demand for construction materials on the rise
Expect gains in both housing starts and nonresidential construction through the first half of 2013.

Make Your Move: Material Progress

With the construction industry in recovery mode, demand for construction materials is on the rise.

With the U.S. economy generally improving for the past three years, demand for materials has been steadily growing. Even industries hit hard by the past recession, such as construction materials, are rising. Annual wholesale trade of lumber and other construction materials climbed to $105.9 billion in July, the highest total since April 2009. Positive indications from leading indicators such as the Architecture Billings Index suggest wholesale trade will rise though the near term as new construction projects keep contractors busy.

See Also: Lean Supply Chain Logistics Best Practices

The increased demand for construction materials is not lost on the production side either: Plumbing fixture production is 4% above the same time last year (annual basis). Annual lime and gypsum production is up 1.1% from last year. Cement production gained 8.3% over the past 12 months, and plywood, veneer, and other miscellaneous wood products, which includes lumber, is 3.1% above last year. It is important to note that, much like the construction industry as a whole, the production of these construction raw materials remain below their precession peaks; however, the steady gains portray the ongoing recovery in the construction industry.

Despite the widespread good news, a few niche segments have not benefitted from the recovery in construction. For instance, glass and glass products production is in recession, with annual production 3.6% below last year and falling.

ITR Economics’ outlook for the construction industry is generally positive. We expect additional gains in both housing starts and nonresidential construction though the first half of 2013. The residential market will then begin to decline in the second half of the year, but keep in mind activity will remain about the current level through 2014. The nonresidential market will expand through 2014. The coming slowdown in residential construction will translate into weaker demand for materials in the second half of 2013 and 2014. For companies that focus in the residential market, consider missionary efforts into the nonresidential side, as that will provide better growth opportunities in 2014.

Synthetic Materials Head for Recovery

Unlike construction materials, the synthetic materials industry has been unable to capitalize on recent economic growth. Artificial and synthetic fibers (-7.7%), plastic material and resin production (-5.4%) and synthetic rubber (-0.2%) are all below year-ago levels (annual basis). However, there is good news: Internal trends in all three industries suggest the worst part of their respective data trend declines is over, and annual production will likely begin rising in the near term. Synthetic dyes and pigments production is a bright spot in this industry, gaining 11.9% from the year-ago level and rising.

Annual chemical products and materials production as a whole have been flat since October 2011 due to weak foreign demand. We expect flat activity to persist through the first half of 2013. However, there is one advantage in this industry: low natural gas prices. Natural gas prices will remain around the current level through the near term, giving U.S. companies cost advantages in the international markets. Firms dealing in chemical and synthetic products will need to be patient and keep an eye on costs though this period of mild activity, but growth will re-accelerate in the second half of 2013.

The outlooks for these industries heading into 2013 reflect the mixed signals for the general economy. There will be opportunities for construction materials in the first half of the year, but residential will be off in the second half. Conversely, demand for chemical materials will be relatively stagnant in early 2013, with growth expected in the second half of the year. Knowing where your company stands in relation to your markets will be crucial in using the next four quarters to position yourself for the 2014 recession.

 

Alan Beaulieu, President of ITR Economics

Contributing Editor Alan Beaulieu is an economist and president of ITR (itreconomics.com). He is co-author, with his brother Brian, of "Make Your Move," a book on spotting business-cycle trends.                               

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