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3 economists look at the construction industry and economic recovery

3 min read

Modern Money

Regulatory uncertainty, sub-par gross domestic product growth, an inventory of distressed residential properties and a Congress that sees compromise “as a four-letter word” — as Bernard Markstein, chief economist at Reed Construction Data, put it — all contribute to a feeling of uncertainty about the country’s economic growth, particularly in the architecture, engineering and construction industries hard hit by the recent recession. That was the consensus of three economists speaking at a recent webinar sponsored by Reed Construction Data.

In addition to problems in the housing market and severely repressed housing starts, office and retail construction have slowed and federal, state and local funding cuts negatively affect some needed infrastructure improvement and transportation work.

But not all is gloomy

Ken Simonson

Ken Simonson, the chief economist for the Associated General Contractors of America, said, “I have more good news than I’ve had in several years.” He proceeded to list several multibillion-dollar plant construction projects announced over the past few months — some that will start this year, some in a few years. All that will translate into construction spending, which is a noticeable change from mid-2008 through 2010, when so few projects were being built.

The oil shale effect

Much of that work is among power and manufacturing plants, which have seen a 22% and 40% increase in spending, respectively, between March 2011 and March 2012. This is in good part from the oil shale boom in the U.S. Construction employment rose 16% in South Dakota and 8% in West Virginia in that period. Simonson said this trend likely will continue.

And then there’s housing

Twenty-three percent of homeowners with mortgages are underwater nationally — some by as

Kermit Baker

much as 50% to 60%, although the average is closer to 34% to 35%, said Kermit Baker, chief economist at the American Institute of Architects. And, because one-third of the home-for-sale inventory is made up of distressed properties, we’ll “see continued downward pressure on sales until the distressed properties are worked through,” and we “can expect to have a large number of foreclosed homes enter the market for years to come,” Baker noted.

But, again, an upside

As banks and homeowners ready these distressed properties for sale, the remodeling sector has grown and will likely continue to do so, Baker said. Last year, an estimated $300 billion was spent on home improvement, $8.5 billion on distressed properties alone.

In addition, the Architecture Billings Index, a nine- to 12-month leading indicator of construction activity, has been trending up and appears particularly “healthy” in the commercial and industrial areas, Baker said. He’s forecasting that the commercial area will grow 11.4% next year.

What could stall the slow recovery?

The three agreed that the situation in Europe, energy prices, Congressional inaction and gridlock in Washington, D.C., could derail the “spotty recovery,” as Simonson put it.