The expansion for the U.S. construction industry has been underway for some time now. As compiled by Dodge Data & Analytics, total construction starts showed annual growth in the 11 percent to 14 percent range during 2012-2015, followed by 7 percent increases in both 2016 and 2017. For 2018, it’s estimated that total construction starts advanced 3 percent to $807 billion, continuing the process of deceleration that emerged a couple of years ago.

Residential building climbed 6 percent in 2018, with gains for both single-family and multifamily housing. Nonresidential building rose 3 percent, reflecting steady activity for commercial building and institutional building, combined with a sharp jump for manufacturing plant construction. Nonbuilding construction retreated 3 percent, as moderate growth for public works was outweighed by a steep decline for electric utilities/gas plants.

An important question going into 2019 is whether deceleration is followed by a period of high-level stability or a period of decline. For construction activity, the stage becomes set for decline when imbalances are present, such as the excessive amount of office space produced during the mid-1980s or the excessive amount of single-family housing and retail space produced during the mid-2000s. These types of imbalances are not yet present in the current construction expansion, lessening the likelihood that a sharp decline will take place.

On balance, the economic and legislative environment remains generally supportive of construction. It’s true that the headwinds have picked up, namely rising interest rates, higher material costs, and labor shortages of skilled construction workers. At the same time, the headwinds were offset in 2018 by several tailwinds. These include the stronger U.S. economy, benefiting from the tax cuts under the tax reform legislation passed at the end of 2017. The stronger U.S. economy was also accompanied by more job creation, and employment gains tend to have a positive impact on market fundamentals (like occupancies) for commercial building and multifamily housing.

A portion of the Dodd-Frank banking regulations were rolled back last May, which should support more lending from mid-size banks, and some easing of bank lending standards took place during 2018. The omnibus federal appropriations bill passed last March provided federal construction programs with funding increases for fiscal 2018. And, the numerous construction bond measures passed at the state and local levels of government in recent years continue to provide ongoing funding support.

For 2019, it’s estimated that U.S. economic growth will settle back to 2.5 percent from the estimated 3.0 percent in 2018, as the benefits of tax cuts begin to wane. Short-term interest rates will rise further, as the Federal Reserve moves monetary policy toward a more neutral stance. Long-term interest rates will also rise, reflecting higher inflationary expectations by the financial markets. In addition, mounting trade tensions have the potential to dampen U.S. exports and raise inflationary pressures.

On the plus side, both Republican and Democratic members of Congress have made statements in the aftermath of the November 2018 elections about working together to provide additional funding for infrastructure work. On a cautionary note, that discussion will take place against the backdrop of a rising federal budget deficit.

In such an environment, it’s forecast that growth for construction starts will decelerate further, but not yet make the transition to decline. For 2019, total construction starts are forecast to be essentially flat at $808 billion. By major sector in dollar terms, residential building will be down 2 percent, nonresidential building will hold steady, and nonbuilding construction will increase 3 percent. Next year’s pattern of construction starts by more specific segments is the following:

Single family housing will be unchanged in dollar terms, alongside a modest 3 percent drop in housing starts to 815,000 (Dodge basis). There will be a slight decline in homebuyer demand due to higher mortgage rates, diminished affordability, and reduced tax advantages for home ownership as the result of tax reform.

Multifamily housing will slide 6 percent in dollars and 8 percent in units to 465,000 (Dodge basis). Market fundamentals such as occupancies and rent growth had shown modest erosion prior to 2018, which then paused due to the strengthened U.S. economy. However, that erosion in market fundamentals is expected to resume in 2019.

Commercial building will retreat 3 percent, following 2 percent gains in 2017 and 2018, as well as the substantial percentage increases that took place earlier. While 2018 market fundamentals for offices and warehouses are healthy, next year vacancy rates are expected to rise as the economy slows, slightly dampening construction. Hotel construction will ease back from recent strength, and store construction will experience further weakness.

Institutional building will advance 3 percent, picking up the pace slightly from its 1 percent gain in 2018 which itself followed an 18 percent hike in 2017. Educational facilities should see continued growth in 2019, supported by funding coming from numerous school construction bond measures. Health care projects will make a partial rebound after pulling back in 2018. Airport terminal and amusement-related projects are expected to stay close to the elevated levels of construction starts reported in 2017 and 2018.

Manufacturing plant construction will rise 2 percent following its 18 percent jump in 2018. The recent pickup in petrochemical plant projects should continue, and cuts in the corporate tax rate from tax reform should encourage firms to invest more in new plant capacity.

Public works construction will increase 4 percent, after gains of 18 percent in 2017 and 2 percent in 2018. The omnibus federal appropriations bill passed last March provided greater funding for transportation projects that will carry over into 2019, and environmental-related projects may get a lift from the October passage of the Water Resources Development Act, assuming Congress agrees to the authorized levels in the legislation. New pipeline construction starts will likely recede from the elevated levels in 2017 and 2018, but rail transit projects should stay strong.

Electric utilities/gas plants will drop 3 percent, continuing to retreat after the exceptional amount reported in 2015. New generating capacity continues to come online, dampening capacity utilization rates for power generation. In addition, tax credits for solar and wind projects are now waning.


Robert Murray, is vice president of economic affairs and chief economist for Dodge Data & Analytics (www.construction.com), North America’s leading provider of analytics and software-based workflow integration solutions for the construction industry.