US construction sector heating up

Construction spending in the United States totaled $85.8 billion in March according to data recently released by the Census Bureau.

This was the total spent in the month for all types of construction — public, private, residential, nonresidential, buildings, infrastructure — everything. The March figure represented a solid gain of 8 percent when compared with the same month last year. During the first three months of this year, total construction spending amounted to just over $240 billion, which was a tidy 9.1 percent above the same period in 2015.

Nobody is going to complain about a quarterly gain of 9 percent, but this is actually a modest deceleration in the recent trend, as total spending increased by almost 11 percent in 2015. So if you are one of those manufacturers mired in a world where end-market growth of 2 percent looks pretty strong right about now, and you are wondering what sectors are driving economic growth in the United States, now you know one of them. It's the construction sector.

Total spending on residential projects expanded by 7.5 percent in the first quarter when compared with last year. This category includes money for new houses and also spending for repairs and renovations to existing structures. The fastest growing segment of the residential market is investment in new multi-family structures. Through the first quarter of 2016, spending in this category is up 31 percent when compared with last year. Spending for new single-family units is up a robust 11 percent in the first quarter, so this segment is also faring pretty well this year. But the growth in multi-family is significant, and processors who supply the construction markets should take notice.

Home ownership rates have drifted downward in recent years to historically low levels, while occupancy rates for rental units have steadily risen and are now at historically high levels. Economists, market analysts and other so-called experts noticed these two trends a while ago, and most of them predicted that the data would begin to revert back to historic norms as the economy strengthened and household incomes started to rise. But that hasn't happened yet, and I am increasingly of the opinion that for the new generation of households, owning a large home in the suburbs is not as important to the American Dream as it once was.

If these recent trends in home ownership rates and occupancy rates persist, the result will be a substantial shift in the household consumption patterns for not only building materials, but also appliances, furnishings, lawn and garden products, and automobiles.

Expenditures for nonresidential projects accounts for about 60 percent of total construction spending, and this sector expanded by a bit more than 10 percent in the first quarter. Lodging, office buildings, and highway and street projects are the fastest growing categories so far this year. Spending on buildings for commercial and educational uses are expanding at a strong pace, as are communications projects.

There are a couple of nonresidential categories that are of particular interest to plastics manufacturers. The first is spending on water supply projects. So far this year, spending on water supply enhancements is down by 6 percent from last year. Count me as one of those people who thinks we should be investing a lot more into our water supply system, and the decline this year is especially glaring in light of the recent lead pipe scandal in Flint, Mich.

The other interesting category is spending for manufacturing buildings. This category was pretty hot last year, but so far in 2016 it has registered a pedestrian growth rate of 3 percent. Investment in new structures is a good indicator of business leaders' confidence in the future of U.S. manufacturing, and at this point I would say it's good, but not great.

My worries about our nation's water supply spending notwithstanding, it is clear that most of the construction sector is off to a strong start in 2016. The question now becomes: How is this affecting those of us in the plastics industry supplying these markets?

Fortunately, we now have a good indicator that provides some of the answer to this question — our Business Monitor Index connects the trends in macro-level data to business activity levels for plastics processors. The first quarter value for our Plastics News building/construction Index is 109.8 (a value above 100 indicates that business activity levels increased when compared with the previous quarter).

This represents a solid rise over the 106.4 value from the fourth quarter of 2015, and it is much stronger than the 102.5 value posted in the first quarter of last year. This value for the building and construction Index is also above the index value of 106.9 that was reported for the entire plastics industry. So by all accounts, demand for plastics building materials was expanding at an above-average rate in the first quarter.

Respondents to our latest survey reported strong gains in new orders, production levels and payrolls. Thus, the gain in the index corroborates the above-average rates of growth in the overall construction spending data from the Census Bureau. Because of the amount of time it takes to complete most projects, the strong upward trend in the first quarter bodes well for the remainder of this year.

One other fact you will appreciate is that spending levels in a few of the nonresidential categories are finally getting close to their pre-recession levels. And to think it has only taken eight years to recover from the last recession, give or take a year or two. These data are not adjusted for inflation, so that should be taken into account (although the current prices for some materials may actually be lower than they were back then). We were in a full-blown boom back then, so at the very least, getting back to those levels should brighten our collective mood. I will let you know when to start the celebration.