2012-11-18 04:25:19 - Recently published research from Business Monitor International, "United States Infrastructure Report Q4 2012", is now available at Fast Market Research

Leading construction data is reinforcing our long-held view that the US construction industry will return to growth in 2012. In fact, the data implies a more positive investment climate for the sector than we had previously factored in, and thus we are upgrading our 2012 growth estimate to 1.2%, with further upside potential. The key growth divers remain the energy and utilities sector, as well as the ongoing revival in residential construction.

Construction spending data for the first seven months of the year shows a significant increase in investment in the sector, which indirectly feeds through to our forecast for construction industry value added. Between January and July 2012 construction spending has increased 7% year-on-year (y-o-y), making it the first year

of growth in construction investment since 2006.


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As anticipated, growth is being driven primarily by the nascent recovery in the residential building sector. The sector has finally bottomed out following five years of contraction, and we subsequently see potential for growth. We are also seeing a revival in non-residential building, although demand for commercial property is still weak.

Conversely, and also as expected, infrastructure investment is lagging other aspects of construction. With political gridlock delaying spending approvals, and state and local governments strapped for cash, the only glimmer of hope is from private investment, which only accounts for 37% of infrastructure investment. However, we do see some sector variation, with publicly funded transport projects lagging behind private funded energy projects.

Transport Finally Moving?

We are maintaining our bearish outlook for US transport infrastructure industry value over the near term despite the passing of a new, US$105bn surface transportation bill in July 2012. Between 2013 and 2016 we anticipate real growth of just 0.6% in transport infrastructure industry value. Although the approval of a transportation bill following several extensions provides a more comprehensive and organised approach to transport spending, its value is lower than previous bills. However, the bill does present some upside potential to the roads and bridges sector through the expansion of the Transportation Infrastructure Finance and Innovation Act (TIFIA) programme. TIFIA, which provides credit assistance for transport projects, has been crucial in allowing highway public-private partnerships to close financing, and therefore a US$1.7bn expansion approved as part of the transportation bill is good news for this model of investment. With each US$1 of federal funding able to provide US$10 in TIFIA credit assistance, it has the potential to leverage US$17bn in loans, equal to US$20-30bn in projects.

Energy: From Renewables To Shale

In 2011 and H112, we registered a significant expansion in energy industry value growth. Based on our monitoring of projects, we have attributed this growth to renewable energy projects - specifically wind and solar. Prior to the expiration of incentives, we saw a huge push for projects in order to benefit from federal incentives. This has resulted in an investment boom and we thus anticipate growth in power plants and transmission grids to expand by 7.6% in 2012, following a 24.8% expansion in 2011. We are penciling in a slowdown however, which we anticipated would take hold in H212, and indeed, construction spending data implies this is playing out. New projects have now slowed down significantly, and, therefore, we anticipate growth to dissipate and flatline over the near term by -0.1% in 2013 and 2014.

Overall, however, energy and utilities will remain strong, as the boost from power is replaced by a boost from the construction of new oil and gas pipelines. Huge investment is needed to rewire the US pipeline network following the unlocking of huge shale oil and gas in new energy producing regions. Whilst we believe much of this will be front-loaded, the weak investment seen in 2011 in the oil and gas pipelines sub-sector leads us to have a muted outlook for growth in 2012, primarily as a result of regulatory issues. However, we expect growth to pick up thereafter, with annual average growth of 5.5% forecast between 2013 and 2021. Indeed, a number of proposals have moved forward in 2012 thus far.

Residential Recovery

The biggest driving force behind our upward revision in construction industry value growth is the nascent recovery in the US residential building sector. The industry appears to have bottomed out with a nascent recovery underway. Indeed, construction spending on residential projects grew by 8% over the first seven months of 2012, following a 1.2% contraction in 2011. This data underlines our view that the residential construction sector should contribute positively to the overall construction industry for the first time in five years in 2012. Housing starts, new home sales and homebuilder confidence are all ticking up, although sustained growth is unlikely, with some months being weaker than others, the overall trend is for the industry to have bottomed out and a slow recovery to emerge.

Non-residential building has also turned a corner, from the deep recession seen since 2009. The sector, which incorporates social infrastructure, commercial projects and industrial construction, will contribute to the growth in the overall residential and non-residential industry. Private construction of healthcare and education has expanded, whilst office and commercial construction remains weak.

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