Raising the Bottom Line

Construction Industry Outlook Might Not Be As Rosy As Contractors Think

Posted by Jeff Johnson on Tue, Jun 12, 2018 @ 08:34 AM

construction industry market outlook

Every year Gross Mendelsohn takes the pulse of Maryland’s construction industry in the form of a survey. As this infographic shows, 70% of contractors reported being more optimistic about the construction industry in 2018 as compared to last year. While that upbeat feeling is reassuring for those working in and around the industry, the stock market may be foreshadowing something a little different about the outlook for the remainder of 2018.

When we dug further into the results of the 2018 Maryland Construction Industry Survey, we saw a big similarity between contractors’ perception of the industry today and what’s projected to happen in the overall economy: the rate of growth is slowing down.

construction industry optimism for 2018

In 2017, contractors reported being a whopping 78% more optimistic than they were in 2016. That’s a 28% increase over the prior year! This year, while the vast majority of contractors remain optimistic, that number dropped by nearly 10% in the last year.

Similarly, the U.S economy is projected to cool down in 2018. That’s not to say we see a weak or sluggish environment, but economic growth forecasts suggest GDP (Gross Domestic Product) will moderate from its current 2.9% annual pace to 2.4% by year end.

As our investment team recently reported in our blog post, Investment Outlook: Is the Stock Market Peaking?, the projected slowdown in the economy is already contributing to a bumpy ride for the stock market. While we don’t know exactly how rough the road will get in the short-term, our economic model does not see conditions that would indicate a recession is around the bend.

Additionally, an escalation in trade tariff rhetoric between the U.S. and China is concerning. Markets had cheered the passage of the Tax Cuts & Jobs Act and reduction in regulations, but a trade war between the world’s two largest economies would be a massive headwind (pothole?) for global growth.

What’s Ahead for the Construction Industry?

Although construction spending is expected to remain strong in 2018, the amount of growth is projected to be a bit more subdued. For instance, commercial spending should expect a 4% increase, which is less than half of last year’s forecast.

There are divergences within the industry as well. Commercial construction should see the biggest potential increase in starts while industrial could see the biggest decrease. As an example, recent announcements in Baltimore include a mixed-use development in Port Covington, as well as the expansion of the entertainment district with a new Topgolf facility and the soon-to-be-revived concert hall, Hammerjacks.      

Tax reform is expected to have a positive impact on the construction industry in 2018, as lower corporate tax rates would seek to encourage investments in construction and stimulate more manufacturing activity.

On the flip side, labor constraints combined with rising inflationary pressures on commodities and materials pricing will continue to impact profit margins. According to the Maryland Department of Labor, the construction industry workforce is projected to grow just 0.7% from 2017 to 2019. Growth varies by segment as illustrated in the table below.

Maryland Short Term Workforce Construction Industry Projections (2017-2019)

Does Your Construction Company Have a Financial Roadmap?

Regardless of current or future market conditions, your business should have a financial roadmap that positions you for success in the long term. Our team can work with you to develop that roadmap. Contact us online or call 800.899.4623 for help.

About Jeff Johnson

Jeff JohnsonJeff is the managing director and partner at GGM Wealth Advisors, an independent SEC Registered Investment Advisor and investment arm of Gross, Mendelsohn & Associates. He is a member of the firm’s investment committee and has over 18 years of financial industry experience. Learn more about Jeff.

 

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Tags: 2018 Maryland Construction Industry Survey, investments, Jeff Johnson, construction