The slower growth in construction starts for 2016 has some industry watchers worried about a slowdown in the construction cycle. However, Dodge Data & Analytics Chief Economist Robert Murray attempted to allay those fears with the recent release of the 2017 Dodge Construction Outlook during the firm's Outlook 2017 Executive Conference earlier this month. The big takeaway:
Murray believes the industry is "moving into a more mature phase of expansion," rather than entering a period of decline noting that the current construction recovery only kicked into high gear in 2012, well after the overall economy started to rebound.
Murray predicts construction industry growth will continue into 2018, followed by a cyclical slowdown in 2018 and 2019. Despite the inevitable downturn in the cycle, Murray noted that the slow nature of the recovery means that the decline will also be gradual. "We don't have that boom and bust situation [that was] present in the past decade," he said. "When the slowdown ultimately comes, it's not going to be a repeat of what we experienced in 2009."
The three primary areas of change that the industry should watch for in the coming year:
- Growing support for infrastructure spending: Thanks to the presidential election boosts in funding for infrastructure have gained widespread support across the U.S. Murray views the public works sector as "one of the supportive elements for keeping this expansion going a bit longer."
- Extreme volatility in the electric power and gas plant sector dragging down the overall picture: This pricing volatility has resulted in huge spikes and significant plummets in the past few years, with more of the same expected to continue in 2017. This sector is so turbulent that Murray believes a clearer picture of the construction industry's growth emerges when electric power/gas plant construction is removed from the equation.
- Impact of rising interest rates will not be immediate but significant in a few years: Murray believes the Federal Reserve is expected to raise short-term interest rates once this year at its December meeting and twice in 2017. He notes that the increases are moderate and will not immediately impact the construction industry. However, Murray predicts that interest rates will create "more of a dampening element by 2018, which will lead to a slowdown in overall economic activity in 2018 or 2019."
The annual Outlook report from Dodge is seen as a reliable indicator of future activity in the residential, commercial, institutional, manufacturing, public works and electric utilities/gas plants construction sectors. Overall, Dodge expects the majority of the segments to perform well in 2017.
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