HARDI/ITR Quarterly Forecast October 2016, Part 1

Economic Overview

ITR Economics has a relatively healthy outlook for the economy in 2017. Business-to-business activity is expanding, global demand is rising and there is a strong US consumer base. Industrial production has been struggling the past 12 months from the contraction in mining and utilities but there are signs of improvement in those sectors that will support an imminent recovery trend for U.S. industrial production, says ITR. Production is down 1.3 percent from a year ago but ITR expects a rising trend in late 2016 continuing through 2018.

Higher wages and employment levels and low interest rates have been the drivers for a record $1.6 trillion in Annual Personal Consumption Expenditures. ITR expects consumer spending to continue to rise in 2017 as the macroeconomy grows.

Private nonresidential construction has slowed since first quarter 2016 and will continue the trend into late 2017. However, the shift of consumer spending to online stores will require more distribution centers to be built. Slower growth in manufacturing production has stunted growth in manufacturing facility construction. Residential construction and remodeling activity is expected to accelerate in early 2017.

Northeast

Housing construction has flattened in the Northeast since the last HARDI/ITR, report with 43.2 thousand units built in the 12 months ending in August, a decrease of 27.7 percent year-over-year. New York and Massachusetts have entered contraction stage while the rest of the region is still showing permit growth, especially Maine and Rhode Island, each with double digit increases. Prices for homes have increased in all Northeast states except Vermont which has seen a decline of 0.4 percent. ITR is expecting construction to decline for the rest of 2016 and pick up again in the first half of 2017, achieving year-over-year growth by the second half and persist through 2018. The forecast for the annual permit growth rate is -41.0 for 2016, 15.5 percent for 2017, and 6.5 percent in 2018.

Nonresidential construction spending was down 26 percent y/y at the end of August and is contracting in the entire region to an imminent low. An uptick is expected at the end of this year that will continue through the early part of 2018 before declining as the U.S .moves toward a recession. Growth opportunities are likely in Maine, New Hampshire and New York where double-digit growth is predicted. ITR is forecasting a decline of -12.2 percent growth in nonresidential construction for 2016, followed by an increase of 9.9 percent in 2017, and -5.4 percent in 2018.

Mid-Atlantic

The permit rate for residential construction declined 14.7 percent y/y in the 12 months through August. ITR expects the region to continue to see a declining trend for the remainder of the year before an upward trend starts in 2017 that will extend through early 2017. Permit growth has been generally weak in the region. Home prices, although rising, were at a slower pace than the national average. New York City was the only area in second quarter that did not see prices increase on an annual basis, down 0.7 percent. Permits are expected to end the year at a -20.7 growth rate, increase by 11.6 percent in 2017, and decline again in 2018 to -0.8.

Nonresidential construction in the Mid-Atlantic has a brighter picture than housing. Spending was up 10.2 percent y/y at the end of August to $19.2 billion and is expected to continue to rise through 2018 before slowing near the end of the year. Commercial construction and medical construction are leading the growth in the region. Education and retail construction were below year ago levels but are moving toward recovery. Government construction was up 35.2 percent y/y at the end of August but is beginning to slow. The retail sector is expected to expand as consumers gain more disposable income from rising wages. ITR predicts a positive end to 2016 at a 37.3 percent growth rate, followed by 12.4 percent in 2017, and 7.8 percent in 2018.

Southeast

Nonresidential housing permits were up 11.3 percent y/y in August with only Virginia in contraction and Florida growing at the fastest rate. The rate of growth is expected to slow as the year winds down and enters 2017. In early 2017 permit growth is expected to accelerate and continue through mid-2018 before falling into contraction. Home prices were up 10 percent in the region in August. Acceleration is strongest in Georgia and Tennessee making the attractive for developers. The housing permit forecast is for 5 percent growth in 2016, followed by 9.9 percent in 2017 and -1.2 percent in 2018.

Nonresidential spending was up 22.9 percent y/y in August and is expected to accelerate through third quarter 2017. The strongest construction sectors are Education, Government, Medial and Retail. Commercial construction is below year ago levels. Construction in Florida, Georgia and Alabama is outpacing the rest of the region by double digits. Mississippi and Virginia are recovering from contraction and South Carolina is slowing down. ITR expects 2016 to end at 29.5 a percent growth rate. The slowdown beginning in third quarter will pull the 2017 forecast down to -1.4, followed by a stronger year in 2018 at 7.2 percent.