Construction spending fell to $1.287 billion in June, down 1.3% from May. Meanwhile, the Commerce Department reported a 4% decrease in new housing starts in July.
Are these numbers a sign of trouble ahead, or just a momentary pause in an otherwise robust construction market? An assessment of current trends reveals both promising opportunities as well as continuing risks for contractors.
- A recent survey found that most contractors expect the dollar volume of projects they complete in 2019 to be about the same as in 2018. Continued economic strength, the emergence of a new generation of home buyers and historically low mortgage rates are among the trends pointing to opportunities for growth.
- However, contractors continue to deal with an ongoing labor shortage, fluctuating commodity prices and emerging concerns about how long the current economic recovery will last.
In spite of some key decreases, a closer look at the data suggests a mixed picture for residential construction.
- June residential construction spending declined 0.5% from May. Spending on single family homes fell 0.7%, while spending on multifamily units actually increased 0.2%.
- July housing starts for single-family homes actually increased by 1.3% from June, in spite of the spending decrease reported in June. Although multifamily spending increased in June, new multifamily construction projects actually fell 17.2% in July.
- Regionally, the Northeast witnessed the biggest declines in housing starts for July, down 13.8% from June. The Midwest and South saw smaller decreases of 6.2% and 4.3%, respectively. The West was the only region seeing an increase, with a 1.3% rise.
- In one promising sign, permits to build new properties rose 8.4% in July to an annual rate of 1.336 million.
Spending on nonresidential construction projects decreased in recent months. There are signs of positive growth ahead, however, with some sectors outperforming others.
- Private nonresidential construction spending in June was down 0.3% from May, and off by 0.4% from June 2018.
- June construction spending on public projects declined by 3.7% from May, but rose 6.1% from June 2018.
- Education construction spending declined 6.8% from May but increased 3.6% from a year ago.
- Highway spending was down 6.4% from May but up 6.4% from June 2018.
A mid-year report from the American Institute of Architects predicts 3.8% growth in nonresidential construction for 2019, followed by a 2.4% increase in 2020. While overall growth is projected to slow down, predictions vary for individual sectors.
- Strong growth is projected for hotel and office construction.
- Manufacturing facility construction is expected to recover in the coming year.
- The need for new educational facilities will drive moderate gains in institutional construction.
- Retail construction is expected to see modest declines in 2019 and remain flat in 2020.
Construction Labor Shortage
The construction industry added about 4,000 jobs in July. For the first seven months of 2019, the number of construction jobs increased by an average of 15,000 per month, compared with 26,000 per month for the same period in 2018.
Employment statistics don’t tell the whole story, however, as contractors continue to grapple with a shortage of qualified craftspeople to fill available positions.
According to an annual survey from Associated General Contractors of America, 78% of contractors nationwide are having a hard time filling all or some positions, and 73% of Missouri contractors say the same.
Worker shortages are by far the biggest concern expressed by contractors, and most expect hiring to become harder or stay the same going forward. Consequences of staffing shortages include higher project costs and longer completion times.
Other concerns include federal regulations and intense competition for projects.
Cost of Building Materials
After rising 5.6% in 2018, the cost of building materials was expected to grow at a smaller pace this year, according to one report published in January 2019.
Higher prices affected a number of categories in the past year:
- Steel pipe and tubes: 12.4%
- Architectural coatings: 9.7%
- Asphalt roofing and siding: 8.4%
- Fabricated structural steel: 7.4%
- Sheet metal products: 6.7%
Bucking this trend were lumber and plywood prices, which fell 10.3%.
Countervailing factors could limit wide swings in prices over the coming year. While ongoing trade disputes with China could disrupt supply chains and put upward pressure on prices, a slower global economy could have the opposite effect and lower the price of some commodities.
Demand for Housing
Sales of previously owned homes increased 2.5% in July, up 0.6% from July 2018.
Existing home sales were strongest in the West, which saw an 8.3% uptick. The South and Midwest experienced smaller increases of 1.8% and 1.6%, respectively, and home sales declined 2.9% in the Northeast.
Forbes points to a number of factors influencing the residential housing market:
- More new buyers. Over half of mortgages originated by Fannie Mae and Freddie Mac in 2018 went to first-time home buyers. Millennials comprised 37% of home buyers and 20% of sellers last year.
- Slow inventory growth. Total housing stock remains below pre-recession levels from almost a decade ago. One market analysis found that starter home inventory rose 3.5% for the second quarter of 2019, while prices went up 12.4%. A limited supply at lower price points may limit the number of first-time buyers, while also increasing interest in new home construction.
- Rising home prices. CoreLogic predicts a 5.6% increase in home prices by May 2020. However, price increases are showing signs of slowing down going forward.
- Historically low mortgage rates. A lower cost of borrowing could help to offset the increase in prices and entice more consumers to get off the fence and make that first home purchase or new build.
Broader Economic Trends
The U.S. economy grew at an annual rate of 2.1% for the second quarter of 2019, compared with a 3.1% increase for the first quarter. Personal income also rose at a slower pace in the second quarter.
- Unemployment remained at 3.7% in July, with nonfarm payroll increasing by 164,000 jobs. Industries with the strongest job growth included professional and technical services, healthcare, social assistance and financial activities.
- Consumer spending, which accounts for about ⅔ of America’s GDP, grew by 0.7% in July. “Core retail” activity — which excludes automobiles, gasoline, building materials and food service — increased 1%. However, auto sales declined 0.6%.
- Factory production slid by 0.4% in July and has declined 1.5% since December 2018. These trends indicate possible weakness in manufacturing, which makes up 12% of the economy.
Ongoing strength in personal consumption and government spending point to continued economic growth. Other positive factors include a strong job market, rising wages, low inflation and low interest rates.
The economy could be hampered by negative movements in private industry investment and uncertainty surrounding U.S. trade policy with China.
The current outlook for construction includes a mix of opportunity and uncertainty. In this environment, it’s essential to maximize value when selecting lumber and other building supplies.
At Mid-City Lumber, our construction experts are ready to help you choose the best products for gaining a competitive edge and surpassing client expectations.
Contact us for everything you need to get the job done right!