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United States Infrastructure Report Q4 2011
Business Monitor International, Nov 2011, Pages: 142
Business Monitor International's United States Infrastructure Report provides industry professionals and strategists, corporate analysts, infrastructure associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on United States's infrastructure industry.
BMI View: Our bearish outlook for the US construction industry has been confirmed by weak data from the first half of the year. However, we have further downgraded our short-term real growth outlook to -1.7% year-on-year (y-o-y) in 2011, off the back of even sharper than anticipated falls in transport and non-residential building investment. While we still anticipate a return to minimal growth in the US construction industry in 2012, this will be driven primarily by base effects and the bottoming out of the industry.
We are maintaining our expectation that 2011 will signal the seventh consecutive year of decline for the US construction industry, with a return to marginal growth anticipated for 2012. The trend has been that of a gradual easing of the contraction, which reached a trough in 2009, and will eventually reach positive territory in 2012 (0.6%). However, this is by no means an optimistic trend, and reflects more a bottoming out of the industry, as opposed to any sustained growth forces.
This is especially true for the residential construction sector, where incredibly steep declines have left housing starts stagnating at around their lowest level since records began (1959). Whilst residential construction appears to be bottoming out, non-residential building has seen huge weakness in 2010 and into 2011, at the same time, the one saving grace of the overall sector – infrastructure – is commencing what we anticipated will be a sustained period of little to no growth. With no safety net, the industry will struggle to post growth over the medium term, with 0.9% annual average growth between 2012 and 2015.
Residential/Non-Residential Building – Diverging Stories
Accounting for a combined 68% of construction industry value, these two sectors have been the main source of construction industry weakness since 2007, however not at the same time. While residential construction pulled industry value into recession between 2007 and 2009, in 2010 just as residential constructions started to bottom out, non-residential construction nose-dived.
The same trend is continuing into 2011. With unemployment levels remaining high, and consumer confidence weak we do not expect the construction of commercial real estate to rebound anytime soon. However, residential construction, which has lost almost 20% of its share over the last decade, is bottoming out. Still weak housing starts data shows that the trend has not yet reversed, but we do not expect it to worsen. Overall we expect the subsector to average out at -1.6% for 2011, and return to growth at 1.2% in 2012, as residential construction pulls into positive growth.
Infrastructure: Trend Reversal Playing Out
Infrastructure will no longer be the saving grace of the construction industry in the US, with our expectation for a contraction (the first since 2005), on track. We believe the industry will contract by 1.9% in 2011 driven primarily by transport infrastructure. Negative growth is expected to persist in 2012, as, in contrast to emerging markets, the election year in the US will see limited government support for infrastructure due to the split congress and the focus on reducing the deficit.
Transport infrastructure is expected to see the biggest hit because it is almost exclusively government funded. The potential for high speed rail to lift industry value is looking less likely by the day, and whilst ports are seeking investment to capitalise on the Panama Canal expansion, a lack of funds is thwarting plans. The one area of potential is private investment into railway and ports, in response to increased exports of US coal.
On the other hand, power plants infrastructure industry value has been performing well over the course of 2011, driven primarily by investment into solar power and to a lesser extent wind. However, with federal incentives expiring September 2011 and unlikely to be renewed, we do not expect this performance to persist in 2012. On the other hand, the construction of new gas fired power plants, to replace ageing and polluting coal power plants as more stringent EPA regulations come into place will provide some solace and therefore we anticipate positive growth over the forecast period.
Nuclear power, which would create significant value creation, is currently uncertain with the majority of the numerous projects planned currently stalled. Although the regulatory environment will see some small changes in response to Fukushima, we do not believe that this will be the major stop on growth, rather the high costs, especially with gas prices depressed as a result of shale gas production.
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