FMI’s Third Quarter Outlook Shows Pipeline Expansion as a Bright Spot
As the construction industry stands at the third quarter and looks ahead at 2014, FMI has released its third-quarter “Construction Outlook” for 2013. Based on the consulting firm’s analysis of the overall construction industry, FMI reports sunny skies over most of the U.S. construction industry.
The sun shines brightest in the direction of residential construction, which FMI reports as the only sector growing in double digits. While nowhere does the firm see a hot spot for construction growth, analysts expect most areas to grow slightly ahead of GDP. However, as one looks more carefully at the analysis in this report, there are some foggy areas, especially in those markets dependent on infrastructure growth, such as the power sector. However, oil and gas pipelines provide a bright spot, as the shale boom drives market growth.
Additionally, FMI’s report shows that the job market is improving, but still shaky in most parts of the country unless you are prepared to move to a shale oil boomtown.
However, to continue the meteorological metaphor, weather forecasting is complex, and the satellites that can look around the globe from on high show that there is “weather” out there. Our sunny day could be in jeopardy as we look at the news feeds. Uncertainty in the Middle East, with unrest in Syria, could result in international conflict, which could negatively impact the economy. The battle over the debt ceiling on Capitol Hill could have further economic impacts at home and abroad. It’s impossible to separate politics, moral issues and economic issues anymore; however, FMI tries to in its forecast, because it’s tough to factor in the complex global issues as they might impact construction. One exception might be the effect of government spending on construction, which is shrinking at about 4 to 5 percent from 2012 to 2013, with more expected as we look for more “sequestration-type” cuts.
As noted above, one of the positive areas this year has been a continued growth in residential construction. However, as FMI found in its recent “current issues” question for FMI’s 3rd Quarter Nonresidential Construction Index (NRCI), where once the connection between residential and nonresidential construction was accepted as closely linked, that link may be more indirect or tenuous at best. If a link does exist, some NRCI panelists put the lag at between 18 and 24 months. One panelist offered an interesting theory as to why there may be more disconnect between residential and nonresidential growth these days:
Improvement in nonresidential construction typically follows improvement in residential construction, as new homeowners must buy products to furnish their new homes, generating the need for more manufacturing capacity. However, with so much manufacturing now being done overseas, the effect of this purchasing power may not have as much impact on U.S. nonresidential construction as it once did.
If there is any link these days, it appears to be more of an emotional link. If residential construction continues to grow, it will help the feeling that the economy is getting back on track and that owners in the nonresidential construction sector should consider getting on the bandwagon, so to speak. So far, we haven’t forgotten the last building bubble, and interest rates are showing signs of creeping higher. Bottom line, it is good that residential construction is growing, and if it is sustainable, we can use any help we can get to keep nonresidential construction growing.
Meanwhile, FMI’s overall forecast shows subdued growth. Although most economic indexes are positive, they are just barely so, and it is still two steps ahead, one step back and sometimes the other way around. Fuel prices remain relatively low, but not historically low. Shale oil and gas exploration is booming, but it is only beginning to help attract more manufacturing back to the United States — although many expect a real resurgence in U.S. manufacturing.
Overall Construction Forecast
FMI’s overall 2013 forecast for U.S. construction put in place has been revised down 3 percent from 2012 to 6 percent for 2013. The revised figure for total construction put in place for 2013 is $909.6 billion, but the firm expects growth to return to 7 percent in 2014 and hit $977.1 billion. While FMI expects residential to continue its growth trend — but not at the rate of 2013 — growth in all other markets will slow in 2014. Nonetheless, construction is once again outpacing GDP growth and should continue to do so for the forecast period. Growth in lodging construction will be moderate in 2013, but still increase by 15 percent, overall a long way from the boom years prior the recession, but everything “looks like up” from where it was a few years ago. Transportation construction will continue to grow faster than overall construction, but may be slowed due to reduced government subsidies.
While there is no singular reason for the drop in these markets — each is evaluated on its own criteria — there are a few economic concerns that touch all of them. The first is the continued decline in public construction and expectations of more as the sequestration continues. Second, lenders are still tight with their lending criteria. Consumers are still cautious about increasing their debt load, and that includes their share of public debt with new bond issues for local municipalities.
Interest rates, while still low by historical standards, are creeping up for consumers. Most seem to have absorbed the new tax structures into their budgets, but are uncertain as to the cost of health care. The boom areas of shale oil exploration are helping tremendously in some regions, but haven’t flowed over to the rest of the nation. If, as many have suggested, energy prices in the United States continue to stay low and exports increase in the coming years, this will help fuel the economy in several ways; but that will take some more time. Still, the outlook is better than it has been for some years.
Manufacturing construction increased 18 percent in 2012, but the total is expected to drop 2 percent by year-end 2013 before returning to 4 percent growth in 2014. Due to reduction in energy costs in the United States relative to other countries around the globe and the increase in transportation costs, manufacturing will continue to reconsider operations in the United States or returning to the United States. The resurgence of the automotive industry is a big boost to manufacturing as is the continuing exploration and mining for shale oil and gas. This resurgence in manufacturing will be slow, but any improvement will be felt throughout the economy.
Construction for the power market grew 25 percent in 2012, but has slowed to just 6 percent in 2013. For 2015 through 2017, FMI expects 7 to 9 percent growth. The power market offers a relative bright spot compared to other infrastructure markets, such as transportation and water. The shale story continues to unfold and change the nation’s energy landscape, creating design and construction opportunities across the energy supply chain. According to the Interstate Natural Gas Association of America (INGAA), the United States and Canada need 28,900 to 61,600 miles of additional pipelines by 2030. The U.S. Energy Information Administration (EIA) forecasts that natural-gas-fired plants will account for 63 percent of capacity additions from 2012 to 2040. In addition to shale, investment in power delivery systems continues to grow with no signs of stopping in the near- to midterm. The primary wild card in the power market is continuing uncertainty around EPA regulations on air and water quality.
Despite regulatory uncertainty, the power market should continue to experience robust growth in 2014. Shale-related activity and power delivery opportunities should continue to drive the market.
According to the “Annual Energy Outlook 2013” published by the EIA, “The advent and continuing improvement of advanced crude oil production technologies continue to lift projected domestic supply. Domestic production of crude oil increases sharply in AEO2013, with annual growth averaging 234,000 barrels per day (bpd) through 2019, when production reaches 7.5 million bpd.”
Shale Drives Water Construction
Water for shale oil and gas mining will increase demand for water supply-related construction in selected areas of the country. Construction for water supply projects will improve 5 percent in 2013 after dropping 7 percent in 2012.
Experts agree that the nation’s infrastructure is not getting enough attention and, more importantly, funding. After spending years recovering from significant budget shortfalls, state governments had to look elsewhere for support in 2012 as the federal government begins to address its own fiscal woes. In 2012, $36.5 billion of tax-exempt municipal bonds were used at the state and local levels, to address water infrastructure needs, which represent a 33 percent increase over 2011. Additionally, a number of states are making changes to tax systems in an attempt to find the right balance between growth and taxation. In March 2013, the Senate Environmental and Public Works Committee unanimously approved a Water Resources Development Act, including a measure to create the Water Infrastructure Finance and Innovation Act (WIFIA). WIFIA would provide $50 million per year from 2014 to 2018 to help fund large-scale water infrastructure projects.
FMI is a leading provider of management consulting, investment banking and research to the engineering and construction industry (www.fminet.com).