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February 13, 2020 12:55 PM

Construction outlook: Encouraging early signs for 2020

Bill Wood
Plastics News
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    Scott Ehardt, Wikimedia Commons
    Construction multi-family structures going up by 3 percent.

    For the first time since 2011, total construction spending in the U.S. suffered an annual decline in 2019. After an increase of 3.3 percent in 2018, total outlays for construction projects slipped by 0.3 percent last year. This is according to data recently released by the Census Bureau in the Monthly Construction Spending report.

    Now I will admit that -0.3 percent for an entire year is not much of a decrease. In fact, it is within the margin for error for this data set, and there is a chance it will be revised upward in the coming months. If the revisions go enough in our favor, we may get to flat for the year.

    So for now, let's just call last year flat-to-down. That isn't terrible, but we should be doing better. Interest rates are at historically low levels, and they are barely higher than the rate of inflation. The overall economy grew by 2 percent while the population grew by at least a half-percent. As a nation, we produced and then burned more energy, used more water, made more cellular connections, traveled more miles and employed more people than at almost any other time in history.

    Yet we still managed to spend no more money building things in 2019 than we did the year before. For now, I am going to call this a statistical anomaly. But if the construction sector continues to consistently underperform the overall economy, then it will require much closer scrutiny by the processors who manufacture construction materials and supplies.

    One reason for thinking this is an anomalous problem—that already may be in the past—shows up on the top chart for total spending. A close inspection of the trend in the graph reveals that most of the decline in total spending in 2019 occurred in the first half of the year. By the end of the year, the trend was noticeably stronger.

    Sources: U.S. Census Bureau; Mountaintop Economics & Research Inc

    After posting quarterly decreases in the first three quarters last year when compared with the same quarters of a year earlier, total spending in the fourth quarter registered a tidy gain of 4.3 percent. The monthly gain in December was 5 percent. So the momentum in the data is gathering steam for early 2020.

    I do not think the rate of growth will be sustained at 5 percent for the entire year, but I do expect a moderate rebound in 2020. My forecast for total construction spending this year calls for a gain of 3 percent.

    An overall rise in total spending should provide a tailwind this year, but not all segments of the construction sector will benefit equally. Additionally, there is a wide variety of rubber and plastics products sold into the various construction markets. As always, manufacturers of these products will want to know which segments are growing the fastest.

    On the second chart I have graphed the annual percentage changes in spending for the segments reported by the Census Bureau. The biggest story here is spending for residential projects dropped by almost 5 percent last year. Residential construction spending accounts for about 40 percent of total spending, which came out to more than $520 billion last year. Keep in mind this data includes additions and alterations to existing homes as well as new home construction.

    Spending on single-family structures declined by a surprising 6 percent while investment in multifamily structures increased 3 percent. This divergence is corroborated by the recent trend in the data on housing starts where the growth in the number of multifamily starts last year (up 7.3 percent) was much stronger than the gain in single family starts (up 1.4 percent). This is not a statistical anomaly. The housing market is in the midst of a significant secular shift. Households are increasingly choosing to rent homes rather than own them.

    This fundamental shift in market preference will continue to have profound implications for the plastics industry. It will affect not only the markets for the plastic building materials used to construct these structures, but also on the markets for home appliances, furnishings, fixtures and lawn and garden supplies. In the future, newly formed households may choose to consume fewer or smaller versions of many of these types of products.

    Sources: U.S. Census Bureau; Mountaintop Economics & Research Inc

    As for the nonresidential segments, the overall number increased by 2.8 percent, which is in line with the level of overall growth in the U.S. economy. I am pleased to see the solid gains in spending for sewage and waste disposal projects and also water supply projects. These are big markets for plastics products, and despite the gains last year, there is a lot more that needs to be done. These types of projects usually fall under the category of public construction spending, which is the bottom line on the top graph.

    Public construction spending increased by 7 percent last year, but the long-term trend in the chart indicates our nation's infrastructure projects are still woefully underfunded if we want to have any chance at achieving consistent, real economic growth in the range of 3 percent per year. It is not completely out of the question that Congress will pass large infrastructure bills during this election year. Maybe infrastructure will emerge as a new strategy for getting reelected.

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    Rubber News wants to hear from its readers. If you want to express your opinion on a story or issue, email your letter to Editor Bruce Meyer at [email protected].

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