Construction outlook for 1987

Construction Review, Nov-Dec, 1986

Construction Outlook for 1987

The inflation-adjusted value of new construction put in place increased by nearly 5 percent in 1986, to set an all-time record. (The current-dollar value of about $375 billion was also a record.) Large increases in homebuilding and public works more than offset a decline in private nonresidential construction. The number of private housing starts rose by 6 percent to 1.85 million units, while the mix of new housing shifted toward larger units. Public works construction rose by about 8 percent, led by increases in roads and bridges, schools, and water and sewer systems. Private nonresidential construction declined by 3 percent as the commercial building boom tapered off.

In 1986, the value of new construction put in place was equal to approximately 8.9 percent of GNP. This represents a substantial recovery from the cyclical low of 7.7 percent of GNP in 1982, but is well below the post-WWII peak of 11.9 percent in 1966. During the past decade, several categories of construction that are not included in new construction have grown rapidly. These include maintenance and repair, commercial/industrial renovation, and hazardous waste clean-up.

Construction costs increased by about 3 percent between the summer of 1985 and the summer of 1986, as measured by the Census Bureau's composite construction cost index. This represents the fifth consecutive year of moderate construction cost increases. The current construction cost moderation is remarkable for this stage of the building cycle. Average hourly earnings of construction workers increased by less than 2 percent in 1986, while the producer price index for construction materials was virtually unchanged.

In contrast to most other construction costs, the cost of liability insurance has soared. A 1986 survey of construction firms found that liability insurance was the number one concern of the industry. Many construction companies are paying twice as much in premiums as they paid in 1984, usually for reduced liability coverage, while some firms have had difficulty obtaining any coverage at all. These cost increase are part of an economy-wide insurance problem (see Chapter 61, "Insurance'), but the construction industry has been affected more than most industries because construction is a relatively hazardous and complex business, and because the lifetime of the product is especially long. In 1987, increase in insurance premiums will probably be more moderate, and availability of insurance (albeit at high prices) will improve.

Construction industry employment rose 11 percent in 1986 to set an all-time record of 5.2 million employees. In addition, more than 1 million people were self-employed as proprietors and working partners. Despite the recent moderation in construction wage increases, construction remained one of the highest paying industries, as measured by average hourly earnings and average weekly earnings.

International Construction and Investment

U.S.-based contractors have faced a weak market and increasing competition in foreign construction. Contract awards won by Engineering News-Record's top 250 international contractors dropped from $108.3 billion in 1980 to $81.6 billion in 1985. During this period, the share of all international contracts won by U.S. firms declined from 41 percent to 35 percent. Difficult international market conditions will continue in 1987 because low commodity prices and debt repayment problems will limit development projects in most of the major Third World markets. International competition in increasingly focused upon contractors' ability to provide attractive financing, the lack of which usually puts U.S. contractors at a disadvantage. For a further discussion of this subject, see the final section of this chapter.

A large number of foreign-owned construction companies have entered the U.S. market during the past several years. Foreign construction firms won approximately $7.3 billion in construction contracts in 1985, up from $3.6 billion in 1982. This accounted for approximately 3.2 percent of all construction contracts awarded in the United States during 1985. This foreign penetration of the U.S. market can be compared to the $28.2 billion in contracts won by U.S. firms in overseas markets during 1985.

International trade and capital flows are having an increasing effect on the domestic construction market. While the record U.S. trade deficit appears to be restricting industrial construction, record capital inflows are probably assisting commercial and residential construction. U.S. manufacturers have curtailed a number of investments in new manufacturing plants because surging imports have reduced the need to build new capacity in the United States. In some cases, U.S. manufacturers are adding new capacity abroad in order to remain competitive. On the other hand, the record inflow of foreign capital has directly and indirectly provided much of the financing for commercial and residential construction.