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As Global Construction Sector Foresees Contraction, U.S. Sees Growth Ahead

Feb. 17, 2107

The global construction sector is in the midst of a long-term stable period as credit insurer Euler Hermes sees overall growth of 3.5% this year, slightly better than last year’s 3.4%, while growth in advanced economies like the U.S. will supplant contraction in emerging economies.

Analysts expect construction growth in emerging markets to drop to 4.2% instead of the 8.8% growth witnessed over the past decade, while advanced economies should see growth of about 2.5% versus -0.9%, Euler Hermes said. “The sector remains mainly composed of smaller firms with very high leverage ratios, a weakness highlighted by longer payment terms compared to other sectors.”

The U.S. construction sector is seen by Euler Hermes as the world’s No. 1 importer and the No. 2 exporter while carrying a low-risk rating.

According to credit insurer Atradius, the U.S. construction industry had sector growth in 2016 of 5.3%, carrying on a rebound since 2012, while another 2% increase is anticipated for this year. Residential construction in particular is forecast to see robust growth through 2019, as foreclosures have declined 11%. New hotels, offices and amusement/recreation venues should drive nonresidential expansion by 5.6% in 2017. Unemployment in the sector is low—almost 5%—and barely above the national rate.

If the new U.S. administration follows through with plans to invest significantly in infrastructure, it could prove an added shot in the arm to the sector. Also, more increases in interest rates anticipated this year could result in increased buying activity in housing, Atradius said.

Viable and promising projects typically receive bank lending, and the financing climate is only improving as commercial and residential markets strengthen, the credit insurer said. Still, rising salaries and increasing health care and other expenses cut away at already-tight business margins.

Payments in the U.S. construction industry average from 30 to 60 days, while 90-day terms aren’t unheard of. “Over the last two years, payment experience in the construction sector has been rather good, and the overall number of late payment notifications we received in 2016 leveled off,” Atradius analysts said. “U.S. construction insolvencies decreased in 2016 and are expected to level off in 2017. Small businesses in the industry are generally still paying later and have higher bankruptcy rates and delinquent debt than other industries.”

Trade creditors dealing with smaller construction firms should still remain cautious, however, and Atradius recommends reviewing financial statements on an annual basis and supplemental credit information more frequently. “Reduction or withdrawal of cover is considered if the buyer shows significantly worsening results, including losses, heavy debt levels, problems with working capital, cash flow or liquidity, or deteriorating payment trends.”

– Nicholas Stern, senior editor

Single-Family Housing Starts Gain in January while Total U.S. Starts Drop

Feb. 16, 2017

Single-family housing starts increased 1.9% on the month in January at a seasonally adjusted rate of 823,000, though the overall housing-starts figure dropped, with the slowdown concentrated in the multifamily sector, according the latest report from U.S. Department of Housing and Urban Development.

Overall, housing starts fell 2.6% in January to a rate of 1.25 million, but remains 10.5% higher than a year prior, HUD said.
Total building permits, meanwhile, jumped 4.6% in January to a seasonally adjusted annual rate of 1.29 million—the rate is 8.2% higher, year-over-year. Single-family permits, meanwhile, fell 2.7% in January to a rate of 808,000.

Winter weather is certainly at play in the homebuilding sector and hit hardest in the West, where starts fell 41.3%. The Midwest also saw starts decline by 17.9% in January.

The West was the only region in the U.S. in January to see total permits fall year-over-year, dropping 13.2%.

– Nicholas Stern, editorial associate

Home Builders’ Confidence Falls Back to Normal Territory in February

Feb. 15, 2017

New single-family home builders’ confidence fell two points in February to a reading of 65 on the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). Still in overall positive territory, sentiment fell in all areas except the West, which could reflect the slowdown associated with more normal winter weather, noted Wells Fargo analysts. The prospective buyers’ traffic measure saw the biggest decline, dropping five points in February, while homebuilders continued to say that supply side factors, including increasing fuel prices, kept them from making price reductions.

“While builders remain optimistic, we are seeing the numbers settling back into a normal range,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, TX. “Regulatory burdens remain a major challenge to our industry, and NAHB looks forward to working with the new Congress and administration to help alleviate some of the pressures that are holding small businesses back and making homes less affordable.”

– Nicholas Stern, editorial associate

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