The construction industry is settling in at a new normal.
So says Robert Murray, the former chief economist and vice president at Dodge Data & Analytics, who retired at the end of August. As part of Dodge Data’s midyear update, Murray detailed how both construction starts and construction spending are expanding, yet not at the same booming rate experienced over the last three years.
The deceleration, as Murray calls it, is carrying the construction industry into some interesting times and establishing a new normal with a still-healthy level of activity.
Digging in
2019 has produced a pullback, and some estimates even point to a 10 percent decrease in activity, according to Murray. But construction activity can still be described as healthy when compared to historic levels. Strong growth, after all, in 2017 and 2018 provided slightly skewed numbers for 2019.
Despite a drop in the growth rate, the industry remains optimistic as it looks ahead. For example, a survey from the United States Gypsum Corp. and U.S. Chamber of Commerce reveals that more than half of contractors are highly confident the market will provide new projects in the months to come.
Driving factors
Here are some other takeaways from Dodge Data’s midyear update:
Costs related to building materials and labor rose over a 12-month period, which could be contributing to the decelerating growth rate. Still, the spike in building materials is not as significant as the kind the industry experienced from 2016 to 2018.
– Overall, the price of construction materials went up 1.7 percent between July 2018 and July 2019, according to the U.S. Bureau of Labor Statistics. Asphalt paving (5.2 percent), concrete products (2.8 percent) and cement (2.6 percent) all saw prices increases during this period.
– There has been moderate growth in single-family housing, but multifamily housing has dipped considerably. Despite these developments, their levels can still be considered healthy.
– In addition, single-family housing saw a slight uptick in 2019, but overall projects have decreased 3 percent year-over-year. Despite this trend, there are positive signs for the market, Murray says.
– Millennials, faced with the challenge of paying off student loan debt, pushed off buying a house. Fortunately, the times are changing.
This demographic is getting older and is now in a better position to purchase a home. Additionally, friendly mortgage rates and a strong economy signal that more millennials are nearing the homebuying stage.
Their one constraint, however, is slow income growth. This has played a role in millennials getting to the homebuying stage slower than past generations.
There are economic tailwinds that promote the continued growth of a strong economy, Murray adds. Low long-term interest rates and growing employment numbers, for example, are positive signs for a strong economy into 2020.
Forward thinking
Looking to 2020, multi- and single-family housing will not see renewed growth, Murray says. In fact, these areas are more likely to experience modest declines.
Considering the state of construction activity, Murray says there aren’t too many imbalances.
These imbalances, which the market saw in 2008 and 2009, would generally be worrisome, but Murray expects any construction slowdown to be modest and produce a stable outlook for construction.