The Gilbane Building Construction Economics Report for Spring 2014 has been released, and the positive forecast should encourage construction companies and heavy equipment proprietors around the country to keep their heads up.
The report opens with the headline we all hope to see: “Construction Growth Looking Up.” What follows is a data-driven dive into various facets of the economy that impact the construction industry. Not all rosy, the report also includes an analysis of negative economic factors, as sectors of the economy still struggle to recover from recession.
The author of the quarterly report, Ed Zarenski, was gracious enough to give Tuffwerx an historical look into how Gilbane came to release an extensive economics report for free online, as well as some special insight on how his most recent predictions affect the heavy equipment industry.
Could you share a bit of the history behind your quarterly Construction Economics report?
This economic report started out 20 years ago as a one page internal report tracking indices. Over the years, after seeing the need to periodically prepare unique cost analyses for different clients, some of those were included as part of the regular quarterly report.
About 10 years ago, still only an internal report, it began to morph into what we have today. With an attitude that the best business relationships can be fostered when all are well informed, for the last seven years we have shared this report with our clients and partners. Since 2011 this report has been available free on the Internet.”
You cite a number of negative economic factors in your report, including low construction employment and hours worked, low construction volume, and a shortage of skilled workers. Yet the overall prediction for this quarter’s report is positive: “margins and overall escalation [will] climb more rapidly than we have seen in six years.” How might your predictions impact new heavy equipment spending in 2014?
During these last few years of depressed activity, many construction firms delayed capital expenditures on equipment. Declining workload did not support the demand for new equipment and profits did not support significant capital expenditures.
We should see a re-awakening in demand for new equipment. Although it will vary by location and sector, as owners bring new projects to start, contractor’s backlogs will begin to stabilize and increase.
Once increases start to become the norm, out of necessity capital expansion will take place. Depending on the market sectors in which contractors work, that expansion will happen at different times. The residential sectors have already taken the lead in recovering from the recession.
What about used equipment prices and sales velocity? How might they be impacted based on current economic trends?
The current economic trend is towards moderate expansion. However, there are several years of delayed expansion that will eventually find their way into the markets. We will experience growth, and even moderate expansion will create demand, and demand will drive prices.
There are several predictions of 6% to 10% growth for the next few years. What will be interesting to see over the next few years is to what degree growth affects construction inflation. Real growth in volume may lead to increasing inflation. As prices drive higher, those increases will spread to all aspects of construction, including equipment purchases.
To what extent is depressed government spending responsible for the steep decline in overall nonbuilding infrastructure spending (especially given that almost 60% of non-building work is public work)?
Nonbuilding infrastructure spending accounts for approximately $260 billion in construction spending each year. Yes, currently 60% ($160bil+) of nonbuilding work is public work. But in 2013, public infrastructure work actually increased. By far, the largest decline in nonbuilding infrastructure spending in 2013 was in power construction, which is predominantly privately funded.
Public projects that did show a big reduction in 2013 spending were office, commercial and educational, all as a result of reduced government spending, however these are all buildings. The largest decline in public government spending was for educational buildings.
Within that $160 billion of nonbuilding public work, more than 50% ($85bil) is publicly funded spending for Highway and Street construction. This funding supports close to 600,000 construction jobs per year. If the Federal Highway Act funding is reduced, it will immediately have a detrimental effect on this sector. States may be at risk to proceed with highway infrastructure improvement projects and construction jobs will be at risk.
How would you advise a young person interested in going into the construction industry?
That would depend on whether the individual expressed an interest in learning a trade, practicing design or managing the construction project. But one thing holds true regardless what path a young person chooses, and that is to seek out experience and knowledge. Work on a construction project. Pursue an internship with a construction or design firm. Work with a tradesman who can pass along valuable experience. Seek out educational programs geared towards your future plans.
You cannot ever gain too much experience in this industry and every different type of experience you do gain will be a benefit.
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Now that you know about Gilbane Building Company’s quarterly Construction Economics report and the expertise of Ed Zarenski, we hope you’ll keep an eye out for each report’s release. The Spring 2014 report was released on May 12, 2014, and you can download the full version here.
About Gilbane Building Company
Gilbane provides a full slate of construction services, from pre-construction planning and integrated consulting capabilities to comprehensive construction management, and close-out and facility management services, for clients across various markets. Founded in 1873 and still a privately held, family-run company, Gilbane has more than 50 office locations around the world. For more information, visit GilbaneCo.com.
About Ed Zarenski
Ed Zarenski, author of the Gilbane Construction Economics report, is a 40-year construction veteran and a member of the Gilbane team for 35 years. Ed is an Estimating Executive who has managed multimillion dollar project budgeting, owner capital plan cost control, value engineering and life cycle cost analysis.
Construction photo via Flickr CC by j-imaging. Construction workers photo via Flickr CC by ook.com.sa.