North America and Mexico: An Economic and Industry Trends Update

An in-depth report on the economic trends and challenges facing the U.S., Canada and Mexico

As part of our ongoing study of the state of the global economic climate, we provide an overview of North America and Mexico. The goal of this endeavor is to give an insight into the economic statistics of the regions, including impressions of the general economy, construction industry, strengthening industries and employment rates.

Overview

The North American economy is comprised of more than 528 million people, around 8% of the total world population.^[4] The economy is marked by a sharp division between the predominantly English-speaking countries of Canada and the U.S., which are among the wealthiest and most developed nations in the world. Mexico is a newly industrialized country and part of the North American Free Trade Agreement (NAFTA).^[3]

The U.S., Canada and Mexico have multifaceted economic systems. In 2011, the U.S. had an estimated per-capita gross domestic product (GDP) of US$47.2 trillion, making it the largest economy in North America and the most technologically developed economy in the world. The U.S. service sector comprises 76.7% of the country’s GDP, industry comprises 22.2%, and agriculture comprises 1.2%.^[1]

Canada’s economic trends are similar to that of the U.S., with significant growth in the sectors of services, mining and manufacturing. Canada’s GDP was estimated at US$39.4 trillion in 2010. The country’s service sector comprises 78% of the country’s GDP (estimated in 2010), industry comprises 20%, and agriculture comprises 2%.^[2]

Mexico has a GDP of US$13.9 trillion, with per-capita income estimated at approximately one-third of that of the U.S. The country has both modern and outdated industrial and agricultural operations, though it is modernizing in sectors such as energy production, telecommunications and airports.^[3] 

U.S.

Historically, the U.S. has maintained a stable overall GDP growth rate and low unemployment. It has been the world’s largest national economy since the 1870s and remains its largest manufacturer.^{[5 & 6]} The nation’s workforce is comprised of approximately 154.4 million employed individuals.^[8] The economy experienced a crisis in 2008 led by a derivative market, subprime mortgage crisis and declining dollar value.

In May 2009, the unemployment rate reached 9.4%.^[9] Following the financial crisis, the emerging problem of job recovery resulted in record levels of long-term unemployment, with more than six million people looking for work longer than six months as of January 2010.^[10] By April 2010, the official unemployment rate was 9.9%.^[11]  January 2012 saw the unemployment rate drop to 8.5%, followed by another drop in February to 8.3%, the lowest level in three years.^[31]

The construction industry, with 7.2 million wage and salary jobs in 2008, is one of the nation’s largest.^[13] The sector went into recession a year and a half before the overall economy and has yet to fully emerge.^[15] As a result of the credit crisis and recession, retailers have refrained from building new stores, and state and local governments have reduced spending.^[13] Unemployment in February 2011 was 21.8%, the highest of any industry and more than double the all-industry rate. Construction spending totaled US$816 billion in 2010, a 10-year low.^[15]

A study conducted by Global Construction Perspectives and Oxford Economics forecasts that US$97.7 trillion will be spent globally on construction during the next decade, with the sector expanding an average of 5.2% each year, outpacing global GDP growth. An estimated US$14.5 trillion will be spent on construction in the U.S. by 2020, with growth averaging 7.8% per year over the next five years, driven by residential and nonresidential markets.^[18] 

Despite predictions of slight growth in demand for several key construction sectors and improving construction employment, construction firms prepared for at least one more difficult year in 2011 as the benefits of the economic stimulus package faded, and overall construction demand remained weak.^[14] According to a survey of 1,300 construction firms conducted by the Associated General Contractors of America and Navigant, the industry was not likely to experience a recovery until 2012. Construction employment is expected to increase as markets stabilize and contractors feel more empowered to address profit margins. However, weak demand, stagnant equipment orders, rising healthcare costs and the fading stimulus benefits continue to work against the industry. Considering all factors, the industry will likely improve slowly and steadily in 2012.

In August 2011, Reed Construction Data reduced the construction spending forecast for 2011-2013. Expansion in 2012 was cut from 10.5% to 4.8%, with expansion in 2013 expected to be 10.2%, down from 14.4%. The weaker outlook is due primarily to a low second quarter of economic growth in North America, Europe and Asia; a worsened public debt problem in Europe with high borrowing costs spreading to Spain and Italy; the redevelopment of strains in the financial system, with banks wary of interbank lending and needing liquidity from already overextended central banks; and a sharp drop in spending confidence in the U.S. on the realization that politicians are unprepared to deal with short-term high unemployment and long-term high debt.

