State of the Industry
Construction lays the foundation for the success of almost all business. When the construction industry is healthy and prosperous, it has a notable effect on job growth. When one construction job finishes, additional employment opportunities are seemingly created out of thin air. Because of this, the construction industry has a profound multiplier effect on job growth.
The sad truth is that the US construction industry had a bleak start to the new millennium and has been slowly but steadily recovering for most of the past decade. In March of 2006, before the economic recession, construction spending peaked at $1.2 trillion, or 8% GDP. By February of 2011 it had bottomed out at $746 billion. At 40%, this is a drastic reduction in spending that essentially halted four out of every ten potential construction projects nationwide.
The good news is that 2013 has been a year full of optimism and recovery. Most contractors are confident enough in the economy this year to expand their businesses and grow the size of their staff. Although recovery has been positive this year, outlook is even more promising in the next few years.
Private vs. Public Sector Growth Predictions
According to a report released by the Associated General Contractors of America (AGCA) earlier this year, most contractors are more optimistic about the growth of private sector construction than they are about the public sector. A substantial 36% of firms interviewed believe that they’ll spend more money on private construction projects in 2013 than they did in 2012, compared to 26% who think otherwise. This amounts to a 10% net positive reading of construction firm owners who are collectively optimistic about the future outlook of the private construction industry.
However, perception of the public construction industry is less optimistic. Most contractors remain unconvinced that the public sector is making as quick of a recovery as the private sector. For example, over 40% of contractors report that they expect public construction to shrink in the next year, while a mere 18% expect it to grow.
In another recent survey given to contractors throughout Arizona entitled 2013 Construction Outlook Survey Results by the AGCA, the following question was asked:
Compared to 2012, do you expect the available dollar volume of projects you compete for in 2013 to be:
This survey reveals a slightly unsatisfactory impression of the construction industry’s current growth potential. The construction of power facilities is the only area in which more than 50% of contractors predict that there will be an increase in available funds for those kinds of projects this year compared to last.
However, taking into account the dramatic hit that the industry took in 2006 when the industry bottomed out at $746 billion, any prediction that isn’t entirely pessimistic is promising. Overall, industry growth seems positive and is progressing slowly but steadily.
Perception vs. Reality
Contributing to the recovery, banks are just beginning to lend more liberally to private contractors, as less of them report project delays as a result of lack of funding compared to last year. Although lending practices are getting better, most contractors believe that credit conditions remain essentially unchanged and are still causing more projects to be cancelled than is necessary.
Along the same lines, K-12 School construction is the only area in which more than 50% believe there will be a decrease in available funds compared to last year. For the most part, contractors seem to be in agreement that the available revenue for any given project is more or less on par with 2012. This lends credence to speculation that the industry has stagnated, refusing to grow or shrink by a significant margin compared to last year.
Contrary to previous predictions that the federal healthcare overhaul would force contractors to increase healthcare spending in 2013 and consequently lay off employees, only 3% of construction companies paid more for healthcare in 2013 than they did in 2012. At the same time, 31% of contractors stated that they planned on increasing the size of their staff by end of the year.
Regionally, prosperity in the Southwest’s construction industry looks more promising than almost any other region. A lower percentage of construction employers plan on laying off workers in 2013 than in any other domestic region and contractors in the Southwest are the most optimistic about highway construction this year, as 32% of them predict an increase in highway construction activity.
Nationally, construction employment is picking up as more projects get the green light and less of them are placed on hold for financial reasons. “All of the discussions with clients, both large and small, indicate that more projects of varying sizes are being funded and released for construction after many months of being on hold,” states Jim Jose, principal of the Denver-based architecture firm path21. <ahref =” http://mountainstates.construction.com/mountainstates_construction_projects/2012/1224-regional-2013-outlook-shows-private-sector-strength.asp”>Link</a>
At 60%, a large majority of construction firms plan on making significant investments over the next year. (Excluded from this dataset are new employees, healthcare, or anything that would more appropriately fall under the ‘employment’ umbrella, but intangible assets such as inventory management software are included.) Only 11% of all construction firms planning on making significant investments intend on purchasing new financial and job cost software. Three out of four plan on investing more than $50,000 on these purchases.
After six rough years battling through less-than-ideal economic conditions, the construction industry appears to be making a steady recovery. Home prices are up; home sales are up; building permits are up; home mortgage rates and foreclosures are down. Finally, the recovery in the housing market is driving a turnaround in the labor market. Over 48,000 construction jobs were added nationally in February alone. Some contractors are even beginning to worry about filling positions. Although this sounds like a good problem to have, the fact of the matter is that the most significant problem facing the construction industry today is actually a lack of capable construction workers. As the economy returns to its normal state of equilibrium, the shortage of available help will become the industry’s most challenging dilemma.