BMI View: Growth will decelerate in the US construction sector over 2015 and 2016 in line with a normalisation of the housing market following a steep recover over recent years. Whilst infrastructure industry value will sustain its recovery it will not be enough to offset a slowdown.
We have downgraded construction industry value growth for 2015 from 1.4% to 0.7% as the housing market slowdown has been sharper than expected in H1. In line with our expectations for a volatile but lower trend for homebuilding, we expect the industry to growth in H2, to average lower growth than recent years, although remain positive. Non-residential building is also weighing on overall construction value, with capex cuts in the energy and mining sectors weighing on industrial construction. Infrastructure presents one of the few positives for the industry, with oil and gas pipelines and transport infrastructure presenting a few bright spots for activity.
The recovery in the residential construction sector is showing signs of slowing, with a weak first half reported. In line with expectations that the recovery would run out of steam as the industry normalised, 2015 is on track to see only limited growth - with an expansion in the sector anticipated in H2 2015 to balance out the contraction seen in H1. While the sector has come a long way since 2011, there is considerable room for further expansion as housing starts remain considerably below the peak of 2,273,000 in January 2006. Consequently, we forecast residential construction to continue to positively contribute to the overall construction industry value.
Power and transmission infrastructure industry value will stabilise in 2015 following an estimated two-year recession as the industry slowed following the renewables boom. We see some potential for value creation over the medium term from retrofitting and safety upgrades to nuclear power plants, a new fleet of natural gas power plants as old coal plants are retired, as well as major transmission projects to hook up new renewable supply. However, much will depend on the longer-term ability to implement new legislation guiding existing coal-fired power plants, announced in June 2014, which indicates a significant portion of existing coal projects could need to come offline, requiring investment in new capacity.
Oil and gas pipelines will remain the outperforming segment in the infrastructure sector, with strong growth seen over 2014 to continue in 2015. We expect the segment to continue to grow through to 2017 driven by a substantial pipeline of projects. Weak oil prices and capex cuts will place greater downside pressure on non-residential building through upstream and downstream investment cuts, rather than midstream infrastructure.
Transport infrastructure will begin to recover in line with public sector spending, but with major risks stemming from the availability of public sector funds. There will be a few areas of strength, such as rail investment, highway public-private partnerships and a handful of airport projects, but overall the sector will remain constrained by persistent weakness in state and local fiscal capacity. Investment into transport infrastructure is 90% publicly funded; therefore, improvement on this front will be guided by broader economic recovery. Some innovative measures are being taken on a state-by-state level, which, combined with broader economic recovery, are providing greater funding for projects. However, politics continue to get in the way.