Construction industry shows modest growth despite tough environment

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With modest signs of economic growth, tough conditions will permeate the construction industry for at least two more years, the chief economist for Portland Cement Association said at ConExpo-Con/Agg 2011 in Las Vegas. Edward Sullivan said he’s optimistic about construction overall because of pent-up demand being generated across both the residential and nonresidential sectors.

Construction spending will show meager gains in 2011 and into 2012, but Sullivan said he doesn’t expect to see any significant increase in real construction spending until 2013. The economist is projecting a 2.7 percent growth in gross domestic product and 1.5 million jobs being created this year, compared with most economic forecasts of 3.5 percent GDP growth and 2 million jobs.

“Our industry never wants to be surprised on the downside,” Sullivan told about 150 people attending his economic outlook at ConExpo. “They like to be surprised on the upside. That’s why I layer my projections with conservatism.”

The economy was shedding 750,000 jobs a month not long ago and business crashed to the lowest level of any recession. More than 8.5 million jobs were lost. Had it not been for federal policy, the economy could easily have dipped into a depression, Sullivan said.

The office sector lost 2.4 million jobs. As office occupancy declined, net operating income and return on investment for commercial property plummeted. Office vacancy is at 17 percent nationally. Office employment would have to grow by 500,000 jobs to stabilize lease rates and by 5 million to fill the vacancy, the economist estimated.

On the residential side, homeowners face mounting foreclosures and excess housing supply. “These are huge impediments that must be overcome before we see recovery in construction,” Sullivan said. “Look at it as a wound: the deeper the cut, the longer the recovery.”

Concrete consumption has declined by 50 million tons a year and the imbalance between supply and demand dwarfs that of any past recession by multiples, going back to the Great Depression, Sullivan said. “We shut down 16 plants, eight of them permanently,” he said. “Even when the economy recovers, the cement industry will not.”

The credit crisis that was sparked by subprime mortgage defaults spread into consumer spending, which accounts for two out of three GDP dollars, Sullivan said. That led to job losses, state budget deficits and rising energy prices. The credit pendulum has swung from being too loose to too tight, though lending standards are starting to ease at certain credit rating levels, he said.

With very little private money funding construction, recovery will have to start with public works, Sullivan said. The American Recovery and Reinvestment Act provided $5 billion in spending in 2009 and $11.5 billion in 2010, which leaves about $9 billion to be spent, most of it this year. Composition of the spending is getting away from resurfacing roads to widening and building new routes and bridges, he said.

The political reality of the proposed $1.1 billion highway construction bill is that everyone recognizes the need to improve the nation’s infrastructure, but few leaders in Washington will vote for the 5-cent fuel tax required to fund the projects, Sullivan said. Read More.

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