CMD s Q1 2016 January 2016 Construction Starts Forecast Reportconstructconnect.s3.amazonaws.com/Forecast Quarterly Reports/C… · CMD s Q1 2016 Construction Starts Forecast Report
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CMD’s Q1 2016 Construction Starts Forecast Report
January 2016
US construction slightly underperformed in Q4. The major cause was the ongoing shortfalls in non-residential starts, which declined over the course of the year in spite of reasonable private sector investment. Residential starts were more positive, driven by a cyclical rebound in US housing. Civil engineering finished the year largely in line with expectations.
The US economy grew at a moderate, if unspectacular, pace of 2.4% last year, which it is expected to maintain in 2016. The Fed finally raised rates, marking an end to six years of zero lower bound monetary policy. Rising employment and wages will support consumer outlays which should feed into the housing market. The residential construction sector is undergoing a large cyclical rebound following the sharp declines in construction activity after the financial crisis. The non-residential sector, despite shrinking in 2015, is forecast to rebound this year and grow at a stable rate over the coming decade. Civil engineering is forecast to come in flat in 2016 after very strong growth last year, but over the medium-term, the sector is forecast to return to the 3½% range.
The Canadian economy remains plagued by the weak oil price, with both energy and non-energy sector investment disappointing. This led to a huge downturn in civil engineering sector starts in 2015, with further, albeit milder, falls forecast this year. This has had follow-on effects into the residential sector in parts of Canada that support the extraction industry such as Alberta. Non-residential starts are the one area of Canadian construction that breaks the downward trend with growth expected to reach just shy of 10% this year.
ContentsSummary forecasts (table) and Overview ......................... 2Drivers of headline sectors (table) ................................... 3US type-of-structure forecasts (table) ............................. 5US type-of-structure forecasts - INSIGHT (table) ............. 6US states, total construction starts (table) ...................... 7US four largest states: type-of-structure forecasts (table) .. 8US type-of-structure forecasts (charts) ........................... 9Canada type-of-structure forecasts (table) ..................... 12Canada type-of-structure forecasts - INSIGHT (table) .... 13Canadian provinces, total construction starts (table) ...... 14Canada four largest provinces: type-of-structure forecasts (table) .............................. 14Canada type-of-structure forecasts (charts) ................... 15
Sources: CMD (formerly Reed Construction Data)/Oxford Economics. Forecast reflects actual starts through Q4 2015.
The final tally of the total number of jobs in America at year-end 2015 was plus 2.65 million compared with 2014. The unemployment rate dropped to 5.0%.
OverviewQ4 US construction starts fall below expectations
Year-end growth came in slightly below expectation as a weaker Q4 depressed activity, leading to total starts growth of 3.7% in 2015. Most disappointing were non-residential starts, which fell over the course of the year. Construction of private office buildings has been particularly disap-pointing through 2015, despite moderate growth in business sector investment. Part of the issue may be due to the classification of projects; call centers and data centers, for which there were a number of mega projects in 2015, are classified under the warehouses segment (which repeatedly surprised to the upside through 2015). Hospital construc-tion has been another source of disappoint-ment in 2015, despite a favorable ruling from the Supreme Court on the Affordable Care Act in June. However, there may be some political uncertainty surrounding the legislation’s future — demographic funda-mentals suggest that construction in this category should be strong.
Residential construction starts were somewhat more positive, growing by 6.3% in 2015. The shortfall came exclusively in the multi-family segment which has weak-ened as homebuilders turn their attention to single-family housing. However, as we have argued in previous reports, some of the weakness in the multi-family segment may be overstated, as multi-use residential proj-ects could have been classified elsewhere. Civil engineering starts were largely in line with expectations, with annual growth in 2015 seen in all segments apart from airport construction.
