HARDI/ITR Construction Forecast 2016, Part 1

Economic Overview

The US economy is expanding thanks to the consumer, says ITR Economics. The year over year increase in housing starts is an indicator of growth for GDP and industrial production. Housing is expected to continue an upward trend until 2018 when the economy is expected to falter again. Rising interest rates will be a threat to the housing industry along with any potential surge in energy prices, taxes or health care costs.

Commercial lending rates have increased following the Federal Reserve rate hikein December and will continue to rise, although the pace is uncertain. Financing should be locked in now if businesses did not do so last year, recommends HARDI.

The National Remodeling Market Index was at 56.0 in third quarter, indicating expansion but weaker than the previous quarter and 2014 level. The decrease could indicate a loss of momentum in the remodeling market in early 2016. Existing home sales slowed in November, and coupled with the remodeling index, HARDI distributors may want to think about increasing sales to new residential construction.

The economy is currently in Phase C of the growth cycle, slower growth, which will last through the first half of 2016. Nondefense Capital Goods New Orders and Wholesale Trade of Nondurable Goods are in Phase D, recession. The consumer sector is expected to fuel gains in the industrial sector and the overall economy should accelerate in the second half of 2016, says ITR.

Northeast Region

Housing permits in the Northeast climbed 52 percent in 2015 to the highest total in eight years. New York State saw permits rise 92.7 percent in 2015 but the quarterly and monthly growth rates indicate that the surge will soon moderate. Massachusetts, Maine, and Vermont are signaling slower growth as while Connecticut and Rhode Island are still accelerating. New Hampshire is the only state that is contracting. Home prices increased year over year in third quarter. ITR predicts the annual growth trend will drop in second quarter and permits will end the year 21.2 percent lower than 2015. Permits will gain some steam in 2017, increasing by 9 percent.

Commercial construction is expected to expand in in 2016 after showing some weakness in November. Four of the states, Connecticut, Maine, New York, and Rhode Island, show sustainable year-over-year growth. While Massachusetts and New Hampshire are contracting, Vermont is beginning to show recovery. Competition for projects is expected to be keen in the near term. The low of the cycle is imminent followed by improvement into late 2017. ITR expects strongest growth in late 2016 and early 2016. The annual growth rate is forecast at -0.9 percent for 2015, 16.3 percent for 2016 and 1.0 percent for 2017.

Mid-Atlantic Region

Housing permit authorizations increased 23.5 percent in the 12 months ending in November 2015. The strength of authorizations in the most recent three month period prompted ITR to revise its forecast slightly upwards for 2016. New York City, which is included in the Mid-Atlantic region, had a surge of permits in the second quarter of 2015 prior to expiration of a tax break. Home prices are down in NYC while other areas are experiencing house inflation greater than the five year average. Housing construction for 2015 is forecast to grow 24.6 percent from 2014. Permit levels are expected to fall off in 2016 for the region and end the year -20.7 percent before recovering in 2017 with an increase of 11.6 percent.

Commercial construction levels in the past twelve months are below year ago levels all over the Mid-Atlantic except for New York City. In NYC commercial construction was up 18.5 percent in the last quarter of 2015 due to a few large projects under construction. Measured by value on a 12 month moving average basis, service oriented construction such as stores and restaurants (up 46 percent) and Office and Bank (up 66.3 percent) are doing better than warehouse construction at 8.3 percent. ITR’s forecast is revised upward for 2015 to an increase of 38 percent from the prior year. The 2016 forecast is -9.9 percent followed by 6.6 percent in 2017.

Southeastern Region

The housing construction activity is in the Southeast is expected to accelerate in first quarter 2016 before slowing mid-year. ITR says growth is likely to stabilize at a low double digit pace in the second half of 2017. The Southeast is experiencing a growing population, employment gains and macroeconomic growth—all ingredients for positive outlook for area construction. Home prices have been increasing in the area, helping recoup value loss during the recession and spurring remodeling and replacement activity. Florida home prices were up 20 percent in Q3 compared to the Q3 2014. The forecast for housing construction is 16.1 percent growth for 2015, 11.8 percent in 2016 and 8.8 percent for 2017.

Commercial construction is on the decline in the Southeast. Growth will slip through mid-2016 before rising again in the second half and into late 2017. With the region heading into a construction recession that is hitting all sectors, HARDI recommends contractors prepare to cut costs. ITR forecasts 2.6 percent growth for 2015, 2.9 percent for 2016, and a stronger 2017 with 13.3 percent growth.