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2017 Economic Forecast12-07-16 | Feature

2017 Economic Forecast

Michael Miyamoto, LC/DBM

Gross domestic product expanded by 2.9 percent in the third quarter of 2016, according to Kiplinger, representing the best pace in two years. Fourth-quarter growth is forecast to be 2-2.5 percent.

The economy continues to recover from the recession, and will continue to grow, but at a middling rate for the foreseeable future, according to Kiplinger. In brief, the economy is neither hot nor cold in its present state.

Job gains and consumer spending will improve at a decent level. Gross domestic product grew 2.9 percent in the third quarter, its best rate in two years. Consumer spending expanded at a decent 2.1 percent in the third quarter. Purchases of motor vehicles surged 3.8 percent.

Businesses cut back on equipment purchases, especially cars and trucks, but increased spending on new buildings. Federal government spending picked up, but state and local government spending are likely to be flat for a while.

In 2016, the U.S. GDP is expected to grow about 1.5 percent, versus 2.6 percent in 2015, Kiplinger said. Growth in the fourth quarter will likely be 2 percent to 2.5 percent. First half growth was a modest 1 percent. The rate of GDP expansion in 2017 should be a little better, at around 2 percent, as job and wage gains will pick up. The housing market should see strong demand, and business investment overall should escalate.

The third-quarter increase in GDP resulted from positive contributions in personal consumption expenditures (PCE), exports, private inventory investment, federal government spending and nonresidential fixed investment, the Bureau of Economic Analysis said. Negatives in residential fixed investment and state and local government spending offset the positives.

The rise in the third quarter GDP comes after averaging just 1.1 percent over the first two quarters of the year, the Wells Fargo Economics Group said.

Nonresidential construction spending fell 0.9 percent from August to September, and is down 0.7 percent overall year-over-year. The graph shows spending in most subsectors has dropped since September 2015.

Construction Spending Dips in September
Total construction spending in the private and public sectors fell 0.4 percent in September to a seasonally adjusted annual rate of $1.150 trillion, down from $1.154 trillion in August, Construction Dive said.

Nonresidential construction spending fell 0.9 percent in September on a month-over-month basis, according to an Associated Builders and Contractors report based on U.S. Census Bureau data. Nonresidential spending totaled $690.5 billion on a seasonally adjusted annual basis for the month, 0.7 percent below the September 2015 figure.

Eleven of 16 nonresidential subsectors saw monthly declines. Several segments primarily funded by the public sector fell during the past year, including sewage and waste disposal (-18.8 percent), water supply (-13.7 percent), public safety (-13.0 percent) and transportation (-11.3 percent).

Meanwhile, construction spending, on a year-over-year basis, has gone up in the office (+23.0 percent), lodging (+19.9 percent), commercial (+5.9 percent) and amusement and recreation (+3.5 percent) segments.

Total construction spending was at $906.3 billion in 2013. Then it climbed to $1.00 trillion in 2014, and to $1.112 trillion in 2015. As of September 2016, spending was at a seasonally adjusted annual rate (SAAR) of $1.150 trillion. Construction Economics is anticipating growth of 8 percent in 2017.

Total Construction Picture
The construction industry has largely recovered from the recession, at least in terms of the billions of dollars in construction put in place, FMI Group said its 2016 Construction Outlook. Up until the last two years, it seemed like a very slow recovery, but now the industry is expanding again. Continued slow growth is predicted in most segments, but not at the same pace as before the recession.

ConstructConnect's latest (Q4) forecast lowers the year-over-year projection of 2016 total construction starts to 6.2 percent from 7.9 percent in its previous (Q3) report. Its 2017 versus 2016 outlook, however, has been lifted to 6.8 percent from 6.2 percent.

Total construction amounted to $1.077 trillion in 2008. Spending fell in 2009, declined further in 2010, and yet again in 2011 before moving slowly and steadily higher. It returned to $1 trillion territory in 2014. Spending was at $1.150 trillion (SAAR), as of September 2016, Census Bureau data shows.

Construction Economics expects 8 percent growth in 2017.