Over the next decade, population growth, deteriorating infrastructure and aging buildings are expected to generate employment growth in the construction industry. Due to rising energy costs, “green” construction is an increasingly popular area. The number of wage and salary jobs in the industry is expected to grow 19% through 2018, compared to the 11% projected for all industries combined. Employment depends primarily on the level of new construction and renovation activity on older buildings, which is expected to increase modestly over the coming decade.^[13]

According to Elevator World, Inc.’s 2010 Vertical Transportation Industry Profile, more than one million elevators and 35,500 escalators operate in the U.S., and there is approximately 30,000 trained industry personnel. Of the major multinational elevator companies doing business throughout the world, only Otis is headquartered in the U.S., though all the multinational companies have national and regional operations on all continents. While the segment of independent elevator companies remains quite large, the trend of major companies acquiring smaller independents continues.

 The elevator industry, as with many fields, is constantly changing relative to its participants, the economy and the marketplace. With new construction prospects dim, the real-estate market has focused on modernizing properties, a bright prospect for the vertical-transportation industry, as well. A major portion of the industry’s revenue comes from the maintenance, repair and modernization of existing equipment. With the introduction of new operating systems, the shortage of mechanics skilled in the upkeep of older equipment and competition from newer buildings make elevator modernization an important and ongoing activity in the industry. Research has shown that many 20- to 30-year-old (or older) units are still in operation, making them prime targets for upgrades and repairs.^[19]   

Canada

Canada has the 10th largest economy in the world and is one of the wealthiest nations. The Canadian economy is dominated by the service industry, which employs three-quarters of the country’s citizens.^[7] The logging and oil industries are two of the country’s most important sectors, with a sizable manufacturing sector centered in central Canada and an important automobile industry. The country closely resembles the U.S. in its market-oriented economic system and pattern of production. As of September 2011, Canada’s unemployment rate stood at 7.1%.^[20]

Canadian unemployment statistics

International trade comprises a large part of the economy, particularly trade of its natural resources.^[21] The U.S. is Canada’s largest trading partner, accounting for about 73% of exports and 63% of imports. In 2009, exports accounted for 30% of Canada’s GDP.^[22] These factors closely tie together the economies of the two nations.

Canada fared much better in the economic recession than many countries but is still experiencing recovery setbacks. Its GDP halted in the second quarter of 2011, with economic failings rooted in the trade sector. Goods exports fell 10.4%, while imports increased by 10%. Canada’s merchandise trade balance has been mostly flat or negative for nearly three years.^[23]

Construction is Canada’s largest single industrial activity in terms of both value and employment.^[24] In the second half of 2011, evidence showed nonresidential business construction made a significant contribution to the country’s economic growth. According to Statistics Canada, the constant dollar value of total investment in nonresidential construction was up by 3.4% in the second quarter due to solid gains in spending on commercial and industrial projects. This is also supported by the fact that total construction employment in the country had increased. A Bank of Canada Business Outlook Survey indicates a positive short-term outlook for business nonresidential investment. In addition, the value of nonresidential building approvals has increased by almost 30% due to healthy gains in commercial and industrial work, as well as institutional spending.^[25]

According to Reed Construction Data, by 2014, construction spending in Canada is expected to reach US$300 billion. Emerging national demand is expected to spur expansion plans by owners in the resource sector, helping with overall construction activity levels. Housing starts were strong at the end of 2011, though residential investment is expected to taper in 2013, followed by a rise when the cycle improves. Nonresidential work will be restrained in 2012 and 2013, before increasing in 2014 as demographics cause resumption in demand for healthcare and educational projects. Commercial work dropped severely in the recession and is only now showing early signs of recovery. The slowing in the world economy is holding back the speed of improvement and should take a firm hold in 2012. Recovery of the industrial construction category is being held by the economic malaise.^[26]

According to research studies, Canada will be a leader in construction growth among developed countries, boosted by demand for natural resources and favorable demographics. The combined construction growth for the two countries will almost equal the growth in the entire Latin American construction market, including Mexico, Brazil, Argentina, Chile and Colombia.^[18] In addition, there were 35,000 more construction jobs at the end of 2011 than there were prior to the beginning of the recession in fall 2008. Since the lowest point of the recession, July 2009, 156,000 new construction positions have been created.^[26]

Statistics in the 2010 Vertical Transportation Industry Profile show Canada as having 100,000 elevator and 9,000 escalator installations, with approximately 3,000 trained industry personnel. According to the Canadian Elevator Contractors Association (CECA), the Canadian elevator industry saw a downturn in 2010, with modest unemployment. CECA forecasts sustained strength in the Ontario commercial and institutional sectors through 2014, with all major markets in the west remaining strong. In the east, Montreal’s market will remain steady. Close to full employment is expected over the next three to four years. Absorption in residential markets increased in 2011, and CECA forecasts slight growth in residual starts in 2012-2013. Canada’s modernization market remains strong. 