Moderate growth in the economy, with multiple headwinds…
Real GDP expanded at a 2% annualized pace in Q3 as inventories exerted a nega-tive drag. Consumer spending maintained a steady pace of growth through the year, and a solid rise in disposable income points to consumer spending maintaining a reason-able pace of about 3% growth in 2016. In contrast, export-oriented industries have
been checked by subdued global growth and a US strong dollar. Business investment has been rising at a steady rate, although it has been checked by headwinds facing export-oriented industries and the energy sector. With data through Q3, we estimate that the economy expanded by 2.4% in 2015, and should maintain this pace of growth in 2016.
The US economy continues to add jobs, with on average 220,000 added per month in 2015. We expect the pace to moderate slightly over 2016, but more robust growth in wages will be the major driver of improving labor market outcomes going forward. Price pressures remain depressed in the US as the impacts of falling energy costs weigh on inflation. We expect a gradual rebound over 2016 reflecting low base effects from 2015 and a tightening output gap. The strong US
dollar will keep headline inflation at 1.3% this year.
As was widely expected, the Federal Reserve raised interest rates by 25bp in its December meeting after six years at the zero lower bound. Notes from the meeting stressed a very ‘cautious’ rate hike and implied a shallow path for future rate rises. We are currently factoring in two further rate hikes this year (June and December) and three rate hikes in 2017.
…but cyclical forces to drive construction activity
Looking to 2016, non-residential con-struction starts are set to return to growth as the investment outlook improves some-what, but the forecast is constrained by ongoing headwinds leading to relatively
subdued improvement compared to the residential sector.
The major driver of non-residential con-struction over the next year is expected to be the commercial segment. In particular, construction of private sector office space should start to pick up again in 2016 as pent-up demand starts to break through. In addition, shifting consumer prefer-ences towards online shopping and quicker delivery times require investment in the underlying infrastructure and logistics to accommodate this. Construction of new warehouses and logistic centers should be supported as a result of this trend. Indeed, this sector was one of the best performing in 2015, although after such a rapid expansion, we expect sector growth to take a pause this year, reflecting a natural reversion towards the mean. Over the medium-term, however, the level of warehouses starts should remain at record highs.
The underlying trend in the medical sector remains positive despite starts falling in 2015, a point we largely put down to tem-porary uncertainties. Two major factors underpin the forecast. Firstly, the passage of Obamacare and its consequent affirmation in the Supreme Court have laid the path for universal consumption of healthcare ser-vices. Secondly, the aging US population centred on the baby boomer generation will demand ever greater levels of healthcare services over the coming years and decades. However, there is some uncertainty sur-rounding the sector’s long-term prospects, depending on the outcome of the election in 2016.
New construction of educational facili-ties is slightly less robust. Within education, the elementary schools sector is forecast to grow at the strongest rate in order to accommodate a growing population in the younger cohort as the millennial gen-eration starts to reach childbearing age. In contrast, new construction in the college and universities segment is far slower on account of weaker population dynamics in the relevant age group. In addition, the cost of university education is rising. Further-more, the improving state of the economy has increased the opportunity cost of higher education as students would have to eschew more generous wage compensation in the
labor force than was the case in the imme-diate post-crisis period.
In contrast, manufacturing starts are forecast to fall sharply this year as the surging growth of 2015 reverts to the mean. Growth in the manufacturing sector is likely to be contained in 2016, the result of the strong dollar and weak external demand. Indeed, the manufacturing ISM index has pointed to a contraction in the sector over the last two months. The sec-toral outlook does, nonetheless, remain constructive beyond 2016 with the under-lying structural factors that have driven the resurgence in US manufacturing in recent years remaining in place. A competitive US labor force, shortened supply-chain benefits and cheap energy make the US an attractive location for firms to establish production facilities.
The solid growth rate witnessed in residential starts last year is expected to more than double in 2016 as the cyclical rebound in US housing fires up. The multi-family segment, having shrunk this year, is forecast to rebound moderately, but growth will be relatively constrained compared to the single-family sector, in part because the cyclical recovery in the single-family segment is less advanced. Whereas multi-family starts have largely recovered to their pre-crisis levels, the single-family sector still has considerable ground to cover. The single-family sector was particularly hit by the financial crisis
as people switched to renting, typically the preserve of multi-family accommodation. But as the economy has recovered, wage and employment growth have resumed, prompting demand for single-family housing to once again become the driving force behind residential growth. This trend is further helped by demographic trends, as the oldest millennials start to have families.
