2006 Economic Outlook for Construction in Massachusetts and the U.S.
by Ken Simonson, Chief Economist, AGC of America
The U.S. economy remains remarkably robust in spite of war, hurricanes, and tight energy supplies. All of these impediments are likely to weigh on the economy in 2006 but not enough to stop the expansion.
In the July-September quarter, real (net of inflation) gross domestic product (GDP), the broadest measure of all goods and services produced in the U.S., grew at a seasonally adjusted annual rate of 3.8%. (Seasonal adjustment isolates underlying growth from normal quarterly or monthly variations; annual rate allows comparisons to full years.) That was the 10th straight quarter of above-trend growth.
Furthermore, overall inflation remained tame. The GDP price index for the quarter was up 3.1%, less than in the first half of 2004 and very impressive for a period of record-high energy costs.
Construction has played a large role in the economy’s growth. In September, construction spending totaled a record $1.12 trillion at a seasonally adjusted annual rate. The total for the first nine months of 2005 was 9% higher than in the same period of 2004.
Construction employment was also at an all-time high: 7.31 million in October, seasonally adjusted, despite the loss of 27,000 contractors’ jobs in Louisiana and Mississippi. Over the previous 12 months, construction payroll employment swelled by nearly 4%, more than twice the growth in jobs throughout the economy.
In Massachusetts, seasonally adjusted construction employment in September reached 143,000, 3% higher than in September 2004. In contrast, overall nonfarm payroll employment grew less than 1%.
For 2006, the national outlook remains positive, both for the economy as a whole and for construction. Several categories of construction that grew strongly in the first nine months of 2005 appear to have momentum. For instance, manufacturing construction was up 25% in that span and should continue to grow. Warehouse and distribution facilities and some retail categories also look as if they will stay in the plus column.
However, growth in these categories is likely to be lower than it would have been if the hurricanes had not torn up the “oil patch.” Rita, in particular, knocked out scores of oil and natural-gas platforms, many of them permanently. That will keep prices high this winter for gasoline, heating oil, and natural gas, leaving consumers with less to spend on other goods and services. The lower consumer spending will, in turn, act as a drag on retail, wholesale and distribution, manufacturing, and some services, and on related construction.
The long-predicted slowdown in home building is likely to set in at last by early 2006. If it does, there will also be slowing in related construction categories.
Public construction spending should be higher in 2006, both nationally and in Massachusetts. That’s because the major revenue streams—personal and business income taxes, sales taxes, and property taxes—have been coming in at higher levels than legislatures anticipated when they approved current budgets. For instance, income and sales tax revenues in Massachusetts were 8% higher in the 11 months ending in May 2005 than in the previous 11 months. The resale or refinance value of single-family homes covered by Freddie Mac or Fannie Mae loan participation, an indicator of property tax receipts, rose 12% in Massachusetts from the second quarter of 2004 to the second quarter of 2005
The big worry for 2006 is materials prices. The producer price index for inputs to nonresidential buildings climbed 7.6% from September 2004 to September 2005, and that was before most hurricane impacts were felt.
The lost oil and gas production has hit construction even harder than consumers. Although diesel prices fell a remarkable 46 cents in the last two weeks, thanks in part to mild weather in the heating-oil thirsty Northeast, the national average price on November 7 was 53 cents per gallon higher than one year before. That zaps contractors through their use of diesel fuel for off-highway equipment like earthmovers and tower cranes, their on-highway dump trucks and concrete mixers, and the thousands of freight deliveries to a job site that now carry stiffer fuel surcharges.
Natural gas is both a heat source, used in glass and brick making, and a feedstock for a wide variety of construction plastics. At the end of October, natural gas futures were up 100% from year-ago levels, as was the price some contractors were paying for polyvinyl chloride (PVC) pipe. Natural gas and/or oil is also a key ingredient in roofing materials, insulation, membranes, paints and coatings, and plastic parts.
Other materials that have been rising rapidly in price include cement, copper, and gypsum. Of these, only gypsum looks as if 2006 will be gentler on the price front, as new production comes on line and residential demand tapers off. (For more details, see AGC’s Construction Inflation Alert at www.agc.org.)
Putting it all together, construction should continue to expand nationally in 2006, with continued growth in nonresidential segments offsetting a slight weakening in residential construction. However, higher gas and heating costs may put a damper on retail expansion. New England is likely to be a little harder hit than other regions because residents will spend so much more to heat their homes and correspondingly less for other purchases. Materials costs will be a worry for all types and locations of contractors, although Massachusetts should at least be spared the cement shortages that plague many other states.
