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Subject - The Impact of a Recession on the Construction Outlook

September 28, 2011
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Construction Forecasts

News & Analysis

The Impact of a Recession on the Construction Outlook

09/09/2011 by Bernard M. Markstein, Reed Construction Data Chief Economist

The negative economic news continues to flow. The health of Euro zone finances remains in question. Gold prices hover close to all time highs. The United States economy treaded water in August, netting no new jobs. U.S. consumers are more pessimistic than ever. Private construction spending fell in July.

As noted earlier (Downgrading the Forecast) the poor economic numbers have led us to lower our baseline forecast and to increase our subjective probability of a recession to 30%. Although we continue to be optimistic that the U.S. economy will avert a descent into another recession, the risk is real enough to look at what a recession scenario and its likely impact on construction.

In our recession scenario, the current (third) quarter is subpar, with growth barely above zero. The next four quarters then exhibit decline, with the first and second quarters of 2012 down the most. Fourth quarter 2012 is mildly positive, with stronger growth in 2013.

 

Year-over-Year % Change

 

2010

2011

2012

2013

Baseline Forecast

3.0%

1.6%

1.6%

2.4%

Recession Forecast

3.0%

1.2%

-1.6%

2.0%

The impact of our recession scenario on construction spending is felt largely in 2012 and 2013. Although some adjustments may be made this year — mainly delaying projects, a further hit on residential construction and possible cancellation of some federal projects, much of 2011 projects are committed. Comparing our baseline forecast with our recession scenario, in 2012 new residential construction goes from expanding by 6.8% to declining 4.1% and residential improvements go from up 8.7% to down 4.3%. Non-residential building takes a smaller hit, rising only 0.9% instead of 3.3% in the baseline forecast. We expect heavy engineering (non-building construction spending) to feel the pinch more, though not as much as residential construction — falling 0.9% instead of rising 3.6%.

Thus, in our recession scenario total commercial construction falls 1.3% instead of rising 4.8%. Two-thirds of the change is due to reduced spending on residential construction. All categories of commercial construction turn positive in 2013, but because we expect the nation to be struggling out of the morass, not as strong as if there had not been a recession.

U.S. Total Construction Spending
(billions of U.S. current dollars – annual figures)

 

Actual

Forecast

 

2008

2009

2010

2011

2012

2013

New Residential (% change

237.0

141.2

136.2

127.2

122.0

126.6

   is year vs previous year)

-33.1%

-40.4%

-3.5%

-6.6%

-4.1%

3.7%

Baseline Forecast YOY % Change

 

 

 

-6.0%

6.8%

17.7%

Residential Improvements*

120.7

112.7

112.5

119.1

114.0

118.9

 

-13.5%

-6.6%

-0.2%

5.9%

-4.3%

4.3%

Baseline Forecast YOY % Change

 

 

 

1.6%

8.7%

10.2%

Non-residential Building

437.7

375.7

288.9

270.1

272.5

281.6

 

8.4%

-14.2%

-23.1%

-6.5%

0.9%

3.3%

Baseline Forecast YOY % Change

 

 

 

-8.3%

3.3%

9.5%

Non-building

272.1

273.5

266.0

259.7

257.3

260.4

   (heavy engineering)

9.7%

0.5%

-2.8%

-2.4%

-0.9%

1.2%

Baseline Forecast YOY % Change

 

 

 

-3.1%

3.6%

7.0%

Total

1067.6

903.2

803.6

776.1

765.8

787.5

 

-7.4%

-15.4%

-11.0%

-3.4%

-1.3%

2.8%

Baseline Forecast YOY % Change

 

 

 

-4.8%

4.8%

10.2%

 

*Residential Improvements include remodeling, renovation and replacement work.
Source: U.S. Census Bureau, Department of Commerce.
Forecasts and table: Reed Construction Data.

 

 

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Comments
  • According to the American philosopher Yogi Berra, the future is the hardest thing to predict. If anyone is certain that construction-in general- is going to stagnate then that person should take all there savings, hock everything and put all that money into put options on commodities whose price follows construction activity such as copper and lumber. I would also recommend that they charge $10,000./minute for their advice. Why give such wisdom away free? Now, construction may or may not stagnate. "May" and "may not" are logically equivalent to each other and to we don't know. Of course, some people believe saying "We don't know" to be a capital crime. Factoid: the Empire State building was built in the middle of the great depression in less than a year. And it was built strong enough to withstand a WWEII bomber crashing into it-though it did take two whole weeks to clean up the mess.

    Bob  September 30 2011, 4:20 pm EDT
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