Construction Industry Remains Unsteady

by Amanda L. Gutshall September/October 2008
With a half million construction jobs lost since last year, the construction industry is teetering on the edge. Its resurgence depends on a variety of factors, but most of all how the industry can work together and with local, state and federal governments to make that difference.

According to the National Small Business Association’s mid-year report, released in late September, 79% of small business owners are anticipating a flat economy or recession in the coming year — further highlighting an already negative view of the economy. The Mid-Year Economic Report looks at responses regarding questions on economic outlook, job and business growth, business financing and other indicators for the small business sector.

But all is not lost — while many see the reality of the situation now, opinions about the future remain bright. Those polled in this study also report that while their job growth objectives remained stagnant, there are many that say they will try to protect job growth while also limiting job eliminations in the next year.

So what does this mean for the construction industry? Plenty. As the current economic struggle has affected just about every industry — starting in the residential sector then spreading to retail, restaurants and many other segments, the construction industry is then affected by many of these other crises. According to the U.S. Census Bureau, percentages in construction spending have dropped in six areas from November 2007 to June 2008 — single family housing (-27%), conservation (-9%), communication (-6%), commercial-retail (-4%), religious (-4%) and highway (-3%). These numbers do not reflect the fact that while spending has dropped, construction costs have in fact increased.

In December 2007, FMI, a provider of management consulting and investment banking to the construction industry, released its 2008 U.S. Construction Overview with a mostly positive outlook. It predicted that construction will experience 5.8% growth this year, reversing 2007’s 3.7% decline. Construction spending, FMI says, will come in at approximately $2.1 trillion.

FMI also notes that residential construction will decline but far less than last year. Nonresidential construction, FMI says, will offset the residential decline. Commercial construction, on the other hand, was projected to grow. The U.S. Census Bureau also expects healthcare to be the biggest leader in construction growth, with double-digit increases through 2011.

“Construction tends to follow a 20-year cycle, but in most cases, commercial/nonresidential construction doesn’t boom and bust at the same time as residential. Residential has slowed in 2004, 2005 and 2006, and will be slow until the end of 2008. Then housing should begin to rebound,” said Jeff Taylor, an economist at Associated Builders and Contractors in an FMI release.

Regarding the commercial construction sector, he continues, “Commercial construction will begin to slow down after 2008, but won’t be as dramatic as residential because the market isn’t nearly as speculative as the residential market, which tends to get ahead of itself. There will be a slowdown in some areas, but unless the consumer market falls hard, we won’t see a meltdown in commercial construction.”

How will these predictions add up by the end of the year is anyone’s guess, but so far many in the industry remain cautious but hopeful. Several Associated Equipment Distributors (AED) reports and addresses this year have noted the negative but have highlighted the positive aspects that are helping the industry along. And many of these mostly government initiatives can continue depending upon a variety of factors, most notably the upcoming presidential and congressional elections.

A survey conducted this year by AED and the National Utility Contractors Association (NUCA) noted that the Economic Stimulus Act of 2008 “has helped motivate equipment purchasing around the country this year, but the housing downturn and other economic factors are causing many utility contractors to forego buying new machines.”

According to a press release on the survey and its results, the president and Congress could give the industry and the overall economy the shot in the arm it needs by increasing water infrastructure investment. This sector of the industry has been obviously hit hard by the residential construction market downturn, with 64% of contractors in this area saying the impact has been “major” for them. Extending the Economic Stimulus Act’s capital investment incentives “would have a positive impact on equipment purchasing next year and demonstrates the direct impact that water infrastructure spending has on the equipment industry,” the release says.

The survey addresses just how the act has helped create positive news in a time filled with days and weeks of increasingly bad news. One third of respondents said they did buy construction equipment in the first half of 2008. Thirty-five percent of them said it was a result of the bonus depreciation initiative, while 32% said it was because the increased Section 179 expensing levels. Twenty-five percent said they were planning to purchase equipment this year, with 53% of them saying their decision was the result of the two initiatives. Two-thirds of those surveyed noted that they would be more likely to purchase equipment in 2009 if these initiatives were extended through that year.

