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Non-residential construction spending contracts despite strong economy

Non-residential construction spending between September 2016 and September 2017 weakened by nearly three percent, with a number of market segments recording double-digit declines, according to the Marcum Commercial Construction Index for the third quarter of 2017.

The report juxtaposes this finding against the nation’s continuing economic recovery, which is now in its ninth year.

“One would expect that faster economic growth, record stock prices, low interest rates, unprecedented levels of household wealth, surging consumer confidence, and elevated business owner confidence, as measured by the National Federation of Independent Business, would translate into significant non-residential construction spending growth…” said Anirban Basu, Marcum’s chief construction economist and author of the index.
“Despite that, the absolute level of non-residential construction spending in September was at its lowest level since December 2015. Much of the recent weakness has been in publicly financed categories like water supply, conservation and development, and highway/street.”

Subsectors showing spending declines during the 12-month period included Manufacturing (-20.3 percent), Religious (-12.4 percent), Sewage and Waste Disposal (-10.7 percent), Water supply (-9.2 percent), Power (-8.9 percent), Conservation and Development (-7.7 percent), Highway and Street (-7.3 percent), and Office (-6.1 percent).

Of the gainers for the year-over-year period, Commercial registered the strongest performance, up 11.4 percent. The other growth sectors included Amusement and Recreation (7.9 percent), Transportation (5.8 percent), Lodging (5.3 percent), Public Safety (4.7 percent), Communication (3.9 percent), Educational (3.7 percent), and Health Care (0.6 percent).

Basu noted that, despite sluggish spending growth in half of the non-residential construction categories, construction firms continue to increase staffing levels. He also points to tax reform as a pending source of improvement for the industry.

“There are many proposed reforms that would impact construction firms and their owners directly or indirectly, including a much lower corporate tax rate, the elimination of the alternative minimum tax, and a lower tax rate for subchapter-S corporations and similarly situated flow-through tax entities, fewer personal income tax brackets, and the elimination of the estate tax,” he wrote.

Joseph Natarelli, national leader of Marcum’s Construction Services Group, added, “This quarter’s index offers a particularly sunny report of the overall economy, if an uneven one for the construction industry. So we advise construction firm owners to enjoy their prosperity, but, planning for the future is essential. Consider the big picture.

“Despite our rosy general forecast, the facts are that nonresidential spending is down overall and is ever more silo’d by subspecialty. It is imperative to watch these trends and plan or pivot for a profitable future.”

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