Although the US construction industry is feeling the positive effects of several government decisions, the headwinds of others could start to blow away their margins in the next few years. Can the industry continue its upward trajectory, or will its ascendance be cut short?
This article originally appeared in CemWeek 47. Click here or on the image to read the full article
Construction companies in the United States are benefitting from the tax cuts that the current government administration has provided, but that same administration’s resolutions could prove more harmful in the coming years. An escalating trade war with China and other large trade partners such as the EU and neighbors Canada and Mexico, which has seen an imposition of heavy tariffs on items that are key for the construction industry, could greatly affect growth in the construction sector.
Costs of wood, steel and other items are rising, as the government has imposed steep import tariffs on several raw materials for these industries, in an effort to boost domestic production. Instead, it has been pushing prices for the manufactured product, which could further pressure companies’ margins and increase consumer prices.
Although the economy is set to be propelled by investors’ response to the corporate income tax, according to the IMF’s latest World Economic Outlook, this boost is set to be only temporary, as productivity is decreasing and the market remains volatile.
Heading towards a slowdown
As observed by Raluca Cercel, CW Group’s Associate, “all signs do point to an imminent slowdown.” Cercel stresses that, even though construction spending has grown in the 2014-2017 period, with residential construction leading the way, not just in growth, but also in costs, macroeconomic factors will have a large impact on the industry.
Infrastructure growth has remained temperate, despite an urgent need of upgrading the existing infrastructure and investing in new one, but President Trump’s USD 1.5 trillion infrastructure plan is moving slowly. In fact, in 2017, infrastructure spending by the government contracted by almost twenty percent when compared to the previous year, with most of the investment coming from regional institutions and governments, rather than at the federal level.
Prices for materials used in construction, such as steel and wood, are also increasing due to the trade dispute, as are prices for fuels such as coal and petcoke, which directly affect the cement industry, as well as other manufacturing sectors. The national debt has also been expanding at a concerning level, which will limit direct investment in infrastructure.
All of this could point to a slowdown of the United States’ economy, which would directly affect the country’s construction industry, as well as other economies in the region.
Government spending less in construction
In 2017, the value of construction put in place reached USD 1.23 trillion, rising by 3.8 percent from 2016, and the smallest gain since a 2.6 percent drop in 2011. Most of the growth was boosted by residential building, which grew by 10.6 percent year-on-year, while nonresidential construction increased by only 0.6 percent, as projects related to power and manufacturing declined.
Government spending in the sector declined by 2.5 percent during that year, or USD 279.8 billion, with key infrastructure projects being affected the most, particularly those involving highways, streets, power, waste disposal, sewage and water supply. Most of the spending had to be taken up by the regional government, as federal spending in those areas remains subdued (...)
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