August 2014 Economic Overview

Posted on 08/15/2014 in Construction, Economic Overview, Engineering - 0
Summary

While 2013 closed well, the ’14 winter punished the economy, construction markets, and design & construction service providers. The bounce back continues despite lingering unemployment and a volatile global economy. Fed tax receipts YTD are up 3.3% (individuals) and 15.6% (corporations), reducing the deficit. Mid-term elections halted all but the most critical legislation. Single-family housing is improving in the face of moderate headwinds. Domestic oil & gas continues big growth and the energy/utility construction market is feeling the pressure through additional projects, faster schedules, and labor shortages. The Fed’s bond buying fell to $35B per month from $75B yielding inflation trending toward the 2.0% target. Continuum’s forecast of a short and shallow recession during early 2015 persists, although it is less likely. All in all, risks are modest and economic progress is positive, slow and steady.


General Economy

  • 1Q’14 GDP growth revised down to dismal -2.9% due to hard winter; Economists expect 2Q’14 improvement and strong finish to 2014
  • Consumer confidence at highest level since ’08-’09 recession; Auto sales at eight-year peak; Employment trending upward
  • Continued Fed tapering may lead to rise in interest rates during 3Q/4Q’14; Unexpectedly rates fell during 2014 YTD

Unemployment

  • 288,000 new jobs in June; Unemployment to 6.1%, a new low since ’08; Labor participation rate is falling, low, and problematic
  • 3.1 million long-term unemployed (> 27 weeks) is highest rate of long-term joblessness since World War II
  • June construction unemployment is down to 8.2% from a high of 27% in February ’10
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Political Environment

  • $130B deficit for May ’14 is 9% improvement from May ’13; Spending cuts and increased tax revenues expected to push deficit projections lower to close out 2014… deficit spending to continue based on President’s 2015 budget
  • High-stakes midterm elections loom; Look for executive action (minimum wage increase, etc.) to be a top issue

Finance & Banking

  • Continued tapering of Fed bond buying to $35B per month (vs. $75B in Jan 2014); End to bond buying by 2015
  • Liquidity extremely high driving high equity returns on top of a fantastic 2013; Equity gains YTD: DJI +2.7%; S&P 500 +7%; NASDAQ +6.6%; 10-year UST yield (2.6%) trending down YTD and was unplanned and unexpected
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Surety

  • 2014 YTD losses flat; Overall, multi-year results are unprecedented and highly positive attracting new surety companies to market
  • Soft market, loosening underwriting, higher capacity, and competition on indemnity are accelerating for surety providers and making it easier for contractors to obtain bonding support
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State & Municipal
Agencies

  • Balanced budgets, spending constraints, and tax revenue growth are placing many states and cities on more solid financial footing
  • Municipal bonds returned 3.2% in ’14 (vs. 2.6% in ’13) attracting wary investors given high-profile trouble in Detroit and Puerto Rico

Global Competition

  • China – 7.5% 1Q’14 GDP growth is 18-month low; Industrial and mfg’ing growth offset by intentionally slowed residential market
  • Brazil – World Cup was a great success despite all of the issues leading up to it… now on to preparation for 2016 Olympics; Central bank benchmark interest rate remains at hefty 11%; economists expect GDP growth of 1.3% in ’14 and 1.5% in ’15
  • Brazil – World Cup was a great success despite all of the issues leading up to it… now on to preparation for 2016 Olympics; Central bank benchmark interest rate remains at hefty 11%; economists expect GDP growth of 1.3% in ’14 and 1.5% in ’15
  • India – New government in May focused on kick-starting Indian economy reeling from recession
  • Russia – Ukraine sanctions are more targeted and severe with less negative bleed over on European Union
  • Russia – Ukraine sanctions are more targeted and severe with less negative bleed over on European Union
  • European Central Bank offers 0.25% loans to commercial banks to spur lending in Eurozone nations and hope to accelerate growth
  • Syria/Iraq debacle & Hamas/Gaza/Israel conflict raises fears and long-term diplomatic risks but short-term US impacts are minimal

Residential
Building

  • Mixed signals for single-family construction: starts dropped 6.5% in May, while single-family permits jumped 3.7%
  • 30-yr fixed mortgage remains in low 4% range; mortgage rates flat through 2014
  • Mixed signals for single-family construction: starts dropped 6.5% in May, while single-family permits jumped 3.7%
  • NAHB Multifamily Production Index suggests positive market conditions for ninth consecutive quarter… supported by rising cost rental market and very low interest rates; constrained by labor, resource, and land availability
  • Growing interest by institutional investors in residential rental property-backed bonds; Blackstone, KKR, Cerebus already in market
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Construction Economy

  • Construction spending growth continues versus ’13 figures with fastest growth in Power, Office, and Lodging, slowest in Healthcare, Sewage & Waste Disposal, and Communication
  • 1Q’14 GDP slump linked to harsh winter yields continued and tempered growth in construction markets for remainder of the year
  • Skilled trades in Energy, Power, Industrial and Residential construction sectors are driving higher labor costs and slowing pace

Construction M&A

  • 1Q’14 construction M&A activity driven by smaller number of large deals; AMEC acquired Foster Wheeler for $3.3B
  • Parsons Brinckerhoff, currently owned by Balfour Beatty, is in play and will likely close in late 2014
  • Toll Brothers’ completes acquisition of Shapell Industries in 1Q’14
  • Continued merger activity in the energy and utility sector (Wis. Energy Corp. and Integrys Energy Group announced merger) serves as a driver for design and construction firms serving these markets to seek growth through acquisition
  • High public equity values and cheap debt yield strong acquisition currency; Expect active M&A market through 2014; Eventually, Fed tapering, monetary policy, and rising interest rates will increase borrowing costs, reduce valuations, and lower deal multiples

Power
Construction

  • Power construction market is the best performing market and the long-term prospects remain fantastic; Domestic natural gas output hit alltime high in June 2014, expect another high in July – is a driver of pipeline, gas processing, LNG, and power gen construction activity
  • MA is first state to issue grid modernization orders; Will drive electric T&D overhead and underground markets

Telecom
Construction

  • Global IT spending revised downward for second half of 2014, still expected to grow by 2.1% year-over-year
  • 2014 state/municipal IT spending focused on data center consolidation, cloud services, and enterprise information security
  • Google’s push & other provider’s response to develop higher speed infrastructure will drive boom in telecom construction in 2015/2016

Utility Contractor Financial Performance

  • Energy and utility contractors continue to thrive with growing markets driving growth and reasonable margin achievement…as an example, many of our clients in this space are 50-100% larger vs. 2010 and achieving equal or higher margins
  • Resurgence of local electric T&D markets will boost small to medium sized firms vs. the largest publicly traded utility contractors

Construction Raw Materials

  • Overall construction materials prices are up ~1.6% over the last 12 months, while crude oil is up more than 3% in the same period
  • Lumber prices continue their volatile rise through mid-2014, driven primarily by short supply, higher demand in residential construction

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Construction Raw Materials

  • Overall construction materials prices are up ~1.6% over the last 12 months, while crude oil is up more than 3% in the same period
  • Lumber prices continue their volatile rise through mid-2014, driven primarily by short supply, higher demand in residential construction



About The Author

Author avatar

Mark Bridgers

Mark Bridgers is a consultant specializing in driving performance improvements through the capital construction process for owners or developers and helping architects, engineers and contractors generate reasonable returns for the risk undertaken. Continuum Advisory Group provides management consulting, training, and investment banking services to the worldwide utility, infrastructure, and homebuilding industry.