Predictions that construction activity will stay at a steady pace in 2019 doesn't really sound very exciting. However, construction starts in 2019 will inch up to just over $808 billion from this year's estimated $806.8 billion per Construction Dive. The economy is currently in a precarious tug and pull between growth stimuli like tax cuts and risks such as rising interest rates.
There are a few themes construction companies can look forward to and plan for in order to both capture opportunity in the coming year and prepare for the storm ahead.
This economy is cooling off from the elevated growth rates we have seen in the past several quarters, including 4.1% in the second quarter of 2018, the fastest pace since 2014.
This decline shouldn't have a huge impact on the construction industry for at least a year to come. Construction spending levels are "rounding the peak" but basically, the levels of activity for 2019 are not that different than what we saw in 2018.
According to Equipment World, the head of consumer research at Moody Analytics, Christian deRotis, stated that while he expects continued growth for the US economy over the next nine months, it's unlikely to continue much longer afterward.
Economic expansions simply don't last forever. The current expansion in the US economy began in 2009 and is currently the fourth longest in history.
"We've injected the economy now with a lot of stimulants. We've spent our stimulus this time around and we can't count on Congress to get us out of a recession when it does come."
Head of Consumer Research at Moody Analytics | Christian deRotis
Based on Moody data, the US economy is likely to slip back into recession in the second quarter of 2020. This expectation is based on the following factors:
- Housing starts remaining low
- Slowing of commercial real estate activity
- Trade war with Chinese
- Insufficient infrastructure funding
"I view this as a major risk to US productivity growth. I would have thought when the current administration took office, infrastructure would be a primary focus. There was bi-partisan support. But the tax cuts took priority."
Head of Consumer Research at Moody Analytics | Christian deRotis
Positives for the industry moving forward are a relatively strong US economy with GDP growth in 2018 expected to be 3 percent. Bank lending standards have also eased slightly and some restrictions on midsize banks, found in the Dodd-Frank legislation have been rolled back.
The biggest challenges the industry faces are rising interest rates, rising materials prices, tariff increases introduced by the Trump administration and the ongoing shortage of skilled laborers.
Commercial building is down 3 percent following 2 percent gains in 2017 and 2018, as well as the substantial percentage increases that took place earlier. While 2018 market fundamentals for offices and warehouses are healthy, next year vacancy rates are expected to rise as the economy slows, slightly dampening construction. Hotel construction will ease back from recent strength, and store construction will experience further weakness.
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Educational facilities should see continued growth in 2019, supported by funding coming from numerous school construction bond measures. Healthcare projects will make a partial rebound after pulling back in 2018. Airport terminal and amusement-related projects are predicted to remain close to the elevated levels of construction starts reported in 2017 and 2018. For a complete look at all the Educational, Healthcare and Airport Projects coming up for bid click here.