Civil engineering starts are set to mod-erate in 2016 with effectively no growth in view after having grown at a double digit pace in 2015. Nonetheless, the medium-term outlook remains robust with a con-stant stream of works to ensure ongoing activity. Starts of bridge construction are the strongest growing category within civil engineering, with much of the worthiness of the US bridge stock being below par. A study by the American Association of Civil Engineers found that one in nine bridges is rated as structurally deficient — a par-ticularly pressing point given that freight ton-miles are to grow by 70% by 2040 — while the Federal Highway Administration estimates that to settle the requirement of bridges by 2028 would require $20bn of investment annually. A number of new projects are expected to follow such as a replacement of the $1.5bn Goethals Bridge between Staten Island and New Jersey and the construction of a third bridge across the Cape Cod Canal. Roads are another area in need of investment, though we
don’t expect the high growth in 2015 to continue going forward. Starts are forecast to grow consistently in the 3% range over the forecast period.
Furthermore, the political climate is slowly warming towards more infrastruc-ture spending, with both political parties increasingly receptive towards more invest-ment in this area. Given the need for infra-structure upgrades across the US (much of New York’s infrastructure largely pre-dates the Depression era for instance), the amount of the potential work is substantial and gives cause to be optimistic on future construction projects.
Canadian outlookCanadian construction in Q4 fell sig-
nificantly as the renewed slump in oil prices impacted on construction activity; in Q4 total starts were 50% below their level a year earlier. The sharpest effects were felt in the civil engineering sector, which shrank by 77% on-the-year. Residential construction activity fell by 11% on-the-year marking uncertainties in the Canadian housing market. Non-residential was the one sector that broke the downward trend with annual growth of 12% in Q4. Of particular note have been hotels and motels starts which more than doubled on the year driven by increased tourism spending on the weak Canadian dollar.
The renewed fall in the oil price has driven down the outlook for the Canadian economy. Business investment, in par-ticular, fell for three consecutive quarters through Q3, driven largely by cutbacks to capital spending in the oil and gas sector. Reasonable US demand and the cheap Canadian dollar are providing some sup-port to exports, but weak growth else-where means the boost from this channel could be rather limited. The outlook for
consumer spending is relatively more upbeat, driven by rising employment and earnings growth that support disposable income. In addition, the continued mon-etary stimulus from the Bank of Canada will provide some support. We expect the policy rate to remain relatively unchanged for most of 2016. Overall, GDP is forecast to rise by 1.7% in 2016, slightly ahead of the 1.2% growth it posted in 2015 (based on data through Q3).
Civil engineering accounts for the largest share of Canadian construction at just below 60% of total starts in value terms. The sector fell precipitously in 2015 as the low oil price caused investment in new projects to all but dry up with the most serious effects directed towards the extraction based industries in the Prairies and Atlantic regions. The miscellaneous civil category that includes Canada’s vast extraction based sector fell by 75% in 2015. Given the recent drop in oil prices, the scope for recovery in the sector is relatively modest, so we expect stagnation in 2016, staggeringly weak considering the extent of the decline last year.
Bucking the falling trend in headline civil engineering, power infrastructure starts more than doubled last year. Looking ahead, there is reason to be optimistic on power infrastructure — the Canadian government has made clear its intention of increasing the weight of renewables in power generation, with the stated aim of reducing emissions by 17% from their 2005 level by 2020. Current figures show that only 3% of Canada’s electricity comes from non-hydro renewables, indicating there is significant scope for development in the wind and solar sectors. Road building also grew at a strong pace last year and we expect robust growth to continue over the forecast period. In Ontario, the Highway
407 East Phase 2 construction project to build a new 32km section of highway is set to commence in early 2016 worth an esti-mated C$1.5bn.
