November 28, 2016

Post-election predictions for construction? Too soon

Three chief economists recently got together for a webcast to share their post-election predictions for design and construction.

Ken Simonson from the Associated General Contractors of America, Kermit Baker from the American Institute of Architects and Alex Carrick from ConstructConnect were on the panel.

Carrick said the post-recession expansion is getting long in the tooth, but the U.S. is still doing better than most other countries.

“A lot of people have been wondering if the economy can stay on a roll,” he said.

Baker said business investment is softening, with a major decline in the last quarter of 2015 and first quarter of this year. It has since turned positive, but it's still slow.

As of September, total spending on construction was just 5 percent below the peak: $1.21 trillion in 2006.

Baker said the strongest sector in this cycle has been multifamily, which has surpassed the peak level hit before the recession. The weakest has been single-family, which is still 45 percent off its peak.

The commercial/industrial sector has also recovered to pre-recession levels, and institutional work is catching up, he said.

Nonresidential construction was up 4 percent for the year that ended in September, and Simonson projects a 3 to 6 percent gain for this year.

The AIA forecasts nonresidential construction will be up 5.6 percent this year.

Simonson predicts a 2 to 7 percent increase in total construction spending for next year. He sees a 5 to 10 percent jump for residential and a 2 to 7 percent increase for nonresidential.

Baker said the strongest sectors so far this year are lodging, up 26.3 percent, and office, up 22.3 percent. The weakest sectors are public safety, down 8.1 percent, and transportation, down 5 percent.

Baker's information was from September data provided by the U.S. Census Bureau for put-in-place construction spending.

Carrick said one sector to keep an eye on is residential.

“There's still tremendous potential for residential construction,” he said.

Many economists are expecting millennials to start families and move to the suburbs. Carrick said that may happen, but on a smaller scale due to student debt and millennials' love for cities.

Baker said Donald Trump's election brings uncertainty: Tighter trade policies could lead to higher prices for imported materials; tax reform could lead to more investment in the economy; less regulation could speed up construction projects; and infrastructure spending could boost the construction industry but exacerbate labor problems.

“It's a little too early to make predictions on the impact to construction,” he said.

Simonson said there's little detail about Trump's plan to spend $1 trillion on infrastructure over the next decade. If that $1 trillion were spread evenly over 10 years it would mean a 9 percent increase over current spending.

One of the biggest issues facing construction is a shortage of workers caused by the recession and an aging workforce.

Baker said the construction labor force shrank by 1.8 million workers since the peak in 2007, and it didn't increase when the market rebounded. He said there still is a disproportionately small number of women and young people in the industry, even though they are the fastest growing groups in the overall labor market.

Simonson said contractors have trouble filling a wide variety of positions. A recent AGC member survey showed that 60 percent of firms have trouble finding carpenters. Electricians, plumbers, roofers, concrete workers, project managers and supervisors are also in short supply.

“Contractors aren't hiring because they can't make do with less experienced workers,” Simonson said.

The survey said 48 percent of contractors are adding in-house training, a sign that they are using less experienced workers.

About half of the firms said they plan to raise base pay.

“I think companies are going to have to start raising pay much more,” Simonson said. “Even wages at the entry level will be rising.”

In 2015, about 30 percent of workers in construction were foreign-born, and it's not clear how Trump's immigration policies will affect the industry.

Baker said the labor issue is also affecting architectural firms.

A recent AIA survey showed about a third of architects were getting fewer contractor bids on most projects and another third were getting fewer bids on some projects. Architects are also seeing higher prices from contractors.

Baker said the AIA Architecture Billings Index, an indicator of construction spending nine to 12 months out, is beginning to slow. It stood at 50.8 in October, which is about average for the year, according to Baker. Readings above 50 indicate an increase in billings.

“Not terribly strong readings in recent months,” he said. “No sector looks to be poised for particularly strong growth in the near term.”

The AIA Billings Index also surveyed architectural firms about projections for 2017. Here's the results: 12.9 percent said revenues will be up more than 10 percent; 28.7 percent predicted 5 to 10 percent growth; 33.4 percent saw flat growth; 15.6 percent thought revenues would drop 5 to 10 percent; and 9.5 percent expected they'd be down more than 10 percent.

Average projected growth for 2017 at architectural firms was 2 percent, about half of this year's expected level.

Carrick said employment at architecture and engineering firms is almost back to pre-recession levels.