FMI, management consultants and investment bankers for the construction industry, recently released its construction outlook report for the second quarter of 2009. Following are some of the highlights.
Last quarter, the outlook for construction was described as just plain ugly.
Unfortunately, this still holds true. Total construction in 2009 and 2010 will
be down 13 percent and 7 percent, respectively. We still anticipate that
residential construction may find the bottom this year, but that the decline
until it does will be steep. Residential construction will decline 19 percent
in 2009 and 1 percent in 2010. Nonresidential construction will turn negative
this year and decline 14 percent with even further declines of 17 percent in
2010. Nonbuilding construction will continue to be the only bright spot,
increasing 4 percent per year in 2009 and 2010.
Year-to-date nonresidential put-in-place construction through April was flat,
but is expected to decrease sharply throughout the year. Tight credit continues
to cause cancellations and delays. Credit is expected to remain tight through
2010, and delays and cancellations are likely to increase.
Now that the details of the American Recovery and Reinvestment Act of 2009
projects are beginning to become known, nonresidential building contractors are
realizing stimulus funds won’t bring an immediate cure for declining backlogs,
however, 23 percent expect the bill will increase their backlogs as much as 5
percent in the next year.
The nonbuilding construction sector is the only bright spot in put-in-place
construction. This mainly is due to the stimulus bill, but it is not in the
apparent segments. The stimulus bill appeared to be ready to step in and save
the highway and street segment, and to create new jobs in this segment. As it
turns out, only paving contractors have benefitted so far, and they are facing
intense competition, which has driven down prices. The stimulus funds for
highways and streets are only barely, if at all, offsetting the loss from state
revenues that would be used for this type of construction. The water and
wastewater segments were intended to benefit from the stimulus bill, and both
will receive some benefit. These segments have been revised slightly upward
from 2010 to 2012. The conservation and development segment was a surprise
winner from stimulus funds. This segment has been revised significantly upward
for 2010 through 2013. The Army Corps of Engineers received $4.6 billion from the
stimulus. Although, not all of these funds will be used for what we consider
construction, and it will take several years for the funds to be worked into
construction, it is a large amount of money considering that the market is
around $5.5 billion before the stimulus.
Obviously, the construction industry is not only dependent on the stimulus
bill. The general economy is a main driver for both residential and
nonresidential construction. Consumer
spending likely is to be the key to recovery. However, consumers won’t spend
while their confidence is low, and they can’t spend if they don’t have income
from employment. The employment situation continues to worsen. The unemployment
rate increased to 9.4 percent. Since the recession began in December 2007,
payroll employment has fallen by 6 million, and the unemployment rate has
increased by 4.5 percentage points. Job losses continued to be widespread, but
the rate of decline moderated in construction. Construction has lost more than
1 million jobs since its January 2007 employment peak.
The economy may show some signs of improving, but it is just the beginning of
the downfall for nonresidential construction. Nonresidential con-struction
typically lags the general economy by about 18 months. Intense competition that
has been bringing down prices has been reported. This is good for owners, but
not so good for contractors. Nonbuilding construction will remain positive for
the forecast period with conservation and development, water and wastewater construction
leading the sector.
FMI's Economic Outlook
August 1, 2009