DESPITE factors such as increased fuel costs, rising interest rates, continuing powder shortages, and an increase in demand due to hurricane-related rebuilding, the near-term outlook for construction remains positive but with clear signs to “proceed with caution” in the coming year. Economic and industry analysts who gathered in late October as part of Reed Construction Data's BuildingTeam Summit agreed that US construction will continue to grow at a steady 3% to 3.5% during 2006.
Six experts and two panels of industry leaders at the two-day event in Washington DC emphasized innovation in the areas of architectural design, capital investment, and business practices as the critical elements necessary for construction to exceed the economic gains projected for the US economy as a whole. Their consensus is that 2006 will continue the economic recovery seen in 2005, despite higher inflation driven by rising fuel costs. It was forecasted that the next two years will see a strengthening economy, accompanied by positive growth for several sectors of the building industry including commercial, public, and other nonresidential segments.
Apparently concurring with this analysis is Portland Cement Association Chief Economist Ed Sullivan who put the construction scene in the perspective of cement consumption in his annual Fall 2005 Economic Forecast. “Keep in mind that the expected declines [in home building] will be coming off record 2005 cement consumption of 38.5 million metric tons (mt) in residential,” he says. “Furthermore, consumption gains in nonresidential and public segments are expected to more than offset the marginal declines in residential.”
In addition, PCA expects the rebuilding of New Orleans to begin in earnest during the second half of 2006 — adding further strength to the near-term outlook. Closely in line with its summer, pre-Katrina forecast, PCA projects cement consumption to reach 120 million mt in 2005 and 125 million mt in 2006, reflecting growth of 5.2% and 3.7%, respectively.
“This summer's hurricanes served as trigger points to start slightly slower economic growth,” explains Sullivan. “Higher home heating costs, rising inflation, and rising interest rate levels will cause some construction slowdowns. Fortunately, the rebuilding of the Gulf Coast, particularly New Orleans in the latter half of 2006, will help keep cement consumption on track with earlier forecasts, as will increases in public construction.”
According to Sullivan, although rebuilding New Orleans could consume 650,000 to 1.8 million mt each year of an expected five-year process, additional powder imports will not necessarily fill this need. “The slightly more adverse economic environment early in 2006 will act to neutralize the additional cement consumption anticipated from the post-Katrina rebuilding efforts.”
The United States is expected to import 33 million mt of cement in 2005, roughly 27% of total consumption. PCA's fall forecast projects 2006 import levels to reach 35 million mt, in-line with earlier, pre-Katrina estimates.
PCA assumes a complete restoration of the building stock within greater New Orleans, and the potential for building code changes in the aftermath of Katrina could boost material requirements. Code changes have not been incorporated into PCA estimates, adds Sullivan.
Incorporating higher oil prices, inflation, and interest rates beyond 2006, Sullivan expects modest 2% to 3% growth per year from 2007 to 2009, the year when cement consumption is forecast to top 140 million mt.
According to McGraw-Hill Construction's 2006 “Construction Outlook” (which anticipates an overall 3% construction increase in 2006), the important construction shift from recent years will be that single-family housing will no longer be a source of expansion. Although this slowdown had been anticipated (and avoided) for 2005, “the weight of evidence is mounting that single-family housing will finally begin a cool down,” says the report.
McGraw-Hill's report forecasts a reduced pace in 2006 for single-family homes in four of the five regions, with the Northeast and Midwest continuing declines in the 2% to 5% range. The South Atlantic is expected to slip about 5%, while the West takes the biggest hit with a 9% drop from a healthy 2005. The South Central region will stand apart with a modest increase, thanks to post-hurricane rebuilding.
Meanwhile, public construction provides the rationale for net gain, although PCA's Sullivan warns that the potential still remains that funds intended for construction and infrastructure building activity may be diverted to a greater extent than anticipated. Still, the passage of the new highway bill is expected to add significant strength to state highway projects in 2006. McGraw-Hill's outlook toward public works anticipates a 7% growth in 2006, after an 8% jump in 2005.
Sullivan adds that slower consumer spending activity and job creation will reduce the expected improvement in vacancy and utilization rates, and hence, the expected return on investment — softening the expected growth in nonresidential construction. These signs — coupled with slightly slower revenue growth that implies a possibly tempered public spending scenario — point toward a more hostile outlook toward construction spending than PCA's previous summer forecast.
McGraw-Hill's report also named commercial building activity as finally beginning its recovery in the last year after four years of decline. Commercial is expected to see gains of more than 5% in 2005, with a 9% upturn next year. Institutional construction levels tend to remain more moderate through the construction cycle and are expected to rise about 2% this year before accelerating to more than 4% in 2006.