ABC: Nonresidential Economic Performance “a Tale of Two Sectors”

Improved performance of the U.S. economy during the third quarter of 2016 gave way to a weaker period of growth in the fourth, according to analysis of U.S. Bureau of Economic Analysis data by Associated Builders and Contractors (ABC). Real gross domestic product (GDP) expanded 1.9 percent on a seasonally adjusted annualized rate during the final quarter, down from a 3.5-percent expansion in the third quarter.

While the fourth quarter represents the 11th consecutive quarter of GDP expansion, overall GDP growth for 2016 totaled 1.6 percent, the slowest rate of expansion since 2011.

Nonresidential fixed investment, which is closely aligned with construction and other forms of business investment, expanded at a 2.4 percent annualized rate during the fourth quarter after growing 1.4 percent during the third, according to ABC. Despite expanding during the final three quarters of 2016, this category of GDP contracted by 0.4 percent in 2016. Investment in structures, a component of nonresidential fixed investment, shrank at a 5 percent annualized rate in the fourth quarter and at a 3.1 percent rate for all of 2016.

“The nonresidential construction sector’s 2016 economic performance will go down as a tale of two sectors: private and public,” says ABC chief economist Anirban Basu. “Private construction fared reasonably well due to ongoing construction of hotels, office buildings and other forms of commercial space. However, public investment languished with little exception as state and local governments continued to budget cautiously and public monies were directed into non-construction categories like healthcare financing and the hiring of additional employees to work in existing facilities.

Basu says that while 2016 will be considered as another slow-growth year for the U.S. economy, there is reason to believe that 2017 growth will be meaningfully higher.

“With better prospects for tax reform, deregulation of key economic sectors and stepped-up defense spending, business confidence has surged since November’s election,” he says. “The nonresidential fixed investment category is poised to experience a particularly significant uptick in the near-term. There are a number of indications suggesting this, including the recent surge in the Architecture Billings Index, one of the construction industry’s primary leading indicators.”

He adds that 2017 will also be “fraught with hazards.”

“Contractors will continue to fret about a lack of available workers, which will drive up compensation costs,” he says. “Materials prices have begun to rise, as have borrowing costs. However, many contractors will find their backlog replenished and rising opportunities to compete for work.”