Construction Sees a Slow, Steady Recovery

by John Crum November/December 2012
The construction industry is on its way to recovery, with pockets of life in certain construction sub-industries, says John Crum, of Wells Fargo Equipment Finance, Construction Group. But, he warns, the "usual suspects" — lingering European debt crisis and a looming fiscal cliff — could disrupt this growth.

For more than the last year there have been signs that the construction industry is starting to contribute to overall economic growth in the U.S. After reading some rather devastating construction activity reports over the last four years, it’s a breath of fresh air to see the construction industry — and the financing of construction equipment — actually adding to economic growth.

Of course, those in the construction equipment finance business have seen this coming to some degree. Equipment sales generally have been on the rise for the last year or more in some regions of the country.

There is mounting evidence that the construction industry is on its way to a full recovery. Signs are clearly showing improvements and there have been pockets of life in certain construction sub-industries and in certain geographies.

For example, the Association of Equipment Manufacturers’ August 2012 report on Construction Equipment reports a 15.2% increase in units sold compared to August 2011. AEM’s Value Index shows a 24.7% increase from a year ago. The trend line in this report is unmistakably positive beginning about mid-2010.

Construction numbers from the U.S. Census Bureau reinforce the theme of a generally improving construction market. For example, the total value of construction put in place started to turn for the better early in 2011. In September 2012, total construction at a seasonally adjusted annual rate was $852 billion, up 7.8% compared to the year prior. The last time total construction spending was this good was about three years ago in late 2009. To put that in context, construction spending topped out in the summer of 2006 at just under $1.2 billion. So the industry fell a long way and has been slowly climbing out for the last year and a half.

The total construction number only tells part of the story, however. The three major categories of spending (public non-residential, private non-residential and private residential) have all gone their own way over the last year.

Residential construction has been a bright spot in an otherwise lackluster year of economic growth in the U.S. and, since the foundational elements of new home construction have been improving, we expect residential to post strong gains in 2013 and 2014. Several factors are contributing to this modest resurgence including persistently low mortgage rates, rising home values and an abatement in the number of distressed home sales. It appears the inventory of foreclosed homes has finally been whittled down to a manageable number in many parts of the country and those households with good credit and some geographic flexibility are willing to invest in new home construction.

Two-and-a-half years of private sector employment gains are finally paying off and supporting this modest housing boomlet. Multi-family construction led the charge by posting an 11.9% gain in the October 2012 report by the U.S. Department of Commerce. The NAHB/Wells Fargo Homebuilders’ Index rose to 46 in November, which is higher than it’s been in the last 6 years. Inventories of new homes are near 50-year lows so any rise in demand will turn into stronger building activity. The Wells Fargo Economics team expects single-family starts to rise 28.3% in 2013 and an additional 29.2% in 2014.

Private spending on non-residential projects remained mostly steady through the summer and into the fall at a seasonally adjusted annual pace of just under $300 million. In September 2012, it totaled about $295 million and was a solid 8.8% above the September 2011 total. The team of Wells Fargo Economists expects the residential recovery to spur modest growth in retail development in the coming year as several chains have announced modest expansions to their development budget.

Much of the growth in nonresidential construction has come from investment in energy and power projects. That growth should continue into the new year and beyond as the U.S. positions itself to become the world’s leading oil producer. Pipeline development also remains strong and could improve if public policy becomes more favorable. For example, the Keystone pipeline now appears more likely to win approval than in the past. Construction of power generation facilities has slowed to some degree, however, reflecting still sluggish growth in the economy and the corresponding power demand. Alternative energy projects have slowed somewhat and may grow less rapidly over the next few years.

Public spending on construction is not supporting economic growth at the moment and in the most recent report was down 4.2% from the September 2011 report. Highway and Street spending, which is the largest sub-category of public spending came in at $78.4 billion on an adjusted basis and was down 2.4% compared to the year prior. A survey of construction contractors and equipment distributors by Wells Fargo Equipment Finance in late summer 2012 found that the signing of a new two-year highway funding bill is viewed positively by construction contractors and equipment distributors and should provide at least some short-term stability to the industry.


Our overall outlook for 2013 remains cautiously optimistic. Wells Fargo’s economists are forecasting a 1.6% GDP growth rate in 2013, with the caveat that much of the weakness is expected to occur at the beginning of the year, when uncertainty about Europe and the fiscal cliff should be at its peak. Moreover, private sector economic activity should be stronger than overall growth, with final sales to domestic purchasers growing at a 1.7% pace in 2013. In addition, there are a few areas of the economy that almost certainly will do better in 2013, including residential development, commercial construction and energy development.

Public spending for infrastructure projects, especially roads and bridges, is not likely to increase much, if at all, in 2013. Passage of the new two-year highway funding bill mitigates much of the risk of a large drop in public funding for the foreseeable future but we don’t see much opportunity for an upside either.

Residential construction is likely to enjoy another year of solid growth. New housing sales and new housing starts have picked up nicely through most of 2012 and the momentum should continue through the coming year. Interest rates are likely to remain low, providing continued incentive for those with good enough credit to qualify for affordable new home loans. As long as demand for housing is sustainable, home values can continue to rise and provide a corresponding lift to consumers who may feel financially fit enough to open their pocketbooks and increase their spending.

Private Non-residential spending should be a positive for the equipment industry as long as the economy continues to putter along at its modest pace of around 2%. If politicians can successfully navigate around the pending fiscal cliff — and by so doing likely avoid a recession — then there should remain enough confidence for private enterprise to continue investing in the capital infrastructure to support ongoing growth.

Growth in the energy sector is one of the key positives in our intermediate-term outlook. The International Energy Agency recently announced that the U.S. is expected to become the world’s largest oil producer by 2017. The growth in energy exploration, pipelines and infrastructure should provide a major benefit to overall economic growth. Moreover, dependable access to energy, particularly inexpensive natural gas, is providing a major boost to industrial development, particularly in the South and Southwest.

Some of the other factors with a potential to influence equipment acquisition will likely only affect it at the margins. For instance, we’ve seen some post-election, year-end buying designed to take advantage of the 50% bonus depreciation. Just before the election we saw a lull in activity reflecting the uncertainty of the race but since then, we’ve seen our normal year-end push.


With all these factors at work, the team at Wells Fargo Equipment Finance, like many in the industry, is modestly positive about the prospects for equipment finance in the construction industry. We don’t expect a significant boost or rapid drop in the overall market opportunity for construction equipment finance. The factors that could disrupt our outlook are — not surprisingly — the usual suspects: the lingering European debt crisis and a looming fiscal cliff, which we expect will be resolved at least well enough for the U.S. to avoid plunging itself into recession. As long as the U.S. economy maintains its mostly slow-but-steady recovery, we see opportunities for growth.

John Crum is senior vice president and national sales manager for Wells Fargo Equipment Finance, Construction Group.


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