Economy Watch: Slower Construction Growth Expected in 2017

While the construction industry isn't likely to contract next year, rising commodity prices and potential interest rate increases are a concern, Associated Builders and Contractors reports.

040512-EconWatch-Construction-user-compujerameyAssociated Builders and Contractors (ABC) is predicting a slowdown in growth for the U.S. commercial and industrial construction industries in 2017. That isn’t to say the industry will contract, though. Contractors might be vulnerable to rising commodity prices and potential interest rate increases in 2017, but consumer-led growth in the economy should still spur modest growth in construction spending and employment.

Despite the various risks to the construction industry, nonresidential spending should expand 3.5 percent in 2017, according to ABC Chief Economist Anirban Basu. As commodity prices— including energy prices—firm up and labor costs edge higher, the Federal Reserve will need to be more concerned about rising inflation going forward. Interest rates increases (likely beginning this week) might adversely affect certain asset prices, such as stocks, bonds, commercial real estate and apartment buildings.

Some property types will see more construction spending growth than others, ABC noted. Private office construction spending will be up 5.7 percent next year compared with this one, while private commercial (largely industrial) will be up 3.5 percent and health care will be up 3.6 percent. Various kinds of public projects, however, will see construction spending drop in ’17, which points to a need for public infrastructure spending.

ABC asserted that the level of under-investment in electricity infrastructure is about $200 billion, while the level of neglect in water and wastewater infrastructure is more than $100 billion. Airports need about $42 billion in investment to meet demand, while waterways and ports require about $15 billion (U.S. infrastructure gets a D+ from the American Society of Civil Engineers).