Expect steady growth for US construction

After factoring in the data just released by the U.S. Census Bureau, my estimate for growth in total construction spending in the U.S. in 2016 is a little over 4 percent when compared with the total from 2015. The data for 2016 will be updated and revised a few more times in the coming weeks, so this estimated pace of growth may go up or down a bit, but not by much. This follows a jump of 10 percent in total construction spending in 2015.

A deceleration in the annual growth rate of this magnitude is often an indicator of a continued deceleration, or even a negative growth rate in the near-term. But this time I expect the growth rate in the spending total to at least hold steady, or even accelerate moderately.

My forecast for 2017 calls for a rise of 5 percent. This is based on expectations of continued growth in the overall U.S. economy of between 2 and 2.5 percent. Be aware that at the present time, this forecast does not include any of the pro-growth initiatives being advanced by the Trump administration. I have no doubts that tax reform or fiscal stimulus in the form of expanded infrastructure spending will have a strong upwards effect on the growth rate in both construction spending and the overall economy, but I am just not sure Congress can get anything done in time for it to take effect in 2017.

So for now I am only factoring in steady, reliable, incremental growth in construction spending this year due to the continued moderate rate of expansion in the U.S. economy. Obviously this assumption could change as the year progresses, so I will happily revisit this forecast as early and as often as needed. As tempting and fashionable as it has become in recent weeks to branch into political punditry, I am resolved to maintain my discipline and stick to economics.

A breakdown of the data from 2016 shows that private construction spending increased by 6 percent while spending on publically financed projects actually declined by about 1 percent when compared with the previous year. Private spending accounts for about three-fourths of the total, so a gain in the private sector is usually the main driver of growth. My forecast is for a gain of at least 5 percent in private sector spending in 2017 with the gains spread evenly between the residential and non-residential segments.

Within the private sector, spending on residential projects accounts for a little more than half of the total. Overall, private residential spending increased by 5 percent last year, but the total spent on the subset of multi-family projects jumped by 17 percent. I expect the growth rate in the multi-family segment to moderate in 2017, due to a moderate decline in the number of new multi-family units started in 2016. But the longer-term trend of lower-than-usual home ownership rates will persist for the foreseeable future. Vacancy rates for rental units will remain low.

In the non-residential sector, total construction activity expanded by almost 8 percent in 2016. The strongest gains were posted in projects for offices (up 29 percent), lodging (up 27 percent), and amusement and recreation (up 22 percent). The largest category in terms of total spending is the commercial segment, and spending in this category expanded by a solid 9 percent. Spending on projects for manufacturing (a personal favorite of mine) declined by a modest 3 percent in 2016, but this followed a jump of more than 40 percent in 2015. So investment in manufacturing facilities remained at a respectable level, we just need to get the trend aimed upwards again. The odds appear favorable at this time, but as always, I will monitor this data closely.

The total number of new houses started in the U.S. in 2016 was 1.17 million units. This was a gain of almost 5 percent when compared with the previous year. After sagging a little during the middle of last year, the pace of growth regained some momentum at year's end. The total expanded by a robust 9 percent in the fourth quarter compared with a year ago. So the outlook is for a gain in total housing starts of at least 6 percent in 2017. This will put the annual total just over 1.2 million units. Demand for new houses will remain strong, but rising home prices combined with shortages of labor and building lots in some areas will be a small drag on the overall growth rate.

There is one more market that merits a comment as we start 2017, and that is appliances. As the charts show, the trend in the production levels of household appliances in the U.S. closely followed the trend in the housing starts data during the past three years. The overall growth rate in the appliance data was slower than the pace of growth in the housing data, but the reasons that are usually cited for this difference are a rising value of the U.S. dollar and the long-term trend of increased competition from overseas competitors. In other words, if ever there was an industry that reflected the problems in the U.S. manufacturing sector, it was the appliance industry.

But in the fourth quarter of 2016, the data measuring output of appliances registered a noticeable surge. Total U.S. production jumped 10 percent when compared with the year before. This is visible on the chart if you look at the steepening slope in the trend during the second half of 2016. This is a more aggressive gain than I expected given the trends in the overall economic and construction sector data.

Now this trend in the appliance market may revert back to the mean, and to be honest, my forecast calls for a healthy, but not spectacular gain of 5 or 6 percent in U.S. output of appliances in 2017 which is comparable to the expected gain in housing starts and total construction spending. But like I said, this industry is a perfect example of what got Donald Trump elected. If a combination of an expanding economy and an aggressive pro-manufacturing president spurs faster expansion and restores the U.S. appliance industry to its former glory, then that will be great news for the U.S. plastics industry in particular and the nation in general.