The construction market is still expanding, but analysts for Dodge Data & Analytics are starting to see some construction deceleration, according to Robert Murray, chief economist for the firm.
Through April, the Dodge momentum index was showing a 7% decline in nonresidential construction, Murray said on a webinar on Wednesday. He warned that the drop doesn’t tell the whole picture.
“We had a particularly strong first quarter of 2017, which was pulling down those year-to-date comparisons,” he said. He added that he expects “construction starts in the second quarter of this year to be picking up the pace from a middling first quarter.”
Residential and single-family activity
“Most construction cycles are led by residential building,” Murray said. In the most recent upturn, that came largely from multifamily building; the single-family side didn’t start growing until 2012, he noted.
Murray anticipates a 5% increase in single-family housing activity in 2018, pointing to an increase in new and existing home sales as well as prices. Overall, though, “it’s been a very muted recovery, at least compared to what we’ve seen in previous decades.”
Mortgage rates are one concern, as the 30-year fixed rate has crept up to 4.6%. While the current rate is probably not enough to stall home buying, if it reaches 5.5% or 6%, Murray believes that could limit buying activity.
A bigger question is what millennial buyers will do. Murray said some data show older millennials, who are in their 30s, are starting to buy single-family homes, but others may prefer multifamily housing in urban centers.
Multifamily housing activity is approaching 2005 levels, Murray said. He expected activity to slacken in the first quarter, but instead, those numbers came in “fairly strong.”
He warned that if any sector is approaching overbuilt levels, it’s multifamily building, Murray said, which could attract attention from regulators.
The first quarter of 2018 has been positive for all construction sectors except for commercial, which has been flat, Dodge found. Institutional building had a very strong increase last year, but Murray wondered if it can still “perform its role as a second-stage boost in the overall nonresidential building expansion.”
Murray said that residential, commercial and institutional building may be reaching a peak, but he added, “I don’t think in any of those cases a severe downturn is likely in 2018.”
The most noteworthy recent change in the economy, Murray said, is probably the passage of the Tax Cuts and Jobs Act. “It’s generally viewed that this measure will provide a lift to the economy, certainly in 2018 and possibly some in 2019,” he said.
Murray estimates that the act could increase GDP by 0.4% this year, and 0.2% in 2019.
Lowering the corporate and pass-through tax rates could help foster economic growth, but Murray noted most of the benefits associated with those changes this year have been related to stock buybacks rather than direct investments.
The state and local income tax and the mortgage interest deductions are “a slight negative in terms of the demand for single-family housing, which may have on the flip side … a near-term lift for multifamily housing.”
Murray expects GDP over the second, third and fourth quarters of 2018 to be around 3%.
The Consumer Price Index has started ticking up recently, Murray noted, largely on the increase in oil prices. The Producer Price Index has shown that “after a period of fairly benign inflation from 2012 through 2016, we did see a pickup in prices in 2017.”
That increase was driven by rising metals prices, he said. Iron and steel prices rose 13% and brass and copper mill shapes increased 19%.
“With the proclamation of the tariff increases, that has caused more concern in terms of the increase in materials price having a negative impact on construction activity,” Murray said. However, he expects that in the near term, tariffs will have “more of a mild dampening impact as opposed to an element which would shape the construction cycle.”