The numbers, to put it plainly, are pretty grim for the construction industry. Despite a 0.3% increase in nonresidential construction spending for March after five straight months of decline, the construction industry still faces a slew of negative indicators, according to Ken Simonson, chief economist for the Associated General Contractors of America (AGC) — and that's going to put a damper on construction truck sales for the foreseeable future.
“Increases in manufacturing construction are being propelled by huge refinery and steel mill projects that were begun well before the economic downturn,” he explains. “[But] these large projects are eclipsing broader negative trends.”
For instance, Simonson pointed to the Bureau of Economic Analysis report at the end of April that noted real gross domestic product (GDP) growth — net of inflation — fell from January through March at a precipitous 6% annual rate for the second quarter in a row. Investment in private residential, private nonresidential and public structures each plunged at much steeper rates, dropping by 44%, 33% and 17%, respectively.
“In coming months, [federal government] stimulus money will flow in increasing amounts. But it is not likely to overcome the downturn in private, state and locally funded projects,” he says. “Given the broader economic trends at play, it is likely that nonresidential spending could fall by as much as 9% in 2009, even with stimulus funds.”
The other problem is that money allotted to construction projects within the $787 billion in spending and tax cuts contained in the American Recovery and Reinvestment Act is only slowly wending its way into the system. Of that stimulus money, just $27.5 billion is provided for highway and bridge projects. To date, only 2,163 projects have been approved, totaling $6.7 billion. This represents about 25% of the appropriated funds, notes Brian Lindgren, director of vocational sales for Kenworth Truck Co.
“I've learned that you have to read the news reports very closely, and watch for distinctions between words such as ‘provided,’ ‘approved,’ ‘appropriated’ and ‘work started,’” he says. “If the work hasn't started, nobody is firing up those trucks.”
That also means few construction firms are willing to invest in new equipment, notes John Walsh, spokesman for Mack Trucks.
“Industry-wide sales of dump trucks and mixers continue to run at low levels due to the dramatic decline in housing construction,” he says. “Government stimulus and moves by the Federal Reserve to create greater liquidity should ultimately have a positive impact. But with customers currently still hesitant to purchase new equipment in the face of economic uncertainty and relatively tight credit, it remains difficult to predict exactly when the situation will improve.”
- INDUSTRY OUTLOOK
Any improvement in the overall construction industry is still at least a year away, according to Jim Haughey, chief economist for Reed Construction Data.
As far as construction spending, Haughey says that the market will see a steep decline through the spring, increasing slightly by the end of the year. “We won't see a construction spending peak similar to 2006 until 2012,” he said during a webinar in late April hosted by AGC, American Institute of Architects, and Reed Construction Data.
Haughey expects the recession to continue well into the fall of 2009, with subpar GDP growth for a year. “That same level of confidence will remain at recession levels; it will get better but not back to normal this year or next, so it will be difficult to get contracts,” Haughey notes. “We will also see worsening access to credit.”
AGC's Simonson noted during the webinar that stimulus spending should help spur construction projects, though it will take time for them to develop. “The stimulus bill means the government is starting to buy construction,” he said, noting that total stimulus dollars for construction-related spending is between $135 billion and $144 billion.
“In the building segment quite a few government agencies have a hand in this,” Simonson explained. “The Dept. of Defense is getting about $7 billion for military bases and housing; the GSA [General Services Administration] is getting about $5.6 billion; and $9 billion is scattered through other government agencies.”
More importantly for the construction truck market, the stimulus bill allows for increased expensing for anyone who buys equipment and puts it in service by the end of the year. “They will be able to write off 50% of the cost and then use accelerated depreciation for the rest,” he said.
Simonson said that overall construction spending dropped 10% over the last year with the biggest hit coming in residential construction. Public construction spending, however, actually increased. For the rest of 2009, Simonson expects that the single-family market will come back by the end of the year, perhaps enough to raise total residential spending — even though the multi-family market will be down for probably the next two years.
“Nonresidential spending, in spite of the stimulus money … is still dragged down by severe contraction in the developer finance project, a big cutback in manufacturing, and sluggishness in the hospital and university market,” he notes.
Simonson expects nonresidential spending to be down between 3% and 9% for the year, total construction spending will be down, material costs will be down, and labor costs will be moderate. “By 2010, I think nonresidential could be down again; at best it will be break-even. Residential should be up solidly,” he points out.
