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Construction National Outlook: January 2016

As the seventh year of economic expansion begins in the U.S., expectations for gross domestic product (GDP) in 2016 are in line with a mature economic cycle. In a growth environment of just under three percent, however, economists forecast continued strength in hiring and for construction spending to increase at a rate that is three times the rate of GDP growth in 2016.

Observers whose forecasts reflect a weak outlook for the global economy are predicting GDP growth of 2.4 or 2.5 percent for the U.S. economy in 2016. Most economists see the strong employment market, more rapidly rising personal incomes and low costs of credit – even with the first interest rate increases – as factors that will encourage consumer and business spending in 2016. That school of thinking is driving the majority of forecasts to look for GDP growth of 2.7 or 2.8 percent in the U.S. And most forecasters continue to be fooled by the strength of job creation as the recovery grows long in tooth.

New hiring in October and November exceeded the expectations of virtually all economists, especially on the heels of slowing job creation in August and September. Bureau of Labor Statistics (BLS) reported on December 4 that hiring increased in November by 211,000 jobs. That report came on the heels of 298,000 new jobs in October. In addition to the higher-than-expected November number, BLS revised both October and September – which was weaker – upwards by 35,000 jobs. The improved hiring pace lifted the monthly average to 210,000 new jobs per month for the full year of 2015, a pace that is again higher than forecasted.

The strength of the job market helps to explain why construction spending is significantly higher. At a November 19 seminar held at GreenBuild in Washington, DC, economists for the Associated General Contractors (AGC) and American Institute of Architects (AIA) gave their forecasts for 2016 and 2017.

Kenneth Simonson, chief economist for the AGC, noted that construction in 2015 was significantly stronger than expected. Through that date, construction spending was up 14.1 percent year-over-year, with residential construction still very strong well into a period of recovery. Although the multi-family sector was up 27 percent and single-family was up 13 percent year-over-year, Simonson saw that trend peaking in 2015 with both segments of residential construction slowing to between five and ten percent in 2016. Simonson’s forecast for 2016-2017 is for six to ten percent increases in nonresidential construction. He sees office construction as the strongest building type, with growth in construction of educational and healthcare facilities at or above five percent. Notable among the weaker sectors will be hotels and manufacturing, which Simonson predicts could decline by as much as ten percent.

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