Nonresidential spending was at $577.1 billion in 2013, $630.7 billion in 2014, and $672.1 billion in 2015. It stands at $690 billion (SAAR), as of September 2016. Construction Economics is forecasting 6.3 percent growth in 2017.

Total Nonresidential Construction Spending
Nonresidential starts in 2016 will increase 6.6 percent, compared with 5.3 percent in 2015, ConstructConnect reports. Spending stood at $710 billion in 2008, compared to $690 billion (SAAR), as of September 2016.

The annual volume of commercial and institutional starts this year will be almost the same, at slightly over $100 billion each. Since the peak of the recession in 2008, nonresidential spending has never eclipsed the $700 billion level.

Nonresidential construction spending increased 9.7 percent in 2014 and 13.8 percent in 2015, and will grow 8.5 percent in 2016 and 6.3 percent in 2017, Construction Economics said.

Residential construction spending was at $329.2 billion in 2013, then $374.8 billion in 2014, and climbed to $440.2 billion in 2015. As of September 2016, it stood at $460 billion (SAAR). FMI is forecasting 4 percent growth in 2017.

Total Residential Construction Spending
Combined residential has gone from $366 billion in 2008 to $460 billion (SAAR) in September 2016. Like its total construction counterpart, it experienced steep declines from 2009-2012 before moving back above the $300 billion mark in 2013. It has been making steady gains ever since.

After four years of double-digit expansion, FMI's forecast is for single-family housing to increase 6 percent in 2016 to $246.9 billion, far short of the pre-recession years. The multifamily market has also been hot the last four years, but FMI is saying this sector should see a nominal growth rate of 7 percent in 2016, to $61.8 billion.

Lodging was at $13.4 billion in 2013, moved to $16.7 billion in 2014, and then to $21.7 billion in 2015. As of September 2016, it was at $28.8 billion (SAAR). Construction Economics is forecasting 8 percent expansion in 2017.

Lodging Construction
Experts have forecast 18 percent growth in this subsector in 2016, to $25.6 billion, compared to 30 percent in 2015, FMI Group said. This subsector continues to be the highest of all construction categories, but its numbers are still well below the $35.8 billion it logged in 2008.

It is not unusual for lodging construction to have large swings, and at this time, new supply is beginning to surpass absorption, thus putting downward pressure on revenue per room and occupancy rates. The July 2016 Pipeline Report in STR shows 529,665 rooms in 4,322 projects under contract in the U.S. This represents a 22.9 percent increase in the number of rooms under contract, compared with July 2015. In 2017, Construction Economics expects spending growth of only 8 percent.

Office construction was at $37.9 billion in 2013, jumped to $46.5 billion in 2014, and then climbed to $55.1 billion in 2015. As of September 2016, it was at $70.7 billion (SAAR). Construction Economics is predicting 15 percent growth in 2017.

Office Construction
Construction of offices grew 18 percent in 2015, and the forecast is for 16 percent expansion in 2016, to $63.9 billion, FMI Group said. Office construction spending stood at $68.5 billion in 2008.

Much of the growth will result from an increase in employment, especially in high-tech job markets. This pace will decrease in 2017 and beyond. CBRE reports: "The vacancy rate decreased by 10 basis points to 13 percent in Q2 2016, the lowest level since Q1 208. The decrease was entirely attributable to suburban markets, which recorded a 20-basis-point drop in vacancy o 14.4 percent."

Office construction spending increased 23 percent in 2014 and 19 percent in 2015 and it will grow 23 percent in 2016 and 15 percent in 2017, Construction Economics said.

Commercial construction was at $53.1 billion in 2013, climbed to $62.8 billion 2014, and then to $66.9 billion in 2015. As of September 2016, it stood at $71.7 billion (SAAR). Three to four percent expansion is anticipated in 2017, according to Construction Economics.