Mexico 

After a difficult few years, Mexico is gaining traction as a player in the global economy. According to a Latin Trade analysis of projects from the International Monetary Fund, the country is expected to see an average annual GDP growth of 4.4% over the next five years. The labor cost gap between China and Mexico has become so narrow that many manufacturers are relocating to Mexico, taking advantage of its proximity to the U.S. market. Chinese labor costs are rising, along with the price of oil, making nearshoring a more logical option: transporting goods via trucks and trains is less expensive than shipping by sea from China. Due to the proximity, orders can also be filled quicker in Mexico. Furthermore, the country’s membership in NAFTA means import duties are cheaper, the customs process is simpler and conflict resolution is more straightforward than with other countries.^[27]

Mexico’s future growth will be driven not only by exports, but also by increased local demand. Americas Market Intelligence believes the country’s largest source of growth will be domestic consumption. Tourism has also revived and should help drive future expansion. PricewaterhouseCoopers expects Mexico to outpace Brazil. The consultancy believes Mexico’s GDP will grow at a faster annual rate than Brazil’s through 2050. By that year, the country’s economy will have overtaken that of Germany, Europe’s largest, to rank seventh worldwide, up from 14 in 2010.^[27]

Mexico’s construction industry is in a growth period, though the past few years have been difficult for the sector. As a whole, the Mexican construction industry recorded a decline in 2009, with commercial construction most adversely affected by the global economic crisis. By August 2010, the industry had posted 24 straight months of contraction. As the U.S. economy showed signs of improvement in 2010 and investment plans in Mexico were gradually reactivated, construction grew and showed an increase through December 2010. After a strong January, growth rates slipped in the first half of 2011. A somewhat improved rate of 2.4% was posted in May, with the National Statistics Institute reporting an overall growth of 4.6% in June when compared to that of the previous year. This saw an increase in demand for electrical materials, paints and coatings, cement, metal structures, sand and gravel, asphalt, concrete, and other steel and iron materials.^[28]

Despite slowing growth rates for the overall economy, key regions in Mexico expected improved second halves for construction in 2011. The projections were based primarily on expectations of increased government spending on infrastructure projects in various areas. Construction in Monterrey and the Nuevo León area was expected to increase due to reconstruction projects for bridges, roads and water management infrastructure. Quintana Roo expected similar growth for highway and school construction. Awarding tender contracts for such projects to local construction contractors, in turn, spurred demand for materials and equipment.^[28]

Housing and building construction appeared to slow later in 2011. An increase in public housing projects in 2010 that carried over into early 2011 boosted the industry, but demand has not caught up with the additional inventory. Although the housing market is faced with excess supply in some areas, some industry reports expected building to rebound in the second half of 2011 due to the activation of state funds for subsidized housing, as in the case of infrastructure.^[28] The construction sector was expected to grow 4% in 2011. This projection expected the recovery of up to 160,000 jobs, a marked improvement, though far from recovering the 250,000 lost during 2009.^[29]  

The 2010 Vertical Transportation Industry Profile shows Mexico as having 27,000 elevator and 1,250 escalator installations, with approximately 2,000 trained personnel. The new construction market is rated as average, while the modernization market is below average.   

Conclusion

Though a majority of the examined regions have seen a sharp economic decline in recent years, gradual growth is expected through 2012 and beyond. With time and effort, these regions should see marked improvements, not just in the construction industry, but also in their overall economies and employment rates.

