Simonson Says: Construction revs up, but not on all cylinders

The latest reports on construction employment and spending were encouraging. Industry employment climbed by 15,000, seasonally adjusted, in February to the highest level since June 2009. Spending in January hit the highest seasonally adjusted annual rate since March 2009 and rose 9.3 percent over the past year, the fastest rate of growth since May 2006. Moreover, the gains were widespread. In the latest 12 months, overall construction employment climbed 2.6 percent, with residential construction employers (residential building and specialty trade contractors) adding 4.8 percent to their head counts and nonresidential employers (nonresidential building, specialty trades, and heavy and civil engineering construction) adding 1.4 percent. Private residential spending soared 15 percent over the year-ago month; private nonresidential, 9.7 percent; and public construction, 2.5 percent. For 2014 as a whole, there is a good chance private nonresidential spending will continue to grow at nearly a double-digit rate. That would be a substantial improvement over the 0.5 percent contraction recorded from 2012 to 2013. But residential construction spending growth is likely to cool from the 18 percent rate in 2013 to 10 percent or less. Public construction was down 2.6 percent from 2012 to 2013 and may shrink by nearly as much again in 2014. Total construction spending, therefore, is most likely headed for growth of 6 to 10 percent, up modestly from the 4.9 percent rate last year. The biggest turnaround should be in power and energy construction, which covers construction in oil and gas fields and pipelines as well as conventional and renewable power generation, transmission and distribution. Shale-related drilling will continue to expand, adding to demand for pipelines, plants to supply pipes and oilfield machinery and downstream facilities. “Downstream” encompasses several construction segments and includes tank farms, petrochemical plants, export terminals for liquefied natural gas (LNG), gas-fired power plants, and fueling stations for LNG and compressed natural gas-powered vehicles. Private nonresidential spending should also see growth in other manufacturing plants, warehouses, hotels and railroad construction. But the large and once-active markets for office, retail and hospital construction are likely to remain weak. The largest public category—highways and streets—should remain above 2013 levels through the first half of this year. But it may plunge by yearend, unless Congress can pass a timely extension of the current federal-aid highway and transit funding bill, known as MAP-21, which will expire on September 30. Education construction—the second-largest public category—slumped 8 percent last year. It is likely to be flat, at best, in 2014. Other public segments will also experience flat or shrinking budgets. The major driver of private residential construction—single-family homebuilding—has slowed somewhat from its 28 percent expansion in 2014. Multifamily construction has likewise throttled back from its 44 percent growth rate in 2013. But multifamily has much better prospects of maintaining a double-digit rate of increase than does single-family, which may stall later this year.