Commercial Construction
The solid growth rate of 6 percent in commercial construction in 2015 will be repeated in 2016 ($71.7 billion), and then it will drop to 4 percent and lower through 2020, according to FMI Group. Commercial spending stood at $86.2 billion in 2008. It plummeted to $54.7 billion in 2009 and was mired in the $40-billion range from 2010-2012. It began making a comeback in 2013, and has been steadily climbing ever since. It moved back above the $70 billion mark in December 2015.

Some of the fastest growing areas in commercial retail construction have been drinking places and eating establishments. While many national chain stores continue to close and downsize, new startup businesses are taking off in major metro areas.

Commercial construction is changing rapidly because of technology and growing options for consumer spending. Disruption in traditional commercial construction is occurring not only for online shopping but also in the form of boutique startups and the future of smart stores both online and stick-built. This will create opportunities for contractors who can accommodate new design ideas. Total commercial construction spending for 2016 will finish 9 percent higher than 2015 and 2017 will grow 3 percent to 4 percent, Construction Economics said.

Health care construction was at $40.6 billion in 2013, dropped to $38.6 billion in 2014, and was at $40.7 billion in 2015. It stood at $41.0 billion (SAAR), as of September 2016. Construction Economics says this sector will increase by 3-4 percent in 2017.

Health Care Construction
Health care construction is making a steady recovery. Experts are forecasting spending will increase 1 percent in this category to $41.0 billion in 2016, and predicts 5 percent growth in 2017, FMI Group said. Spending in this sector amounted to $46.9 billion in 2008. It has been in the $40-billion range for many of those years, although it dipped below $40 billion in 2010 and 2014.

There will be increased activity in traditional large hospital projects, mostly renovations and additions and outpatient care facilities. New facility designs are upping the game for a patient-centered environment as well as reducing concerns for the spread of supergerms, FMI Group said. Construction will continue to become more collaborative and integrated with the various communities involved.

Total health care construction spending for 2016 will finish only 2 percent higher than 2015, and 2017 will grow 3 percent to 4 percent, Construction Economics said.

Education construction was at $79.0 billion in 2013, improved to $79.6 billion in 2014, and then $83.5 billion in 2015. Spending was at $87.0 billion (SAAR), as of September 2016. Construction Economics expects an increase of about 9 percent in 2017.

Education Construction
Education construction increased 5 percent to nearly $83.5 billion in 2015. FMI expects this sector to end 2016 up by about 3 percent to $86.4 billion. Spending in this category was $104 billion in 2008.

New schools will be greener and take more advantage of new materials and technology to create safer places for learning. On the downside, schools will need to renovate and upgrade to beef up their security. There also need to be funding solutions to improve deplorable conditions of inner-city schools. Also on the downside, federal and state government funding for schools will decline, while enrollment will continue to rise.

Total educational construction spending for 2016 will finish 8 percent higher than 2015 and 2017 will grow 9 percent, Construction Economics said.

Amusement and recreation construction was at $15.2 billion in 2013, $16.7 billion in 2014, and $19.8 billion in 2015. It was at $21.3 billion (SAAR), as of September 2016. Construction Economics anticipates this subsector will expand 2 percent in 2017.

Amusement and Recreation Construction
This subsector jumped 19 percent in 2015, the equivalent of 21 stadiums costing $1 billion each. In 2016, FMI predicts spending in this category will expand by 8 percent to $21.5 billion. In 2008, spending on amusement and recreation amounted to $21.8 billion. Sports venues are promoted as job creators with the ability to revitalize many dilapidated areas around a city. The market for amusement and recreation will continue to grow as long as professional teams want to keep expanding, improving and attracting fans. Total amusement/recreation construction spending for 2016 will finish 12 percent higher than 2015 but 2017 will grow only 2 percent, Construction Economics said.

Transportation spending was at $39.4 billion in 2013, then to $42.0 billion in 2014, and then to $45.5 billion in 2015. It was at $41.6 billion (SAAR), as of September 2016. Construction Economics says this subsector will grow 6 percent in 2017.

Transportation Sector
Spending in this subsector gained a solid 8 percent in 2015, but FMI expects it to slow to 1 percent in 2016, to $45.9 billion. These numbers compare to $35.4 billion spent on transportation projects in 2008.