References
[1] “U.S., Economy.” CIA World Factbook. Central Intelligence Agency. www.cia.gov.
[2] “Canada, Economy.” CIA World Factbook. Central Intelligence Agency. www.cia.gov.
[3] “Mexico, Economy.” CIA World Factbook. Central Intelligence Agency. www.cia.gov.
[4] United Nations Development Program. www.undp.org.
[5] Maddison, Angus. “Historical Statistics for the World Economy.” The Groningen Growth and Development Center, Economics Department of the University of Groningen. 2004. http://www.ggdc.net/maddison/Historical_Statistics/horizontal-file_09-2008.xls.
[6] “The U.S. Becomes a World Power.” Digital History. www.digitalhistory.uh.edu/database/article_display.cfm?HHID=188.
[7] “Actual Hours Worked Per Week by Industry, Seasonally Adjusted.” Labor Force Survey, Statistics Canada. http://www40.statcan.gc.ca/l01/cst01/labr68a-eng.htm.
[8] McFeatters, Dale. “Saluting 154 Million in Workforce on Labor Day.” Napa Valley Register. September 6, 2010. http://napavalleyregister.com/news/opinion/editorial/article_43f9e712-b96a-11df-9e2d-001 cc4c002e0.html.
[9] Current Population Survey. U.S. Bureau of Labor Statistics. June 5, 2009. http://www.bls.gov/cps/.
[10] Goodman, Peter S. “Millions of Unemployed Face Years Without Jobs.” The New York Times. February 20, 2010. www.nytimes.com/2010/02/21/business/economy/21unemployed.html.
[11] Izzo, Phil. “Broader U-6 Unemployment Rate Increases to 17.1% in April.” The Wall Street Journal. May 7, 2010. www.blogs.wsj.com/economics/2010/05/07/broader-u-6-unemployment-rate-increases-to-171-in-april/.
[12] “What Accounts for the Decline in Manufacturing Employment?” Congressional Budget Office. February 18, 2004. www.cbo.gov/doc.cfm?index=5078&type=0.
[13] Career Guide to Industries, 2010-11 Ed. U.S. Bureau of Labor Statistics. http://www.bls.gov/oco/cg/cgs003.htm.
[14] “2011 Construction Hiring and Business Outlook.” The Associated General Contractors of America. January 2011. http://news.agc.org/wp-content/uploads/2011/01/Outlook-Report.pdf.
[15] “The Economic Impact of Construction in the U.S.” The Associated General Contractors of America. March 4, 2011. www.agc.org/galleries/econ/National%20Fact%20Sheet.pdf.
[16] “Global Construction 2020.” Global Construction Perspectives and Oxford Economics. www.globalconstruction2020.com.
[17] Haughey, Jim. “Construction Spending Outlook Worsens.” Reed Construction Data. August 24, 2011. www.reedconstructiondata.com/construction-forecast/news/2011/08/construction-spending-outlook-worsens2/.
[18] “Global Construction to Outpace GDP Growth in Next 10 Years with China and India Leading.” Merco Press, South Atlantic News Agency. March 5, 2011. http://en.mercopress.com/2011/03/05/global-construction-to-outpace-gdp-growth-in-next-10-years-with-china-and-india-leading.
[19] 2010 Vertical Transportation Industry Profile. Elevator World, Inc. 2010.
[20] “Labor Force Characteristics, Seasonally Adjusted, by Province (Monthly).” Statistics Canada. http://www40.statcan.gc.ca/l01/cst01/lfss01a-eng.htm.
[21] “Exports of Goods on a Balance-of-Payments Basis, by Product.” Statistics Canada. http://www40.statcan.gc.ca/l01/cst01/gblec04-eng.htm.
[22] “Imports, Exports and Trade Balance of Goods on a Balance-of-Payments Basis, by Country or Country Grouping.” Statistics Canada. http://www40.statcan.gc.ca/l01/cst01/gblec02a-eng.htm.
[23] Carrick, Alex. “Canada’s Economy Came Up Short in the Second Quarter.” Journal of Commerce. September 14, 2011. http://www.journalofcommerce.com/article/id46553.
[24] “Construction Industry.” The Canadian Encyclopedia. http://www.thecanadianencyclopedia.com.
[25] Clinkard, John. “Stronger Business Investment Should Offset the Impact of Slower U.S. Growth.” Reed Construction Data. August 26, 2011. http://www.reedconstructiondata.com/construction-forecast/news/2011/08/stronger-business-investment-should-offset-the-impact-of-slower-u.s.-growth/.
[26] Carrick, Alex. “An Interesting Mix in the Construction Outlook to 2014.” Journal of Commerce. August 31, 2011. http://www.journalofcommerce.com/article/id46503.
[27] “Mexico: The Comeback Kid.” Latin Trade. March 30, 2011. http://latintrade.com/2011/03/mexico-the-comeback-kid.
[28] “Construction Industry Looks to Boost Growth in Second Half.” Mexico Business Blog. August 15, 2011. http://bdp-americas.com/blog/tag/mexican-construction-industry/.
[29] “The Construction Industry Will Grow 4.0% in 2011.” Mexican Business Web. June 21, 2011. http://www.mexicanbusinessweb.com/english/noticias/inversiones-inmobiliario.phtml?id=6441.
[30] Homan, Timothy. “U.S. Employment Falls to 8.5% as Jobs Gain.” Bloomberg. January 6, 2012.