable, consistent, multi-year bill is the biggest hope out there for a piece of equipment, which has a utilization prospect of three, five, or more years.

If that passed, would business pick up for dealers?

Sure. That’s one of the things historically that has driven a lot of activity at the dealer level, not just new machine deliveries but support, rentals, parts. It’s all very much underpinned by highway and other kinds of infrastructure projects. So that’s the one thing that could turn things around. Having just returned from Washington, I would say it’s going to be a struggle to get that done much before the middle of next year and possibly later, so we’re not going to see any effects that might have come into play until later in 2010, if that.

How many jobs have been lost in the equipment distributor field?

About 550,000 (Editors Note: This figure includes indirect jobs, like food and beverage workers depending on dealer business.) That was as of September. We think there has been substantial additional job loss since then. We wouldn’t be surprised to see some additional job loss between now and the end of the first half. So it’s just not a pretty picture.

Are there any bright spots?

Dealers who either by geography or customer base are serving metal extraction or energy production markets. Coal mining has been a little bit better. Gold has been strong, of course. Anything related to oil fields has been good. Some dealers also have some presence in agriculture, and that has certainly been healthier than construction. If you are a dealer in the mining or agriculture area, you are probably doing better than the guys who depend on construction.

How many dealers have gone out of business?

I don’t have any metric for you on that, but we have seen quite a bit of it, not just closing up, but being acquired by neighboring dealers. There have also been some flat-out business failures. It’s just gut-wrenching to see it because a lot of these companies which have been in business for a couple of generations — 30, 40, 50, 60 years in some cases — are just not going to be able to make it. We’re doing everything we can as an association to buoy the market and help companies struggle through and continue to hang on by their fingernails. It’s tough. You talk to any one of them and you’ll get the same story. There’s just nothing going on out there.

That includes both used and new equipment?

Used is in rough shape, too, because as companies have tried to scale down, they’ve had to shed rental fleets and inventory. That has put a lot of iron out on the used equipment market. Then, of course, when you have no end demand and a lot of supply, will have a downward effect on prices. With very few customers for rental fleets, there’s not a lot of rental demand and so rental utilization and rental rates are down. Then you have the product support business. Few, or none, of the machines out there are running, you will have less product support business. It just is not a very good picture.

How about a turnaround?

We can’t point to a turnaround dynamic in play right now. If the housing market picks up, it would be a good thing. The House has just passed another stimulus bill, which they’re calling the Jobs Creation Bill. It has another $27.5 billion of highway and bridge money in it. We also have the stimulus bill, which was signed into law early in 2009. So the House has passed it, but it has some difficult prospects in the Senate, which will not be able to take it up until sometime next year, hopefully early. There’s a lot of pushback on it because it relies on remaining TARP money that’s coming from the paybacks and the unspent balances. There’s a pretty strong headwind against that in the Senate. We don’t know if the new bill has too much of a prospect or not. We’re doing everything we can as an organization [to make it happen], along with the Association of Equipment Manufacturers [AEM]. We, and AEM leaders, went from Senate office to Senate office, and House office to House office, trying to beat the drums for the message that we’re taking to Washington, that this is a job loss catastrophe for the country — 550,000 jobs lost as of last September and, Lord knows, there could be 100,000 or 200,000 more since then by the middle of next year. There’s no way you will get a solid recovery in the overall economy with those kinds of numbers just from our industry.

So how do you view 2010 for equipment dealers?

There’s some talk of maybe the possibility of 10 percent uptick in 2010, most of which will be in the second half, but you’re going up 10 percent from a market which was down 40 percent in 2009. The uptick would be based on residential construction and maybe some more of the 2009 stimulus money getting spent. Quite a bit of it hasn’t been obligated yet. That could possibly drive some more activity. And then if the Senate goes along with the House on Stimulus 2 that would essentially double what was put into the market by the first stimulus bill.

What sectors of equipment have been hardest-hit?

Earthmoving equipment is probably the worst. You talk to dealers and you typically hear new machine delivery rates down 50, 60 or 70 percent.

We very much appreciate your time.

It wasn’t very good news, was it? It’s real. It’s what’s out there. There’s no point in sugar coating it.