FMI Construction Forecast: Direction for 2018

Editor’s Note: This article appeared in the January issue of Trenchless Technology magazine, a sister publication to Water Finance & Management.

By Daniel Shumate

With the last recession clearly in the tail lights, a slow recovery has morphed into a stable period of growth for construction put-in-place. Growth in construction spending has accelerated, with a year-over-year increase from 4 percent in 2016-17 to an expected 5 percent growth over 2017 in 2018. The construction segment is driven by spending from individual consumers. The single-family, multi-family, home improvements and lodging segments all have experienced growth of 5 percent or more in 2017 while spending on infrastructure and government-related services have remained flat.

So, what do we see now for future growth?

Strong growth in areas that benefit from individual investment. The economy is still adding jobs, buying homes and spending money on consumer and durable goods. Spending on most other segments of construction is expected to grow in line with inflation or slightly better and thus are considered stable. The only segments expected to decline in 2018 are the sewage and waste and water supply segments.

The FMI Nonresidential Construction Index slipped 2.0 points in the fourth quarter of 2017 to 58.8. In the fourth quarter of 2016, the Index stood at 56.9. While the trend indicates a slower outlook for nonresidential construction, the Index is still solidly in positive territory as it has been since the first quarter of 2012. While most of the economic components of the NRCI slipped lower, backlogs increased from 10 months to 12 months with expectations that backlog growth will continue in the near term. Looking at markets, the outlook continues to be positive for all markets through 2017, but the three-year outlook is less rosy.

From comments, we see that finding qualified superintendents and project managers is among the toughest human resource challenges. That makes it even more difficult, as can be seen in the answers to a few questions about ownership transfer and management succession. While nearly half of the panelists participating this quarter indicate they need to replace most critical positions within the next five years, only 35 percent currently have management succession plans in place, and only 24 percent have ownership transfer plans. Of those that do have ownership transfer plans, 59 percent expect to sell to employees, a process we have found can take at least five years, depending on how it is structured.

The NRCI Index component for the overall economy remains strong reflecting improvements in GDP, the strength of the stock market and expectations of business-friendly policy changes. While the current administration has had limited effect on new legislation, the potential for a reduction in corporate tax and an infrastructure bill that would fund some of the severely neglected infrastructure projects would be positive improvements. NRCI panelists were slightly less confident about the business outlook in their local markets compared with the overall economy, but still registered a positive jump. We received many comments that external issues were not much of a concern for strategic planning; however, many contractors know they need to be mindful of larger societal issues, both domestic and global. They are also keeping a close watch on what may happen in labor, both in terms of immigration laws and availability of U.S. citizens seeking work. While market sector trends, private investment, regulations and consumer activity are the most immediate and measurable concerns in planning, in a world of social upheaval and political change, everything is connected, and the outcomes are difficult to predict.

Single-family residential building should experience strong growth. Unemployment is at or below” full employment’ rate and wage improvement is creating many first-time home buyers. We expect to see increase home sales creating a shortage of housing stock in many metropolitan markets across the United States.

For many contractors working in infrastructure markets, demand is still pent-up due to lack of funding not needs, as we can see in the non-building sectors. Power still leads the way for growth, but areas like sewage and wastewater and water supply have great potential around the country if the will and the money are there. The other significant limitation on growth is labor. The most commonly heard issue in the construction industry for 2018 is where do I find the people that will complete the work. A strong emphasis on training and development in best-in-class companies will drive growth.

Construction Outlook Highlights

Transportation Construction

Transportation construction is up 1 percent over 2016 with a similar profile for 2018. Airports are planning accommodation of new wide-body aircraft that will require some modification to congested airports and there will be significant spending to repair hurricane-damaged ports. However, the Trump administration is proposing to cut the Department of Transportation budget.

Highway and Street Construction

Highway and street funding is down 1 percent over 2016. As the federal government has not passed a bill that drives growth and improvement in highway infrastructure, the funding must come from state and local governments. There is a greater dependency on infrastructure additions and improvements from the states and privately funded projects continue to gain momentum.

Power Construction

Our expectations for power were driven by the expectation of an infrastructure plan that would improve our nations power generation and delivery capability. Power is down 3 percent from 2016 and we expect slight growth in power in 2018. There are new generating facilities that are coming online but the backlog of new generating facilities has decreased. The approval of Keystone Xl could increase spending in this segment by year-end.

Communication Construction

The communication industry construction put-in-place is up 2 percent over 2016. We expect strong growth in this segment for the next 3 to 5 years. Innovation and technology demands are increasing more rapidly than ever. Connectivity is increasingly becoming a requirement for local and regional economic activity and growth. Major private providers have large infrastructure projects that should positively impact the communication segment.

Sewage and Waste Disposal and Water Supply Construction

Sewage and waste disposal construction was down eleven percent in 2017 and we expect further decreases in 2018. Similarly, water supply spending was down 8 percent in 2017 and we expect declines in spending of 3 to 4 percent across both segments. Local governments are caught in an unsustainable financial situation resulting from eliminated or reduced federal assistance but maintained mandates and regulations. Spending is directed at compliance and there are limited funds to perform new build and improve the water supply in areas that desperately need it. In addition, the EPA has had an air of uncertainty regarding Trump administration decisions. Limited guidance makes it difficult to plan for water systems that will be in place for a very long time. The estimates for what is necessary to take our water infrastructure and funding to an adequate place vary widely but AWWA puts the value at near $1 trillion and the rate-based systems of recovery will fall short.

Daniel Shumate is director at FMI Capital Advisors, Inc. Research for this article was provided by Jay Bowman, managing director of research & analytics at FMI, and Brian Strawberry, research consultant at FMI.

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