Industry Insights

A shortage of work, decreasing backlogs, lower profit margins and increases in both the number of bidders and layoffs are just some of the many issues the construction industry has encountered in 2009 due to a poor economy.

What can we expect in 2010 and beyond?

Ken Simonson, chief economist for the Associated General Contractors of America (AGC), shared his thoughts on the past year and projections for 2010 with contractors, attorneys, accountants and advisors at a December 3, 2009, forum at BKD’s St. Louis office.

Unfortunately, most of his summary was bleak, but he opened with positive news.

Under the backing of taxable “Build America” bonds, the municipal bond market has staged a comeback in 2009. While these bonds have helped fund certain projects, Simonson warned banks are not lending at levels needed to revive the industry.

Tax revenues are lower, which has resulted in spending cuts. Many projects that would be out for bid are being deferred or cancelled. Vacancies have risen in the office, retail and hotel sectors. And not only has there been zero job growth, unemployment has risen significantly in 2009.

Things can only get better, right?

They will, but when is the ultimate question. According to Simonson, the $787 billion stimulus bill signed into law in February 2009, the American Recovery and Reinvestment Act of 2009, has helped and will continue to help. The bill includes approximately $135 billion in construction spending. Provisions of this stimulus bill, along with other stimulus bills, such as the Worker, Homeownership, and Business Assistance Act of 2009 signed into law in November 2009, include:

• Delay (to 2012) in the 3% withholding on government contracts
• Increased expensing
• Expansion of the net operating loss carryback to five years for small businesses
• Extension of the $8,000 homebuyer tax credit to June 2010
• “Build America” bonds
• Bonds for school construction, recovery zones, tribal areas, renewable energy and energy conservation
• Modified renewable energy, conservation credits

Highway and bridge construction received the largest portion of stimulus funds ($27.5 billion). However, approximately 70% of the highway and street construction funds have been obligated. Simonson cautioned that the bill does, however, have certain strings attached. Here are a few to consider:

• Getting appropriated dollars into the economy takes time, which is the primary reason construction hiring is not expected to increase until 2010
• Certain “Buy American” provisions have caused concerns and uncertainty, primarily for waste and wastewater projects, about whether agencies qualify for stimulus funds because products made by U.S. manufacturers typically include certain components made overseas
• Reporting requirements are expanded as contractors must file detailed reports with the government

When asked about the outlook of multifamily housing, Simonson said, “There is no improvement likely until 2011.” Job losses have stalled rental demand and caused some to move back in with parents or others. Supply has been swelled by owners trying to rent houses and condos. Also, banks have remained hesitant on lending to developers.

On the plus side, Simonson said, “Single-family home construction totals should begin to top year-ago figures in late 2009.” He also foresees the single-family home construction sector up in 2010, especially with the extension of the $8,000 homebuyer tax credit. This is good news in light of a recent analysis of overall employment in the construction industry.

The results of the AGC analysis indicate, as expected, construction employment fell from September 2008 to September 2009. On a nationwide level, employment was down by 15.3%, with only one state (Louisiana) showing an increase (2%) over the period. States with decreases of at least 20% include Nevada (28%), Arizona (25%), Michigan (22%), Tennessee (22%), Connecticut (20%) and Kentucky (20%). Forty-two states reported double-digit declines. While the results are distressing and illustrate the economic impact on the construction industry, Simonson forecasts improvement in 2010.

Simonson anticipates employment will rise as a result of certain provisions in the stimulus bill and projects delayed into 2010. Material costs are expected to remain relatively constant in 2010, but he cautioned increases of up to 8% may occur due to increased demand. For the nonresidential sector, stimulus funds may result in gains for the retail, higher education and hospital sectors. However, overall nonresidential spending will likely remain flat in 2010, but could decrease by as much as 3%.

Simonson said the stimulus bill has helped, but the credit system and housing market must be repaired before we start to see a significant recovery. Contact your BKD advisor for more information about the tax benefits of recently enacted stimulus bills.

Simonson writes a weekly one-page newsletter that provides the latest economic news related to the construction industry. To sign up, visit www.agc.org/datadigest. For further information on the stimulus bill, visit to www.agc.org/stimulus.