Total non-residential-construction spending is likely to disappoint over the next decade, but growth in construction-heavy industries like manufacturing and highways bodes well for some companies.
Kristoffer Inton: The Great Recession ravaged non-residential-construction spending. Nonresidential construction, which includes everything from hospitals to highways and everything in-between, has recovered slowly and unevenly. Spending remains well below prerecession peaks on a nominal basis and below-average levels on a real basis. Consensus expectations are for high-single-digit to low-double-digit growth over the next several years, as the non-residential-construction share of GDP recovers to long-term historical averages.
While we do expect strong recovery in the near term as pent-up demand is unleashed, our bottom-up analysis reveals a secularly diminished need for new construction in many key sectors for the next decade.
At initial reaction, this might sound negative for the economy overall, but we view it as a positive. Sectors as diverse as health care and retail are delivering more goods and services for each construction dollar spent. This might weigh on construction spending, but it reflects improved economic productivity and frees up capital for other endeavors.
Total construction spending is likely to disappoint, but growth across the various construction categories will vary widely, given differing factors and trends. We expect relatively strong growth for "construction-heavy" industries like manufacturing and highway and street. This bodes well for companies that supply these sectors such as aggregates producers Martin Marietta (MLM) and Vulcan Materials (VMC) and steel producer Nucor (NUE).
Kristoffer Inton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
