North American regional report: Recovery time?

A year ago, iC's report on the North American market was headlined 'The only way is up'. The evidence of various historical data sets, forecasts and anecdotes from the industry suggested the US market had turned a corner and that a full-blown recovery was imminent. It was not expected to be a sharp recovery, but a recovery none the less.

But 12 months down the line, the US construction market looks, if anything, worse than it did at the start of 2010. So what went wrong, and when is it going to get better?

According to figures from the US Census Bureau, the value of construction put in place last year was US$ 814 billion, a -10.3% contraction from the figure of US$ 908 billion for 2009. In fact it was the fourth consecutive year of falling construction output in the US, and the value of the market in 2010 was some -22% less than the high point of US$ 1198 billion in 2006.

This makes it the longest and deepest construction recession of any major market in the world. The US is often thought of being more dynamic than Europe, but the European construction market was still growing in 2007, and its downturn has not been as deep or as drawn-out as that of the US.

One of the consequences of this, according to the Associated General Contractors of America (AGC), is that the unemployment rate among US construction workers is running at about 20%. Citing federal figures in December, the AGC noted that employment in the industry stood at 5.6 million people, compared to 7.7 million at the peak in August 2007.

Residential

The downturn in the US was led by a collapse in the residential construction markets. Output in this sector has plummeted from a high of US$ 642 billion in 2005 to a low of US$ 241 billion last year. Granted the market was over-inflated before the recession, but the disappearance of more than 60% of the US residential market has had a crushing effect on the construction industry.

This time last year it looked like the residential market was finally going to return to growth. The number of housing starts was on the rise, and executives of the major residential construction companies were making optimistic noises. However, the value of residential construction put in place last year was US$ 251 billion, down -1% from the total in 2009.

In contrast to the -25% drops of 2008 and 2009, this could be counted as something of a relief, but it was not the rebound that was being widely (albeit cautiously) predicted a year ago.

Although many of the major house builders are now back in profit and have adjusted to the much smaller market, there is still a lot of caution about when the upturn will materialise.

Jeffrey Mezger, president & CEO of KB Homes said, "Entering 2011, housing market conditions remain difficult due to soft demand and a general oversupply of homes available for sale. While there are indications that the overall economy has started to recover, the lack of improvement in employment and consumer confidence is likely to continue to hinder a sustained housing recovery."

Donald R. Horton, chairman of D R Horton, another big house builder put it a different way. "Housing affordability remains near record highs, interest rates are favourable and new home inventory is still very low. However, we still face challenges, such as rising foreclosures, significant existing home inventory, high unemployment, tight mortgage lending standards and weak consumer confidence," he said.

So the good news seems to be that the US residential market has finally bottomed-out. The bad news is that there is not much happening in the market to drive it back up. As Mr Horton said, houses may be cheap, but there a lot of vacant properties around. Until employment picks up and mortgages become more widely available, demand for new build homes looks a distant prospect.

But while residential construction found the bottom last year, the wider private construction sector looks like it still has some way to fall. Total private construction output - including residential - fell -14.7% last year in the US to US$ 507 billion. Compare this to the peak in 2006, when this segment was worth US$ 928 billion - a -45% fall - and again the harsh effects of the US recession become apparent.

Last year every category of privately funded non-residential construction fell, and it was a particularly tough year for sectors like office, commercial and lodging construction, which had been slow to enter recession.

Stimulus impact?

When the recession hit, the idea was that the American Recovery and Reinvestment Act (ARRA) - the government's stimulus package - would cushion the blow for the construction industry. But whether there was a noticeable effect in direct construction spending is a debatable point.

Yes, public construction spending rose in 2009, but at +3.7%, the percentage increase was actually smaller than the growth in the boom years. You would have to go back to 2003 to find weaker growth in public construction.

What's more, last year saw public construction fall for the first time since the last downturn, with a -2.7% contraction to US$ 307 billion. This is surprising given that 2010 was expected to be the year when the stimulus programme had most impact for the construction industry.

Granted there has been a small uptick in some of the areas targeted by the stimulus plan. For example highway & street construction accounted for just over 27% of public construction last year, compared to 26% in 2008, but in absolute terms this translates to an increase of just US$ 3 billion.

It is a far cry from the total of US$ 48 billion put aside in the stimulus plan for infrastructure work, although many of these projects are long-term schemes that will boost the industry for several years.

Bright spots

But although it was another tough year for the US construction industry in 2010, there were still some bright spots. Environmental work continues to grow, with the government spending more and more on conservation projects as well as urban schemes to renew sewage and waste disposal networks. The power sector has also enjoyed consistent growth throughout the recession.

Publicly funded transportation and highway-related work has also stayed positive, and there are encouraging signs of future work, with ambitious plans to put high-speed rail links in place between several major cities.

The country's only high-speed rail link at the moment is between Boston and Washington D.C., via New York, Philadelphia and Baltimore. However, the ARRA identified a further nine potential rail corridors for development and allocated US$ 8 billion to get the projects off the ground.

These ambitious plans would see lines built the full length of the US Atlantic coast from new England to Florida, with spurs going through the gulf states into Texas. A separate network would connect the major cities of Texas, Oklahoma and Arkansas.

In the mid-west a hub centred on Chicago would reach into Iowa, Wisconsin, Michigan, Indiana, Ohio, Illinois and Missouri, while on the west coast corridors are planned to link up the major conurbations of California - San Diego, Los Angeles, San Francisco and Sacramento. A separate line is planned in the Pacific Northwest through Oregon and Washington state.

Although these plans have only taken shape in the last two years, there are already promising developments. The California High-Speed Rail Authority (CHSRA) has voted to begin construction on the inaugural 105 km stretch of track in the state's central valley, between Fresno and Bakersfield. The cost of this is put at US$ 4.15 billion, and it represents about 8% of the eventual 1300 km state-wide network.

No construction can begin until the CHSRA completes environmental reviews of the project. The federal deadline for completing these reviews is September 2011, and construction is expected to begin in 2012 and finish in 2017.

Funding

Although the first stages of the US high-speed rail network have financing in place, a big question hangs over the project as a whole due to its cost. In fact funding in general is an issue that continues to cast a shadow over the US infrastructure construction market.

The last transportation bill, a five-year programme worth US$ 285 billion, expired in September 2009 and short-term extensions being used to plug the gaps since then. President Obama's latest budget calls for a US$ 556 investment package over six years, including US$ 53 billion for high speed rail. While this has been welcomed by the industry it is still not clear where the money will come from.

Dennis Slater, president of the Association of Equipment Manufacturers (AEM) said, "Unfortunately the proposal falls short by not addressing the crucial issue of how this essential infrastructure investment will be funded, putting in question whether it will ever be approved."

Another idea, contained in the budget, which has been around for several years, is to set up an infrastructure bank with some US$ 30 billion of capital at its disposal to get crucial projects started using grants and loans - a sort of domestic development bank.

Such a resource was originally proposed in 2007 via a bipartisan bill, so with backing from both sides of the US political divide, it seems to have a reasonable chance of getting off the ground. But with the US running a huge deficit and president Obama finding the going difficult in a Republican-controlled Congress, it may be difficult to fund the proposed infrastructure bank.

So in the medium term, there are certainly opportunities on the horizon in the US construction market. There may be a return to growth in the next 12 months (although iC has said that before and been wrong), but it will take wide economic improvements - a recovery in employment and job creation is probably the most important - before the industry bounces back to genuine good health.

After such a steep fall in total construction output last year - -10.3% - it seems unlikely that the industry will rebound to growth straight away. The most optimistic scenario is for a flat-ish year in 2011 and a return to growth in 2012.