Where's construction headed? 5 insights from economists

What’s the outlook for the construction market for the rest of the year? Economists from trade associations representing home builders, construction companies and architects provided their answers in a webinar Monday.

The bottom line: Nonresidential construction is beginning to recover, because businesses are more confident about investing in growth. The housing market is gaining as well, but is still a couple of years from getting back to normal levels of home-building.

Here are five insights into the state of the construction market from the chief economists of the National Association of Home Builders, Associated Builders and Contractors and the American Institute of Architects:

We won’t have a strong housing market until wages grow

The economy has been adding jobs at a steady clip for the past six months, but this hasn’t been accompanied by much wage growth. That’s a real problem for the housing market, said David Crowe, chief economist for the National Association of Home Builders.

That’s because low wages means fewer first-time homebuyers, particular among young adults.

“They aren’t participating in the housing market,” Crowe said.

The percentage of houses sold to first-time homebuyers has dropped to 28 percent, compared to a normal rate of more than 40 percent.

Much of the job growth so far in this economic recovery has been in lower-paying service sector jobs; broader improvement is needed in the employment market to raise wages for more young adults, so that they’ll have the incomes needed to buy a home.

But if wages grow too fast, interest rates will rise faster than expected

There’s not as much slack in the labor market as the Federal Reserve thinks, said Anirban Basu, chief economist for the Associated Builders and Contractors.

There’s a shortage of skilled workers in many fields, including construction trades, he said.

That’s true for home builders, Crowe said. Two-thirds report labor shortages.

“These workers left the industry for other jobs, and we haven’t been able to attract them back,” Crowe said

So watch out for wage inflation, said Basu, who predicts the Fed will have to raise its federal funds rate before June, sooner than expected.

Energy to power commercial construction

Construction in the power sector is up 26 percent over the past year, “and you haven’t seen anything yet,” Basu said.

There are 27 projects pending for liquified natural gas terminals, he noted. Many of these are in Texas and Louisiana.

“This segment will dominate in terms of growth,” he said.

Businesses more confident about investing in growth

Architectural billings are trending up, which suggests we’re in “the early phase of a nonresidential construction recovery,” said Kermit Baker, chief economist for the American Institute of Architects.

He projects commercial construction will grow 10 percent this year, and slightly higher in 2016.

A big reason for this growth is that businesses are confident enough in the economy now to invest more in new facilities.

“We’re just starting to get to that point where there’s some assurance we’re going to see growth going forward,” he said.

Institutional construction lags behind, however

Construction is down, however, in institutional categories like health care and education, and up only slightly on road projects. One reason for that is state and local governments are just now beginning to get their fiscal houses back in order after the recession.

But Basu is concerned that the nation’s underinvestment in infrastructure could hurt future economic growth because it limits productivity gains.

Source: Philadelphia Business Journal