Economy

Non-Residential Construction Rebound Imminent

February 11, 2014

A recovery in non-residential construction is happening said research analyst Timna Tanners, in a report by Bank of America Merrill Lynch, but the upturn for the non-residential cycle has taken longer than expected and is “less pronounced” than usual.

The last strong cycle for non-residential construction was in 2005-2007, supporting a booming housing market. The current cycle, says Tanners, is confronted by less public spending on infrastructure and tight credit conditions.

Leading indicators like the Federal Reserve Loan Officer Survey and the Architectural Billings Index have been misleading according to Tanners, with the ABI showing a false positive since the second half of 2012. Anecdotal evidence has given the strongest credence to an upswing in non-res construction. Backlogs at steel mills and stronger order books at fabricators and cement businesses indicate a slow but steady recovery in 2014 with potential acceleration in 2015.

Normally non-residential recovery lags behind residential by one to two years. Residential construction has been strong since 2012 but has yet to give the traditional boost to non-residential. Tanners found historical evidence of lags of 30+ months for the non-res cycle which, if applicable in the current cycle, would push serious recovery into the second half of 2014.

Other encouraging indicators are an increase in capacity utilization rates to 79.2 percent in December and a rise of 3.6 percent year-over-year for industrial production. Highway construction also picked up with awards data showing a 6 percent increase from the 2005-2012 average and 7 percent increase year-over-year. Federal Reserve reports also indicated commercial construction beginning to increase, along with commercial sales and leasing activity. The energy sector continues to show increased activity.