General consensus in the building industry predicts high-single-digit to low-double-digit growth for nonresidential construction over the next few years, but Kristoffer Inton, a basic materials analyst with Morningstar and Daniel Rohr, a director at the same company, disagree. The authors of “U.S. Nonresidential Construction Outlook: Spending Will Disappoint as Key Sectors Do More With Less” expect only a 2% increase in the annual real growth rate for the nonresidential sector over the next decade, below their estimate of a 2.25% real increase annually in gross domestic product.
However, the analysts do see positive sectors in the construction arena between now and 2024, including:
- Water supply projects — 5% to 6% growth per year
- Manufacturing projects — 6% per year growth, with chemical-related construction driving the increase
- Commercial — about 4.9% annual growth, driven by a growing need for warehouses as more shoppers go online
- Health care projects – 5% growth per year, primarily driven by an increase in outpatient centers that are less expensive to build than hospitals
- Road and bridge projects — 5% per year growth, compared with 5.3% compound annual growth rate between 2004 and 2014
Let’s look at the road and bridge project estimates
A few weeks ago, Alex Carrick chief economist at CMD Group, noted that spending on highway and bridge projects in 2014 was up more than 9% from 2013, but he sees on the order of only a 4.2% increase this year, and about half of that the year after.
On the other hand, Ken Simonson, chief economist at the Associated General Contractors of American, see no growth in the sector this year, or perhaps even a decline, because states and local governments are holding off on projects because of uncertainty in Congress over transportation funding.
Compared to them, the Morningstar analysts are positively bullish. They see federal spending on roads and bridges increasing at a 4.9% CAGR through 2024, compared with a 3.7% CAGR between 2004 and 2014. And that’s just to deal with maintenance and repairs to keep our infrastructure from deteriorating more.
All told, they expect spending on highway and bridge projects to reach to $136 billion by 2024, up from $85 billion in 2014. But, they are assuming funding levels do not fall from current levels and, even more positively, “expect funding for the transportation segment to grow at a 4.2% annual rate over the next decade.”
However, they “acknowledge that an obvious funding solution remains elusive, but we think need will trump political inaction.”
Some might disagree, given the level of discord and continuing inaction on Capitol Hill.
Republicans have long said that raising the gas tax is a non-starter, but recently House Speaker John Boehner said that he wasn’t ruling out an increase.
And a bipartisan bill to use repatriated corporate profits to help the fund gain needed revenue is in the works.
So, maybe there is a move toward some action. Maybe.
Which is a good thing.
Morningstar estimates that the Highway Trust Fund “will have a cumulative funding shortfall of $267 billion from 2015 to 2024″ if the current process of just fixing the neediest bridges and most traveled roads continue. The analysts also note that raising the federal fuel tax—12 cents for gas and 15 cents for diesel—”would be enough to allow the Highway Trust Fund to fully fund itself—assuming the new tax includes an annual inflation adjustment of about 2%.”
But they also note “status quo spending would drop the U.S. from 16th in the World Economic Forum’s road quality survey to somewhere in the low 40s.”
So what will Congress do?
A recent Mineta Transportation Institute poll found that the majority of Americans would support a 10 cent gas-tax increase. But, then, why should they pay attention to that when Nebraska goes ahead and vetoes a 6 cent gas-tax increase approved by the Nebraska legislature?
Will Congress be able to overcome its incorrect perception of its constituents?
Will it be able to take a stand and think long term?
Does it really understand the grave importance of our infrastructure and the devastating consequences of flat funding?
The American Society of Civil Engineers reports that flat funding of our transportation infrastructure over the next five years will:
- mean the country will lose about 877,000 jobs
- cost each family $1,060 per year
- cause the country’s GDP to underperform by $897 billion
Do we really want to tumble that far downhill?