The relatively steep slowdown in the growth in construction spending in recent years might suggest that this year might result in a decline in overall spending. However, quite the contrary, the AIA Consensus Construction Forecast panel is projecting a modest pick-up in the growth rate, and another solid performance in 2019. There appear to be several factors behind this optimism:
1. Rebuilding and repairs from natural disasters: The National Oceanographic and Atmospheric Administration recently reported its 2017 estimate of losses from major natural disasters like hurricanes, wildfires, and flooding. At $306 billion, it easily shattered the previous record of $215 billion (adjusted for inflation) set in 2005 from the impacts of Katrina, Rita, Wilma, and Dennis. While the totality of these loss figures won’t be directly translated into rebuilding and repair activity, they will produce significant opportunities for the construction sector. Existing research suggests that the duration of rebuilding activity after natural disasters is significant, with the peak in spending generally occurring two to three years after the event.
2. Tax reform implications for construction: The recently enacted tax reform package dramatically reduced the nominal tax rates for businesses, and some of these savings will likely be reinvested back into the businesses. With capital expenditures able to be expensed rather than depreciated under the tax act, businesses have even more incentive to invest in their businesses. The impact of tax reform on business profitability will vary by industry, with more capital intensive industries (e.g. utilities, real estate, and transportation) and those with higher effective tax rates (e.g. agriculture, financial services) potentially benefiting the most. In contrast, the single-family housing market recovery is likely to be slowed by the tax package. The lower limits for the deductibility of mortgage interest, as well as the cap set on state and local tax deductions (including property taxes) reduce the tax preferences for homeownership, and likely will moderate growth in house prices, particularly for upper-end homes in areas with high state and local tax rates.
3. Possibility of an infrastructure package: A priority of the Trump administration has been an infrastructure investment program. There have been several versions floated, with the current iteration calling for a $200-billion federal investment over the coming decade leveraging and additional $800 billion in state, local, and private investment. The details of such a program, and the likelihood of its being implemented, should unfold over the coming weeks.
4. Strong consumer and business confidence levels: Consumer sentiment—as measured by the University of Michigan consumer sentiment index—turned up in the latter part of 2017, with fourth-quarter figures at their highest levels in almost two decades. Likewise, business confidence levels in 2017, as measured by the Conference Board’s CEO business confidence survey, were at their highest point since before the last recession. These indicators suggest broad confidence in economic conditions across both households and businesses, and a willingness to spend and invest.
5. Leading economic indicators for the construction sector: While there are several “special circumstances” that may provide growth opportunities for the construction sector this year, there are other more basic indicators that point to growth. AIA’s ABI has been signaling growth in design activity for most of the past year, which would point to a comparable upturn in construction activity throughout 2018. Even more significant, the AIA’s index for new design projects coming into architecture firms saw an even sharper upturn than the overall ABI in 2017, demonstrating a growing pipeline for design activity. Additionally, both Dodge Data and Analytics and ConstructConnect reported strong gains in nonresidential building starts in 2017, demonstrating considerable building activity currently under way.
Related Stories
Market Data | Jan 12, 2018
Construction input prices inch down in December, Up YOY despite low inflation
Energy prices have been more volatile lately.
Market Data | Jan 4, 2018
Nonresidential construction spending ticks higher in November, down year-over-year
Despite the month-over-month expansion, nonresidential spending fell 1.3 percent from November 2016.
Market Data | Dec 14, 2017
ABC chief economist predicts stable 2018 construction economy
There are risks to the 2018 outlook as a number of potential cost increases could come into play.
Market Data | Dec 11, 2017
Global hotel construction pipeline is growing
The Total Pipeline stands at 12,427 Projects/2,084,940 Rooms.
Market Data | Dec 11, 2017
Construction backlog surges, sets record in third quarter
CBI is a leading economic indicator that reflects the amount of construction work under contract, but not yet completed.
Market Data | Dec 7, 2017
Buoyed by healthy economy, ABC Index finds contractors upbeat
Despite rising construction labor and materials costs, 55% of contractors expect their profit margins to expand in the first half of 2018.
Industry Research | Nov 28, 2017
2018 outlook: Economists point to slowdown, AEC professionals say ‘no way’
Multifamily housing and senior living developments head the list of the hottest sectors heading into 2018, according a survey of 356 AEC professionals.
Architects | Nov 28, 2017
Adding value through integrated technology requires a human touch
To help strike that delicate balance between the human and the high-tech, we must first have an in-depth understanding of our client’s needs as well as a manufacturer’s capabilities.
Market Data | Nov 27, 2017
Construction's contribution to U.S. economy highest in seven years
Thirty-seven states benefited from the rise in construction activity in their state, while 13 states experienced a reduction in activity.
Market Data | Nov 15, 2017
Architecture Billings bounce back
Business conditions remain uneven across regions.