The boom in petrochemical manufacturing plants, particularly in the Gulf Coast region, will take advantage of the completed Panama Canal expansion and boost transportation infrastructure in both the South and West to accommodate increased activity from Panamax vessels. The passing of the FAST Act was seen as a welcome event for needed transportation infrastructure construction.

Total transportation construction spending for 2016 will finish 2.5 percent higher than 2015 and 2017 will increase 6 percent, Construction Economics said.

Manufacturing construction was at $50.5 billion in 2013, then expanded to $58.6 billion in 2014, and jumped higher to $78.1 billion in 2015. It was at $77.3 billion (SAAR), as of September 2016. Construction Economics says this subsector will drop by 10 percent or more in 2017.

Manufacturing Construction
This subsector took a heavy hit during the recession, but it has more than caught up, with a whopping growth rate of 33 percent in 2015, followed by a more modest prediction of 2 percent growth in 2016, to $80.1 billion. This compares to $54.1 billion in 2008. It dropped to as low as $40.5 billion in 2011.

New records are being set for manufacturing construction investment. Currently, at just 75.4 for July 2016, manufacturing capacity utilization has yet to top the long-term average of 78.5. Continued low energy prices will hold down capacity additions in the oil and gas sector, but help those relocating or expanding in other areas of manufacturing, including the current boom in the petrochemical arena. The completion of the Panama Canal expansion is expected to decrease costs and increase shipments from Gulf Coast ports between the U.S. and Asia.

Total manufacturing construction spending for 2016 will finish 2 percent below 2015, Construction Economics said. Due to declining new starts in 2015 and 2016, spending in 2017 will drop more than 10 percent, and yet still be the 3rd highest year on record.

cational construction spending for 2016 will finish 8 percent higher than 2015 and 2017 will grow 9 percent, Construction Economics said.

Religious institution spending was at $3.5 billion in 2013, decreased to $3.3 billion in 2014, and then moved to $3.6 billion in 2015. It was at $3.7 billion (SAAR), as of September 2016. FMI is predicting 2 percent growth in 2017.

Religious Institution Spending
Spending in this segment is forecast to improve 5 percent to $3.9 billion in 2016, compared to $7.2 billion in 2008. It should stay at about the same level in 2017, according to FMI. With more people working, there is more money available to support religious building, in some cases involving larger building projects. However, there is much uncertainty for growth in this sector because of the rapidly changing religious landscape, including the mix of religious faiths now in the U.S.

Highways and streets stood at $81.3 billion in 2013, grew to $84.7 billion 2014, and climbed to $89.7 billion in 2015. It was at $86.8 billion (SAAR), as of September 2016. FMI predicts 2 percent expansion in 2017.

Highway and Street Construction
Construction in this area increased 7 percent in 2015 to $90.1 billion. FMI forecasts just 1 percent growth in 2016, to $91.3 billion, and then 2 percent growth in 2017. This compares to $81.3 billion in 2008.

The Fixing America's Surface Transportation Act for highway and transportation funding removed some uncertainty for highway funding. However, FMI does not expect a significant jump in spending over current levels. The onus will be on states and communities to develop their own funding sources.

Total highway/bridge/street construction spending for 2016 will finish 4.5 percent higher than 2015 and 2017 will increase 8 percent, Construction Economics said.

Other Sectors
Sewage and waste disposal: Spending amounted to $22.2 billion in 2013, then to $23.1 billion in 2014, and $24.2 billion in 2015. It was at $19.7 billion (SAAR), as of September 2016. FMI predicts 2 percent growth in 2017.

Conservation and development: A total of $5.9 billion was spent in 2013, then $7.3 billion in 2014, and $7.9 billion in 2015. It was at $7.5 billion (SAAR), as of September 2016. FMI forecasts 5 percent expansion in 2017.

Public safety: Spending was at $9.5 billion in 2013, then it dropped to $9.4 billion in 2014, and decreased again to $8.7 billion in 2015. As of September 2016, it was at $7.7 billion (SAAR). FMI anticipates a 1 percent increase in 2017.

