Economy upshifts

Last year arguably represented the best year for the U.S. economy since the Great Recession ended. GDP expanded 2.4 percent for the year, and while that fell short of the 2.5 percent growth generated in 2010, that year was associated with a significant tailwind from the stimulus package passed by Congress one year earlier. Even with no federal stimulus package last year, the economy still managed to expand moderately.

According to the Bureau of Economic Analysis, real gross domestic product (GDP) expanded 2.6 percent (seasonally adjusted annual rate) during the fourth quarter, following a 5 percent increase during the third. Investment in nonresidential structures also increased by 2.6 percent on an annualized basis.

While many will view the fourth quarter headline figure as disappointing—many economists had expected to see a quarterly number in excess of 3 percent—it’s important to consider the context of the fourth quarter data. The number will be revised several times and may ultimately be revised higher.

Perhaps more important is the fact that the impact of diminished federal spending is significantly larger than many had anticipated.

The federal spending category subtracted more than half a percentage point from the fourth quarter’s headline number, which means that the nonfederal portion of the economy expanded faster than 3 percent.
 

A strong quarter

Though the fourth quarter growth figures indicate that the economy enters 2015 with somewhat less momentum than had been thought, the final nine months of 2014 still represent the strongest period of growth of the current recovery cycle. Undoubtedly financial markets will continue to be roiled by ongoing fluctuations in input prices and uncertainties regarding the strengthening of the U.S. dollar. But with gas prices low and with job creation now brisk, consumers are likely to continue to push the U.S. economy forward in 2015.

According to the Feb. 2, 2015, release from the U.S. Census Bureau, nonresidential construction inched higher during 2014’s final month, expanding by 0.4 percent on a monthly basis and 5.9 percent on a year-over-year basis in December. Spending for the month totaled $627.1 billion on a seasonally adjusted, annualized basis.

Nonresidential construction spending lost some of its momentum during the final two months of 2014.

Some may blame this decrease in spending on the fall in oil prices that may have induced a reduction in construction spending related to oil production and distribution. This is unlikely since construction categories like transportation and manufacturing have retained their momentum. It has been in categories such as public safety and education that declines in spending have been observed. Public budgets continue to be strained, and few components of the economy have been as impacted by that as government-financed construction.

It is also possible that the dip in spending is simply noise in the data. October’s and November’s figures were revised higher, while December’s estimate remains preliminary.

A third explanation is that the U.S. economy is not quite as robust as many analysts believe. However, it should be noted that even with the loss of spending momentum during 2014’s final two months, total nonresidential construction spending in calendar 2014 was 6.6 percent greater than during 2013.
 

Mounting evidence

As further evidence of economic recovery, construction employment growth has surged. The U.S. construction industry added 48,000 jobs in December according to the Bureau of Labor Statistics (BLS) preliminary estimate released Jan. 9, 2015. Nonresidential construction added 22,800 net new jobs in December after adding 7,100 jobs in November.

The overall U.S. economy added an average of 246,000 jobs per month on average in 2014, 50,000 per month better than in 2013. During the final quarter of 2014, the nation added an average of 289,000 jobs per month, indicating momentum was building in the U.S. labor market as we approached 2015. This represents good news for the construction industry in 2015 and perhaps beyond, including with respect to office construction, retail construction and other segments that benefit from accelerating job growth and decreasing unemployment.

While 2015 is setting up to be a year of solid nonresidential construction spending growth, executives always have reason to worry. One of the primary sources of concern is the troubling emerging construction skills shortages. According to government data, construction industry unemployment ended the year at 8.3 percent, suggesting that concerns have been overblown. But once one considers the types of workers who are now in demand and geographic differences in construction worker demand, it becomes clear that concerns regarding skilled worker shortages are legitimate.

The implication is that construction wages are set to rise this year. Many of those who are unemployed likely lack the skills necessary to participate in industrial construction or in other rapidly expanding, complex segments. States like Louisiana and Ohio are now in the midst of industrial and energy-related construction booms and skills shortages will make their presence felt this year.

While many contractors remain concerned by prospects for wage inflation in 2015, materials prices continue to exhibit deflationary tendencies as certain key commodity prices continue to plummet. Construction input prices dipped 1.4 percent during the final month of 2014 and failed to rise for five consecutive months. The last time construction prices dipped so sharply was in late 2008 during the global financial crisis. Overall construction materials prices were down by nearly 1 percent on a year-over-year basis according to the Jan. 15 Producer Price Index release from the U.S. Department of Labor. Inputs to nonresidential construction fell 1.7 percent for the month and were down 1.9 percent for the year.
 

Looking ahead

This should be a year of rising construction spending, wages and profit margins. The economic recovery is led by consumers, who are benefitting from job growth, improving job quality, moderate increases in wages and low gas prices.

As always, there are economic headwinds. These include erratic federal spending on public construction work. A rising U.S. dollar will make it more difficult for American companies to export goods and services (something already observed in disappointing fourth quarter corporate earnings reports among America’s largest exporters). A stronger U.S. dollar also makes it more likely that American consumers will turn to cheaper, imported products, thereby affecting the domestic market share of U.S.-based companies. Additionally, while the U.S. leisure and hospitality sector is helped by lower gas prices, some Americans will decide to take advantage of their stronger dollar by traveling abroad.

Even with those headwinds in place, the U.S. economy seems poised to grow at a rate of around 3 percent. Recently, both the International Monetary Fund and the World Bank downgraded their respective economic growth outlooks for the global economy, but upgraded their forecasts for the U.S. Indeed, America stands to be one of the world’s star economic performers in 2015. 

Anirban Basu is chief economist of the Associated Builders and Contractors (ABC), Washington, D.C., and provides analyses on trends in the U.S. commercial and industrial construction industry, in addition to producing ABC’s quarterly Construction Backlog Indicator, a national economic indicator that reflects the amount of work that will be performed by commercial and industrial contractors.