The downturn in Canadian residen-tial construction is ongoing as the con-sequences of the potential overheating housing market in the major cities, and more importantly, reduced demand for housing in the energy extraction econo-mies of the prairies region dampen resi-dential construction. Alberta residential starts fell over 20% in 2015 with a similar decline expected this year. On the national level, residential construction is forecast to fall again in 2016, in the main driven by travails in the extraction economy regions. Over the medium term, Canadian residen-tial construction does not have the same cyclical driving factors that are present in the US, and concern about overheating in the housing market remains a clear risk.
The non-residential building sector is the one bright spot within Canadian con-struction. The sector grew by 6.6% in 2015, and is forecast to accelerate further this year. Canadian manufacturing starts fell sharply in 2015 but we expect the sector to rebound strongly this year and beyond as the impact from the weak Canadian dollar starts to filter through to Canadian producers and the new TPP deal opens up new Asian markets to Canadian firms. Hospitals and medical sector starts are forecast to grow by double digits as the health needs of Canada’s aging population become ever more pressing. In addition, the new government in Canada has publicly prioritized health spending. Construction of transportation terminals and warehouses are also forecast to grow at a robust pace, reflecting the growing impor-tance of logistics in the economy as online shopping and delivery systems become ever more important.
EXPLANATION: Table 3 conforms to the type-of-structure ordering adopted by many firms and organizations in the industry. Specifically, it breaks non-residential building into ICI work (i.e., industrial, commercial and institutional), since each has its own set of economic and demographic drivers.
Table 4 presents an alternative, perhaps more user-friendly and intuitive, type-of-structure ordering that matches how the data appears in CMD’s on-line product ‘Insight’.
Source of actuals: CMD “Insight” / Forecasts: Oxford Economics and CMD / Table: CMD.
EXPLANATION: Table 3 conforms to the type-of-structure ordering adopted by many firms and organizations in the industry. Specifically, it breaks non-residential building into ICI work (i.e., industrial, commercial and institutional), since each has its own set of economic and demographic drivers.
Table 4 presents an alternative, perhaps more user-friendly and intuitive, type-of-structure ordering that matches how the data appears in CMD’s on-line product ‘Insight’.
Source of actuals: CMD “Insight” / Forecasts: Oxford Economics and CMD / Table: CMD.
*One in three Americans lives in one of the four shaded states, New York, Florida, Texas or California. Sum of first column may not exactly equal total due to rounding.
Source of actuals: CMD “Insight” / Forecasts: Oxford Economics and CMD / Table: CMD.
(Yr vs previous yr % Change) 11.3% -7.7% 20.0% 7.2% 5.1% 4.0% 8.9%
Source of actuals: CMD “Insight” / Forecasts: Oxford Economics and CMD. Table: CMD.
Year-over-year average hourly earnings for all private sector workers in America have been trending upwards, but ever so gently. Average hourly earnings in construction now have risen above the +2.5% benchmark for the economy overall.
* With respect to Tables 3 and 7 ‘transportation terminals’ is the one type-of-structure that is categorized differently in Canada (institutional) than in the U.S. (commercial), for reasons having to do with government statistics.
EXPLANATION: Table 7 conforms to the type-of-structure ordering adopted by many firms and organizations in the industry. Specifically, it breaks non-residential building into ICI work (i.e., industrial, commercial and institutional), since each has its own set of economic and demographic drivers.
Table 8 presents an alternative, perhaps more user-friendly and intuitive, type-of-structure ordering that matches how the data appears in CMD’s on-line product ‘Insight’.
Source of actuals: CMD “Insight” / Forecasts: Oxford Economics and CMD. Table: CMD.
EXPLANATION: Table 7 conforms to the type-of-structure ordering adopted by many firms and organizations in the industry. Specifically, it breaks non-residential building into ICI work (i.e., industrial, commercial and institutional), since each has its own set of economic and demographic drivers.
Table 8 presents an alternative, perhaps more user-friendly and intuitive, type-of-structure ordering that matches how the data appears in CMD’s on-line product ‘Insight’.
Source of actuals: CMD “Insight” / Forecasts: Oxford Economics and CMD / Table: CMD.