“While the ESA has clearly had some positive impact, this study also shows that contractors aren’t going to buy equipment if there’s no work to do, no matter what the incentives,” said Bill Hillman, NUCA CEO, in the release regarding the study. “The housing downturn has taken a big toll on our members and we’re hopeful that the housing stimulus bill recently approved by Congress will help. But it shouldn’t end there. Boosting water infrastructure investment would have an immediate and positive impact on the economy, and extending the ESA would continue to provide stimulus next year.”

The AED also performed and released its economic impact study, authored by Stephen S. Fuller, PhD, a professor at George Mason University. The report highlights the impact of the highway infrastructure incentive on the construction equipment industry, and also determines the industry’s impact on the overall economy. A press release on the Fuller study notes, “While the impact of the highway program on equipment distributors is expected to continue to be significant, the consensus of contractors surveyed for the study was that with rapidly rising nonequipment costs, the percentage of a construction budget attributable to the purchase and leasing of heavy construction equipment will be declining in the future.”

Key findings of the study show highway contractors spend about 6.4% of their annual budget on equipment costs. Last year, approximately $10.2 billion was used to lease and purchase equipment for power, highways and streets, sewage and waste disposal, water supply, conservation and development projects. At least $9.2 billion of that $10.2 billion was generated for earnings, which supported more than 260,000 jobs. The study also showed that the economic impact of nonbuilding construction-related equipment spending in 2007 in the United States was $32.5 billion.

In his presentation at the 2008 AED Executive Forum, titled: “Threats and Opportunities for the Equipment Industry in the 110th Congress,” Christian Klein, AED vice president of Government Affairs, discussed the study and other impacts of the government’s decisions on the industry. In his address, he noted that these findings were important for a number of reasons. “First, we now have a better idea than ever before about what impact the federal highway program has on our industry, and we can say with a good deal of certainty exactly what’s at stake for the people in this room in next year’s highway reauthorization: literally billions of dollars.”

In the rest of his presentation, Klein compiled the specific threats, risks and opportunities for the industry. The biggest — highway infrastructure issues. He warns that as “we approach next year’s multi-year reauthorization, the federal highway program is in a state of crisis.” Klein adds that a shortfall of billions of dollars in Highway Trust Fund (HTF) revenues could lead to an approximately $14 billion — or 30% — cut in next year’s highway program. “In the longer term, due to a projected slowdown in HTF revenues, just keeping federal highway spending at current levels will push the HTF $40 billion in the red over the next decade. In other words, revenues going forward will be insufficient to sustain even the current level of spending.”

Along with infrastructure issues, the nation also has an increasing amount of infrastructure needs. According to Klein, “Congestion costs the U.S. economy $78 billion per year in wasted time and fuel.” This translates to $4.2 billion in lost hours and 2.9 billion gallons of fuel that is wasted. “The U.S. Chamber Foundation predicts a $1 trillion gap over the next ten years between what’s going to be spent on surface transportation infrastructure at all levels of government and what needs to be spent to improve conditions,” Klein adds. He notes that Congress will face some “stark” choices when working on 2009’s highway reauthorization. They can “increase user fees [i.e., the gas tax] to provide new highway investment resources or do nothing and let highway spending fall.”

This mounting problem presents both risks as well as opportunities for the construction industry. “The risk is that decline in highway spending will cause highway-related equipment markets to shrink, that the transportation crisis will get worse and that our economy will suffer. The opportunity is to substantially grow — perhaps even double — the size of the highway program, thereby dramatically expanding equipment markets and establishing a solid foundation for America’s global competitiveness in the 21st century.”

But Klein noted in his address that he and AED are optimistic that something will be done in the next Congress for three reasons: infrastructure is crumbling and last year’s Minnesota bridge collapse brought the issue to the forefront; the broader business community is getting involved in ensuring government knows the impact of doing nothing would have on their businesses, and third, with a potential Democratic control in Washington, there will be more attention paid to these matters. “Democrats are almost certainly going to be in control on Capitol Hill,” Klein says, “and traditionally, the D’s have been more receptive to increased highway spending.”


Amanda L. Gutshall is associate editor of the Monitor.

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