Steel Mills

HARDI/ITR Construction Forecast, Q3 2014 (Part 2)

October 28, 2014

Steel Market Update is a member of an association connected to the construction industry called HARDI. HARDI stands for Heating, Air-conditioning & Refrigeration Distributors International. HARDI and The Institute for Trend Research (ITR), an economic forecasting company, work together to gather economic data to provide a forecast to the HARDI members located in the United States and Canada. The information shared in our newsletter is only part of a much larger package seen by participating HARDI member companies.

In our last issue we covered forecasts for the Northeast, Mid-Atlantic, and Southeastern Region. Today we will cover the Great Lakes, Central, Southwestern and Western regions.

Great Lakes Region

Housing construction has weakened in the Great Lakes as expected by ITR. Some near-term negativity for the region will be followed by upward momentum in 2015. Michigan is the only state in the Great Lakes to show growth in housing permit authorizations in August. Home prices, however, continue to grow across the region but at a somewhat slower pace. The housing forecast is for -5.7 percent growth in 2014, followed by an upswing to 21.3 percent in 2015 and 14.8 percent in 2016.

Commercial construction growth weakened over the summer months and a brief dip back into recession is imminent according to ITR. Demand is growing fastest in the tourist industry with Hotel and Motel construction up 39.4 percent from 2013 levels. Because the first half of 2014 showed slightly higher growth than expected, ITR has revised its forecast upward to 5.6 percent for 2014, 1.0 percent for 2015 and 17.1 percent in 2016.

Central Region

Housing permit authorizations slid 6.4 percent y/y in August, marking the first contraction in the region since 2011. Nearly half the states in the region reported decreased permit authorizations in August indicating a general cooling off, but ITR expects a positive trend for permits over the next three years. Home prices also cooled in August and are expected to grow at a slower pace until mortgage rates increase and exert downward pressure. Housing growth is forecast at 7.3 percent for 2013 and 7.0 percent in 2015. Housing is expected to surge in the Central region in 2016, increasing 20.3 percent.

Commercial construction spending is expected to total $9.7 billion in 2014, up from the previous forecast of $9.1 billion due to strong activity in July and August. Although higher spending has been reported in the Central Region the number of projects has decreased 1.4 percent from 2013. The forecast for 2014 was revised upward to 1.5 percent for 2014, 2.4 percent for 2015 and 16.4 percent in 2016.

Southwestern Region

Texas is driving housing permits in the Southwest with nearly 80 percent of the total 200,000 permits authorized in the region. Home prices in Texas metro areas exceed the statewide average and are expected to continue to outperform the rest of the state during a near-term deceleration in price growth. ITR expects permits to remain near 201,100 for the next three quarters before picking up speed again in mid-2015. For 2014, 6.9 percent growth is forecast, accelerating to 12.7 percent in 2015.

Commercial construction declined more than expected in July but was in comparison to unusually high spending in July of 2013. In general, the region has seen accelerating growth since the decline,which is expected to plateau in 2015 before rising again in 2016. Texas has enjoyed expansion and relocation of companies to the lower cost metro areas of Austin, Houston, San Antonio and Dallas/Fort Worth. Arkansas has rebounded from its spending low in February and has gained 50.1 percent y/y in August. The forecast for the Central Region is 13.5 percent growth for 2014, 5.0 percent in 2015 and 10.2 percent in 2016.

Western Region

The housing market is weakening in the West, evidenced by a slower pace in permits and higher prices that have pushed buyers out of the market. After rising aggressively, the price growth has slowed in the southern states of the Western region while prices continue to accelerate in the north. Permits are expected to total 201,800 by the end of 2014 and more than 216,000 by the end of 2015. The ITR housing forecast for 2014 is 6.2 percent, 7.2 percent in 2015 and 16.4 percent in 2016.

The commercial construction growth rate for August looks like a patchwork quilt when visualized as a map—two states in recovery, two in accelerating growth, three in slower growth and two in recession (blue, green, yellow and red). Construction in the West exceeded $15 billion in August, up 36.8 percent y/y. Growth is expected to continue through the end of the year but at a somewhat slower pace. Construction of a $5 billion Tesla plant in Nevada will provide a boom in construction for the region. The commercial construction forecast shows 11.8 percent growth for 2014, 4.5 percent in 2015, and a surge to 26.9 percent in 2016.