Although the third quarter indicates “overall good health” for the commercial construction market, concerns loom for 2020, according to a report by a construction accounting firm.
“The Good, The Bad, and The Ugly,” produced by Marcum’s Construction Services Group, included its Q3 Marcum Commercial Construction Index showing increased spending, growing backlogs, and a strong construction labor market. Highlights include:
- A 1.5 percent increase in public construction spending in September and a 6.6 percent increase year-over-year.
- An average backlog of 10.4 months in the infrastructure category, outpacing the commercial and heavy industrial categories.
- A 0.6 percent decline in construction input prices in September and a 1.7 percent year-over-year decline.
- New-jobs rate in 17 of the 20 largest Metropolitan Statistical Areas matching or exceeding the new-jobs rate nationally.
- A third cut in interest rates by the Federal Reserve, sparking residential construction and fueling consumer spending.
“Despite the lack of a coherent federal infrastructure strategy and the looming insolvency of the Highway Trust Fund, there is no recession in infrastructure spending in America,” said chief construction economist Anirban Basu in the report. “The five fastest expanding segments are all primarily publicly financed, while ten of the eleven slowest growing segments are primarily privately funded, including the commercial segment, which encompasses retail space.”
The five fastest growing construction segments in the third quarter included Water Supply (+20.2%), Sewage and Waste Disposal (+18.0%), Public Safety (+8.5%), Highway & Street (6.4%), and Transportation (+5%).
What is the commercial construction outlook?
In contrast, the report identifies several factors related to construction employment putting downward pressures on the industry. These include the continued lack of qualified construction workers to fill a historic high level of available construction jobs, which in turn is driving labor costs and producer prices higher. Key indicators in these areas include:
- 379,000 (4.8%) unfilled construction jobs in August, the highest level in 19 years.
- Construction producer prices up 5+ percent in the Midwest, West and Northeast.
- 2% year-over-year job growth in October, the slowest gain since 2012.
In addition, the quarter also saw a marked softening in private nonresidential construction, which declined 5.7% on an annualized basis.
“Demand for human capital remains high,” said Basu. “According to Associated Builders and Contractors’ Confidence Indicator, more than 59 percent of surveyed contractors intend to increase staffing levels during the six-month period from the onset of 2019’s final quarter to the end of 2020’s first.”
What is the long-term outlook for nonresidential construction?
Debt levels–corporate, governmental, and consumer–have risen massively, says the report, due to the low interest rate environment and continued economic confidence. But while businesses have begun to slow their spending, consumers haven’t, which will translate into slower job growth and higher consumer exposure, the report predicts.
“When the current administration in Washington, D.C., first entered the White House, uncertainty facing many businesses declined, regulations were withdrawn, corporate earnings surged, markets rose, employment growth accelerated, and consumer spending took off,” Basu said. “Today, the situation is far different, with Americans struggling to understand the impact of trade disputes, hearing considerable chatter regarding recession, and looking ahead to next year’s national elections.
“Given the susceptibility created by enormous levels of indebtedness and elevated asset prices, there is still a chance that the economy will enter recession late next year or in 2021, which would create a new breed of challenges for many contractors at some point in 2021-22,” he said.
Source: Marcum LLP