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AGC outlook: 2013 is a “tentative recovery” year in the construction sector

4 min read

Modern Money

Six years of recession in the U.S. has cut a $1.2 trillion-a-year construction industry into one that is worth about $800 billion a year. It also chopped more than 2 million jobs from the industry, according to data from the Associated General Contractors of America. However, a survey by AGC and co-sponsored by Computer Guidance leads AGC to look at 2013 as a potential turning point with tentative signs of recovery.

Which building sectors will grow? Which will shrink?

In general, a majority of the 1,300 AGC member firms surveyed see construction spending in 2013 to be about the same as it was in 2012. Relatively speaking, this isn’t so bad, since AGC’s chief economist, Ken Simonson, said, “Construction spending in [the] first 11 months of 2012 was up about 9% over 2011.”

But there is also some optimism. About a third of the firms surveyed report that they expect to see increased spending in health care, higher education and power construction this year.

Unfortunately, there are also about a third who see K-12 construction spending as well as private sector spending — lodging, retail, offices and manufacturing — declining. And nearly 40% see decreased spending on public building.

However, perspectives vary depending on where in the country the firms are.

Where the work is

John Nunan, president of Unger Construction in Sacramento, Calif., said, “In the San Francisco Bay Area, you’ll see as many tower cranes and as much construction activity as there has ever been there.” He noted that much of that work has been driven by Silicon Valley, where firms such as Google and Apple are building new campuses. On the other hand, Nunan said, the Sacramento area has seen construction grind to a halt, saying it looked “like the Dust Bowl.” But, in the Central Valley, “unfinished shopping centers are coming back to life,” he said, adding, “Health care has been strong throughout [the] entire turndown.”

T. Dean Word, III, a partner at Texas-based Dean Word Co., a heavy highway contracting firm, says work is exploding in Texas, primarily because of the Eagle Ford Shale play. There’s a “tremendous drive for lodging, man camps and 24-hour labor,” he says. And because of the demand, “bid prices are also going up.” He also sees signs of commercial construction returning and notes that the surface transportation reauthorization bill that passed last year, MAP-21, has been a “godsend and much needed.”

Maryland firms plan to hire the most construction workers this year and lay off none, according to the survey, while South Carolina firms will add the fewest. Michigan, appears to still be feeling the significant effects of the downturn, and 37% of firms surveyed there say they are planning layoffs.

Economic challenges

“The industry appears to be heading in [the] right direction, but many firms face continuing economic headwinds,” said AGC Chief Executive Stephen Sandherr. While 41% of respondents said bank lending did not affect them or their clients’ project, about 40% said bank credit had caused delays or cancellations of client projects.

Seventy-two percent of respondents say their cost for materials increased in 2012 and 71% see it increasing again this year. The cost of providing health care insurance to employees was also up in 2012 for 75% of the respondents, and 77% are expecting it to go up again in 2013.

Spending on construction equipment is not yet likely to change as the possible recovery in the sector is tentative at best. Thirty percent of the firms didn’t buy equipment in 2012 and 36% don’t plan to buy any this year.

Other challenges

“Skilled labor is in short supply,” said Nunan, a sentiment shared by Word. “Even a normal construction program is straining the labor halls,” said Word. “They count on workers coming down from Sacramento and even further away to fill the ranks. When we get to a significant volume, we’ll see significant strains.”

Simonson said he didn’t think the shortage would become a national issue in the coming year. “Most workers will still be available for modest increases in construction activity, although there will be some pockets where that is a problem,” he acknowledged.

Nunan sees the shortage as a structural issue and said, “Our education systems aren’t set up to deal with trades education as they were 30 to 40 years ago.” But he also sees a new trend that pleases him. “There’s a tremendous influx of immigrants who have entered vocational programs,” he said. “They’re not encumbered by the ‘oh-I-have-to-go-to-college’ mindset.”

Meanwhile, the hard workers, optimists and executives at AGC are “cautiously optimistic” about this new year. “With luck and a lot of work, the hard-hit construction industry should be larger, healthier, more technologically savvy and more profitable by the end of 2013 than it is today,” said Sandherr.