By Benjamin Minnick, The Daily Journal of Commerce

Economist Jim Haughey says two clouds hang over the construction industry: overseas turmoil and taxpayers' revolts against public spending.

Haughey is with Reed Construction Data. His comments were part of a construction outlook webinar last week with Ken Simonson of the Associated General Contractors of America and Kermit Baker of the American Institute of Architects.

Haughey said commodity prices are under pressure from demand in developing countries and unrest in the Middle East, and that's starting to have an impact on inflation here.

Simonson said the overall economy isn't seeing significant inflation yet, but prices for construction materials are up 7.5 percent since July of 2009. During that same period, the consumer price index was up 2 percent, he said.

Construction materials could see price spikes this year — up to 8 percent — but the increases should settle down to the same rate logged at the end of 2010, about 5 percent. Simonson expects copper prices to rise this year but steel prices to fall.

Diesel prices have spiked lately, but they won't likely rise to 2008 levels, Simonson said.

Haughey said consumer and business confidence have jumped lately. He said they are still low, but improving and that's good news.

“The economy is capable of stronger growth,” he said, “absent problems with oil prices, absent problems with sharp cutbacks in public construction spending.”

GDP for 2010 was about 2.9 percent and the outlook for 2011 and 2012 is 3 percent, according to Haughey.

Haughey said the oversupply of buildings and other facilities in the private sector will continue to decline this year and next, and that will mean construction opportunities in some markets.

Total construction spending was off 11 percent for 2010 but it's just about hit bottom and activity will turn up this spring, Haughey said. Total construction spending is expected to increase 2.8 percent this year and 12.5 percent in 2012.

Housing

A big boost to the overall construction economy will come from housing, where spending is expected to increase 6 percent this year and 23.8 percent in 2012, Haughey said. Apartments will lead the way, he said.

Baker said the single-family market hasn't likely hit bottom. He said it's plagued by supply and demand problems, which have pushed prices down 30 percent from the peak.

Potential buyers are concerned about prices falling and are reluctant to pull the trigger, according to Baker. Demand is also weakened by people delaying marriages and young people moving in with their parents.

Baker said home remodeling has shown some strength. It peaked in 2007 at $325 billion and dropped to $286 billion in 2009. Data for 2010 isn't in yet, but Baker said it looks like there will be a few percentage points of growth.

Because of the drop in new home construction, remodeling has gone from 45 percent of that market to nearly 70 percent, according to Baker.

Some good news for local remodeling contractors: Seattle was ranked favorable for remodeling among the top 35 markets. Other strong areas are the California coast, the Northeast corridor and parts of the Midwest.

“Those (will be) the areas we see the most strength in home improvement activity over the coming years,” Baker said.

But Baker said the future of Fannie Mae and Freddie Mac, and the potential loss of deductions for mortgage interest, property taxes and capital gains could put pressure on prices.

Plants, labs

On the non-residential side, spending is expected to be off 3.7 percent this year, but up 13.6 percent next year.

The recent trend in non-residential construction favors manufacturing and laboratory space. Haughey said construction starts for manufacturing were up 101 percent for the past three months ending in January and 56 percent for laboratories.

On the flip side, hotel construction starts were down 63 percent and amusement projects were off 39 percent during that same period.

Haughey said those categories could trade places a year from now.

Simonson predicted a big upturn for manufacturing, with Intel's announcement about a $5 billion fabrication plant near Phoenix and several other companies planning plants costing more than $1 billion.

Commercial construction spending was off 32.9 percent in 2010, but will rebound with a drop of 3.9 percent this year and a gain of 13.5 percent in 2012. Leading the way next year will be a 22.2 percent jump in hotel spending, 15.5 percent in office and 12.4 percent in retail.

Institutions

Institutional markets will also be sluggish this year, with a 2.5 percent gain in health care, but declines of 4.9 percent in education and 7.5 percent in public safety. Next year those numbers will be up 12.2 percent for health care, 11.5 percent for education and 12.5 percent for public safety.

Simonson said a lot of hospital projects have started or entered the fundraising/design/permitting stage in the last few months, so he's looking for them to do well this year.

Spending for highways will be up 9 percent this year and 4.2 percent in 2012, power projects up 9.8 percent in 2011 but down 8.4 percent in 2012, and water/sewer projects up 2.9 percent this year and 6.5 percent in 2012. Overall, Haughey said the heavy construction sector is expected to be up 7 percent this year and 1 percent in 2012.

Simonson said the power segment could get a big boost later this year or next if lawmakers approve new nuclear plants.

Federal work is peaking, with stimulus projects, military base realignment and Gulf Coast hurricane projects under way, according to Simonson.

“I see this as a year of change in which the federal programs are staying at a high level for now, but they're going to drop back either late this year or in 2012,” he said.

Lower spending by state and local government is dragging the economy, but when states balance their budgets in about two years spending will pick up, Simonson said.

Turnaround?

Simonson said the national construction unemployment rate has been above 20 percent for the past two years — more than double the overall unemployment rate.

Washington fared relatively well with a 2 percent loss of construction jobs versus 4 percent in Oregon and 6 percent in California. Idaho lost 12 percent of its construction jobs last year, second only to Nevada, which lost 19 percent.

Overall private-sector employment has risen for 10 straight months, according to Simonson.

Baker said a December 2010 national survey of construction forecasters showed they expect 2012 to be better than this year. The consensus for 2011 was for a 2 percent drop in non-residential construction, which includes a decline of 4.2 percent in commercial, 11.8 in industrial and 0.2 percent in institutional.

For 2012, they were looking for a 5 percent overall increase, with gains of 10.9 percent in commercial, 5.8 percent in industrial and 1.6 percent in institutional.

“We seem to be on the cusp of a turnaround in the construction industry, although more so in some sectors than others,” he said. “Looks like we're moving in the right direction, looks like we will be there later 2011 into 2012.”