Communication: A total of $17.7 billion was spent in 2013. It dropped to $17.2 billion in 2014, and then expanded to $20.0 billion in 2015. It stood at $18.6 billion (SAAR), as of September 2016. FMI expects a 4 percent increase in 2017.

Power: Spending was at $93.3 billion in 2013, then $110.0 billion in 2014. It decreased to $92.4 billion in 2015, and was at $95.1 billion (SAAR), as of September 2016. FMI predicts a 6 percent climb in 2017.

Sluggish Construction Industry Growth Forecast in 2017
Escalating material and labor costs will slow expansion of the U.S. construction industry in 2017, according to Jones Lang LaSalle (JLL), a financial and professional services firm.

In its Construction Outlook Q3 2016, JLL said the labor shortage continues to be a major challenge for construction firms, and that it expects a drop in productivity by the end of 2017. To view the full report go to: http://www.us.jll.com/united-states/en-us/research/us-construction-perspective.

The value of combined construction in 2008 was just little more than $1.077 billion; as of September 2016, it stood at $1.150 billion on a seasonally adjusted annual rate basis. Residential was at $366 million in 2008, and climbed to $460 million (SAAR) in September 2016. And nonresidential was at $710 million in 2008, and was at $690 million (SAAR) as of September 2016.

Total Starts Forecast to Climb 5 Percent in 2017
Total construction starts in the nation are forecast to rise 5 percent next year to $713 billion, with the residential sector climbing 8 percent, Dodge Data and Analytics said in its 2017 Dodge Construction Outlook. This compares to 11 percent in 2015, and an estimated 1 percent in 2016.

A gain of 8 percent is expected in nonresidential building, while nonbuilding construction is forecast to slide 3 percent. Single-family housing will rise 12 percent in dollars, corresponding to a 9 percent increase in units to 795,000.

"Access to home mortgage loans is improving, and some of the caution exercised by potential homebuyers will ease with continued employment growth and low mortgage rates," said Robert Murray, chief economist for Dodge Data and Analytics.

Significant Increase in Remodeling Activity
Spending on home remodeling projects is forecast to reach a new high next year before retreating, according to the Leading Indicator of Remodeling Activity (LIRA) of the Joint Center for Housing Studies at Harvard University.

LIRA shows that the amount of money homeowners spent on improvements and repairs rose 6.6 percent in the four-month period ending in September, compared with the same time frame of a year ago.

Spending on remodeling projects will accelerate until it reaches 8.3 percent in the second quarter of 2017, according to the forecast. Then it will ease back. Expenditures will continue to rise through the third quarter of 2017, but at a slower pace, the Joint Center for Housing Studies said.

Stellar Home Sales Forecast for 2016
An earlier prediction that 2016 would turn out to be the best year in home sales in a decade looks "increasingly on the mark," Freddie Mac said in its "Outlook" for September 2016.

"Through the first seven months of the year, home sales -- both new and existing homes -- totaled 3.4 million, the highest total for this same time period since 2006," Freddie Mac said.

Data pertaining to mortgage applications and pending home sales imply this momentum will be sustained through the third quarter. In fact, mortgage originations will "surge" in the third quarter of 2016, Freddie Mac predicts.

Forecast of 2017 Home Sales
Predictions from the National Association of Realtors, the Mortgage Bankers Association, Fannie Mae and Freddie Mac show that home sales are going to heat up in 2017, the NAR said.

The NAR predicts existing home sales will reach 6 million in 2017, an increase from this year's forecast of 5.8 million. The MBA predicts home sales will reach 5.75 million, while Fannie and Freddie have forecast home sales at 6.2 million.

Meanwhile, new-home construction starts likely will tick up to about 1.5 million per year to 2024, predicts Forisk Research. Homebuilders likely will continue to be more subdued, despite calls for more inventory and increased home building.

The NAR expects a jump of 4 percent in 2018 to 5.68 million home sales, said Lawrence Yun, its chief economist. The national median existing-home price is expected to rise to around 4 percent both this year and in 2017.