HARDI/ITR Quarterly Forecast July 2016, Part 2

Great Lakes

Residential construction permit authorizations rose 17.9 percent in the twelve months through May but slowed on a month-over-month basis. Kentucky, Michigan and West Virginia drove permit growth, followed by Indiana and Ohio. Western Pennsylvania permits declined 22 percent during the period, extending the month-over-month decline to 25 months. Michigan is offering the most opportunity for HARDI members with permit increasing 42.2 percent. Home prices cooled in May after rising in most of the region in the previous 12 months. ITR revised the permit forecast to reflect a 19.5 percent increase in 2016 and 7.4 percent in 2017. Growth is expected to decelerate in 2018 to -0.6 percent.

Nonresidential construction spending will accelerate through third quarter 2016 but ITR forecasts a bumpy ride for the next three years with several periods of accelerating and decelerating growth. The overall trend will be upwards with a peak in mid-2018 at about $18.7 billion. Indiana and Kentucky are growing at a faster rate than the rest of the region but Ohio leads with spending that exceeds the combined total of Indiana and Kentucky. West Virginia. Construction spending in 2016 will outpace last year by 16.3 percent, predicts ITR. Growth will continue in 2017 with an increase of 8.5 percent and decelerate in mid-2018 for a decrease of 0.6 percent.

Central Region

ITR raised the outlook for housing permits in the Central region after the growth trend accelerated beyond expectations. Housing permits grew 8.6 percent in the Central region in the 12 months to May. Minnesota, Wisconsin and Illinois reached double digit rates while Kansas and North Dakota contracted. Kansas housing construction has been affected by the agricultural downturn and North Dakota by the oil and gas collapse. Home prices rose across the region in first quarter 2016. The revised ITR forecast for housing permits continues a on an overall upward trajectory but at a stronger pace. Permits are expected to be up 14.2 percent in 2016, 7.4 percent in 2017, and gradually decline in 2018 to -3.7 percent.

Nonresidential construction spending accelerated 12 percent in the 12 months through May, and was up 24.0 percent in the three months through May. Spending has been inconsistent on the state level: Illinois, Kansas, Minnesota, Missouri, South Dakota, Wisconsin and Wyoming are below 2015 levels and the national trend. Colorado is booming with new residents and is becoming a second-tier tech hub. Overall for the region, all construction sectors are either recovering or rising, said ITR. Spending is forecast to exceed 2015 levels by 17.8 percent in 2016, followed by growth of 4.5 percent and 1.1 percent in the 2017 and 2018, respectively.

Southwestern Region

Residential permit authorizations in the Southwestern region increased 3.7 percent in the 12 months ending in May. ITR revised its forecast lower due to the slowdown in residential activity caused by the oil and gas decline. Gulf states of Louisiana and Texas are struggling the most while Arkansas permits rose 40 percent in the three months through May, making it an attractive market for HARDI members. Home prices slowed in Texas in Q1 as well as in Louisiana and Oklahoma. New Mexico and Arkansas home prices are on the rise. ITR predicts permits authorizations will fall 5.6 percent in 2016 before accelerating to a 14 percent increase in 2017, followed by 3.2 percent in 2018.

Nonresidential construction spending saw a 35.6 percent surge in the past year but will flatten and finish the year at a 5.7 percent increase. Retail construction has been strong with little signs of slowing. Bank, store, hotel, restaurant and shopping center construction may provide opportunities later in the year. ITR forecasts 2017 will be a good year for nonresidential construction with spending increasing 23.3 percent and continuing through mid-2018 before finishing 2018 with a decline of 5.9 percent.

Western Region

Most of the Western region is showing accelerating permit growth other than Montana which has slowed and Hawaii which is in contraction. Residential permit authorizations are at double digit rates in most of the region. Home prices rose in the entire region in first quarter but has slowed everywhere but Washington, Oregon and Montana in the second quarter. Permits are expected to rise 8.2 percent in 2016 and accelerate through mid-2017. Permits are forecast at a 9.4 percent increase for 2017, and -2.4 percent for 2018 as a mid-year contract takes hold.

The improvement in residential construction bodes well for nonresidential demand for heating and cooling maintenance and installations. Nonresidential spending is expected to accelerate throughout 2016 and 2017. 2018 is likely to see a decline in spending beginning early in the year and continuing to the end. Medical, retail and government construction are supporting the regional growth in nonresidential construction. ITR expects a 26.0 percent increase in 2016, 7.5 percent in 2017 followed by a decline of 4.3 percent in 2018.

Note: The forecast regions are comprised of the following:

• Great Lakes: Indiana, Kentucky, Michigan, Ohio, Pennsylvania (west), West Virginia
• Central: Wisconsin, Illinois, Missouri, Iowa, Minnesota, Wyoming, North Dakota, South Dakota, Nebraska, Kansas, Colorado.
• Southwestern: Louisiana, Arkansas, Oklahoma, Texas, New Mexico
• Western: Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, Washington

Dr. Alan Beaulieu, Chief Economist for HARDI and one of the partners at the Institute for Trends Research will be a keynote speaker at our 6th Steel Summit Conference in Atlanta on August 29-31, 2016. You can find more details about our conference on our website: www.SteelMarketUpdate.com or by contacting our office at 800-432-3475.