North America: is the construction market turning the corner?

By Chris Sleight15 April 2010

After the most difficult recession many can remember the North American construction market is turning the corner to recovery. Chris Sleight reports.

There is a feeling that the US construction market has fallen as low as it is going to get. Figures from the US Census Bureau say the value of construction put in place was just US$ 883 billion for the 12 months to the end of January this year - the lowest since June 2003.

However, there are clear signs the recovery is underway, and as the year moves on and weather conditions improve activity should start to pick up.

There is already positive news from the housing sector, with permits for some 612000 new starts being granted in the 12 months to the end of February. This figure was up +11.3% on the same time a year ago, demonstrating the sector is bouncing back from a long and devastating recession that begin in 2005.

But there is a long way to go until the industry is back to its natural steady state of about 1.5 million housing units per year.

Indeed, with the industry running at such low levels, most of the nation's major house builders are still losing money on their day-to-day operations. For example, Pulte Homes, the largest house builder in the US lost US$ 117 million on revenues of US$ 1.69 billion in the final quarter of 2009.

Not exactly good news, but results had narrowed a lot from the US$ 338 million net loss it made from similar revenues a year earlier.

Other encouraging signs in the results included a growing backlog, although the average selling price of houses was yet to improve.

This sense of cautious improvement is being seen by other house builders too. Commenting on the company's first quarter results, KB Home CEO Jeffrey Mezger said, "The operating environment for the homebuilding industry is better today than last year. Encouraging data in recent months suggest that a number of housing markets may be stabilising or starting to rebound, though we do not yet see a sustained nationwide recovery.

"While the pace is likely to be uneven in the months ahead, we currently expect housing market conditions to follow a generally positive trajectory throughout this year and into 2011."

Stimulus impact

There is clearly optimism in the industry that wasn't there a year ago and there is a lot of debate as to how much the American Recovery and Reinvestment Act (ARRA) - the Obama administration's stimulus plan - has helped.

Speaking on the first anniversary of the Act being passed, US vice president Joe Biden said some US$ 452 billion of the total US$ 787 billion funds had been spent or allocated.

In his first Annual Report on Progress Implementing the American Recovery and Reinvestment Act, Mr Biden said, "Almost 60% of the Recovery Act funding is now at work in the US economy.

"Since the Act was passed a year ago we have funded over 12500 transportation construction projects ranging from highway construction to airport improvements."

Notwithstanding the huge amounts of money involved in the stimulus plan, the fact remains that US construction output declined last year. Census Bureau statistics show the US$ 884 billion total construction put in place to the end of January was a -9.3% fall compared to 12 months previously.

But while privately funded construction fell a massive -14.3%, the value of public sector construction rose +2.1%.

In the public sector it was transportation infrastructure and projects related to conservation that saw the biggest gains. Meanwhile all the sub-sectors of privately funded construction fell, with non-residential building taking a much bigger hit than the house building sector.

So while the figures suggest that the stimulus plan provided some stability in the US construction market last year, the fact that output suffered a big overall fall meant that the effects of the plan passed many people by.

This is certainly the view of Andy Studdert, chairman and chief executive officer of Chicago-based NES Rentals, one of the country's largest equipment rental houses. He told iC that even if the stimulus plan had never been approved, it wouldn't have affected business much.

However, he too added that an improvement was on the horizon. "We sense that eventually, one of the things that we could think will happen is the kick-in of a lot of effort to go green, refurbishing old heating/cooling and lighting systems in government buildings and in commercial buildings," he said.

It may also be the case that the impact of the stimulus plan is yet to be felt by the industry. A year or two ago, there was much talk of "shovel ready" projects, which is to say there were apparently schemes that could start the next day if only funding were approved.

This of course proved to be something of a myth. Those involved in the industry know construction projects require planning, approvals and a competitive bidding process before the contract can be awarded, and even after that it takes time to assemble the necessary equipment, materials and personnel that are needed to get a project underway.

Indeed, there was a fanfare of publicity at the end of January when work started on a scheme to increase the capacity of the Caldecott road tunnel in the San Francisco bay area of California.

This US$ 420 project has received the largest single injection of funds from ARRA - US$ 198 million - but the reality is this scheme was only just starting almost a year after the act was passed as the industry was beginning to recover anyway.

The continued downturn in construction last year has had a serious impact on employment in the industry, and this continues to be a worry. According to the Associated General Contractors of America (AGC) employment in the industry fell in every state in the US between January 2009 and January 2010. There were double digit percentage falls in 38 states as well as the District of Columbia (D.C.).

Commenting on the figures, Ken Simonson, chief economist at AGC said, "Construction employment is dropping everywhere and plummeting almost everywhere. Looking at this data, it is quite clear that the construction industry is yet to hit bottom."

The five states with the largest declines were Nevada (-29.9%), Arizona (-26.0%), Colorado (-22.2%), Idaho (-21.0%) and Florida (-20.4%). Meanwhile, the smallest declines were seen in North Dakota (-1.0%), Nebraska (-4.1%), Alaska (-4.2%), South Dakota (-5.9%) and Arkansas (-6.2%).

The AGC is urging lawmakers to address this issue with an extension to the national surface transportation bill and an acceleration of stimulus-funded construction projects. "As privately-funded construction activity continues to decline, federal investments in infrastructure are often the difference between a job and unemployment for what's left of the industry."

Policy shift

Perhaps recognising the medium- to long-term nature of construction, the Obama administration seems to be adapting the ARRA to fulfil some policy goals.

Particularly interesting for the industry was the announcement that US$ 8 billion of the funds would be used to develop high speed rail links in the US - an interesting development for a country often thought to be so in love with its cars and freeways

The bulk of the funding will go to new, large-scale programmes, with US$ 1.25 billion for a 140 km long high speed rail corridor in Florida between Tampa and Orlando, while in California US$ 2.25 billion will be invested in a 440 km link to connect Los Angeles and San Francisco.

In addition to investment in 13 high-speed rail corridors, grants have also been awarded for the improvement of existing rail lines, tunnels and bridges in 31 States as well as the District of Columbia.

As Secretary of transportation, Ray LaHood said, "Investment in these routes will lay the groundwork for future high-speed and intercity rail development. We cannot just put faster trains on old tracks and send them across bridges that need repairs. With these targeted investments, passengers will see real benefits in the near term."

New game?

This may be a long-term scheme, but shifts in policy like this may be very significant for the industry. Yes, the industry is recovering, but with only weak growth it will be important to focus on areas like high-speed rail and 'green' power generation that have a clear policy commitment, rather than sickly areas like non-residential building.

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