- LONGER OWNERSHIP
Complicating the construction truck sales picture is that the ownership cycle in this market segment tends to be longer than that of over-the-road (OTR) fleets; because of this, construction fleets can postpone equipment purchases without too many ill effects.
“Typically, we find construction fleets tend to keep their trucks anywhere from four to six years, but can feel content to keep them longer,” says Ken Marko, market segment manager for vocational products at Peterbilt Motors Co. He points out that because of the downturn in the market, fleets are keeping their concrete mixers even longer, from six to eight years, compared to the three- to five-year ownership cycle for most OTR operations.
“The dynamic right now is that construction fleets are not working their trucks as hard as they usually do — if they are even working them at all,” adds Melissa Gauger, marketing manager for Navistar's severe service division. “The trucks may be getting older, but they have fewer miles or hours of operation.”
Construction fleets are also “parking” a lot of excess equipment, giving them access to extra capacity should they need it, which again potentially delays the need to purchase new trucks, she says.
“It's really going to depend on how they're treating parked equipment,” Gauger explains. “Are they maintaining it for operation or using it for spare parts? The whole issue of getting trucks re-operational will drive the fleet's equipment acquisition approach.”
“Given the overall market conditions, we believe construction companies will be cautious when deciding to purchase a new truck,” adds Maria McCullough, spokeswoman for Freightliner LLC.
“Although there may be an increase in construction as a result of stimulus money, we do not expect a huge surge in the amount of construction trucks purchased,” she says. “We believe construction companies will exercise fiscal prudence and purchase trucks only if necessary, and we anticipate that construction companies will try to do all they can with the trucks that they currently have.”
- IMPACT ON EMISSIONS
One interesting side effect of the current economic malaise is that construction fleets are nowhere near as leery of emissions control technology due to be added to all new heavy-duty diesel trucks as of Jan. 1, 2010, as they were during the last round of regulatory change back in 2007, OEMs report.
“Customers are still concerned over the price increases to cover the new technology, but they aren't nearly as skeptical of system performance as they were in 2007,” says Navistar's Gauger. “Of course, no one wants to undergo these changes, but there is more of an understanding of what is involved this time.”
“We've seen 2010 go away as a major concern for construction fleets, though it is still of concern to them,” adds Kenworth's Lindgren. “Regardless of the technology chosen — be it SCR [selective catalytic reduction] or advanced EGR [exhaust gas recirculation] — it's still going to add weight, cost and some complexity to the truck. But emissions [technology] is not nearly the concern it was back in 2007.”
“Our customers have not indicated that 2010-compliant technology is a concern; rather, it's obviously a relief,” notes Freightliner's McCullough. “The reaction has been overwhelmingly positive.”
It's also helpful that the federal stimulus package included $300 million for grants under the Diesel Emissions Reduction Act administered by the Environmental Protection Agency (EPA). This represents a sixfold increase from the $49.2 million funding level in 2008, notes Allen Schaeffer, executive director of the Diesel Technology Forum.
Such grants can be applied to everything from retrofits and idle-reduction technologies approved by the EPA and California Air Resources Board to new clean diesel equipment, such as 2010-compliant trucks. However, fleets need to partner with public entities and complete daunting amounts of paperwork to obtain the grant money, leading many industry groups to call for more straightforward incentives to help spur the purchase of low emissions construction trucks.
“As we see some of America's largest heavy equipment makers reporting virtually unprecedented losses, it is time for Congress to act on our repeated calls for new incentives to encourage the purchase of newer, more efficient and cleaner construction equipment,” says Stephen Sandherr, AGC's CEO.
“While the construction sector already accounts for less than 1% of all greenhouse gas emissions in our economy, making it easier for construction companies to replace older equipment will give a needed boost to our economy and enhance our environment,” he says. “We must turn adversity into opportunity by helping our economy grow jobs, boost productivity and further shrink emissions.”
|Actual 2008||Forecast 2009|
|Residential||-27%||-2% to +2%|
|Nonresidential||+11%||-3% to -9%|
|Total||-6%||-1% to -7%|
Source: Census Bureau Data; Ken Simonson, chief economist, Associated General Contractors of America