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3 economists offer construction outlook for 2014, beyond

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Modern Money

Three economists offer their outlook on construction activity and construction spending for the rest of this year, and beyond.

Bernard Markstein, chief economist at Reed Construction Data, Ken Simonson, chief economist at the Associated General Contractors of America and Kermit Baker, chief economist at the American Institute of Architects were the featured speakers at the April 17 webinar “2014: Emerging Opportunities for Construction.” They each mapped out what they’ve seen this year and where they think the AEC industry is headed.

Where we are now: Good news

Baker noted that since 2008 the country’s economy has been on a roller coaster, but he says it is starting to become more stable, which makes a “good foundation for construction recovery.” Markstein said there was a fair amount of consensus among economists that the construction sector “appears to be improving somewhat,” but as Simonson observed, that improvement is “uneven.” Simonson cited the strength of the industry in the shale-play areas and the work at various ports that are upgrading in anticipation of a widened Panama Canal, but also noted that construction employment in the country is only up 2.6% from a year ago. However, Baker said we were getting closer to adding 20,000 to 30,000 construction jobs a month, something that used to be a norm.

The three economists agreed that house prices were finally “moving in the right direction,” and were optimistic about continued growth in the multifamily sector. Simonson noted that construction spending in the lodging industry was up 26% between 2012 and 2013, and last year, transportation, commercial and manufacturing construction each saw decent increases in spending. Baker said that total nonresidential building was getting off to a healthy start this year, with a 6.4% increase in the value of construction put in place between February 2013 and February 2014.

Where we are now: The not so good news

The year is off to a “mixed start” from a construction perspective, according to data Baker presented. Although the commercial and industrial sectors had a reasonable last year, that’s not the case this year, and the institutional is “sluggish,” he said.

The Architecture Billings Index has been “a bit soft this year,” as Baker put it, noting that there were pretty solid numbers in 2012 and 2013. However, the fourth quarter of last year and first quarter of this one have been “kind of disappointing.”

Water projects, and sewage and waste projects have been seeing a decline in spending, according to Census Bureau construction spending reports, as have academic and hospital projects.

Another downside is that credit remains difficult as lenders are only slowly loosening lending standards, Markstein said.

Going forward: The good news

Baker pointed to the December 2013 forecast of the American Institute of Architects’ Consensus Construction Forecast Panel’s outlook, noting that total nonresidential construction spending is expected to be up 5.8% this year and 8% next year, with commercial building leading the way. Simonson was a bit more flexible in his forecast, expecting a 6% to 10% increase each year until 2017. However, all three seemed to agree that manufacturing, commercial and lodging would all fare better. Markowitz even included slides in his presentation to indicate which states would likely see the most work in various sectors.

Baker also noted that new design contracts, a new indicator, is doing better. The implication of this, he explained, is that firms have been building up more work, which means more billings moving forward and therefore more construction.

And professionals in the field are also more optimistic about growth this year, according to survey of members of the Associated General Contractors of America. Two-thirds of the respondents expect there will be more work available to bid on this year or next. Simonson doesn’t see that happening on the public side, but does expect an upturn in overall nonresidential construction. Simonson sees the best prospects going forward in construction of multifamily, manufacturing, oil and gas fields, pipelines, warehouses, hotels and resorts, data centers and rail.

Going forward: Where the bumps might be

Over the next three years, Simonson predicts materials costs to rise 1% to 3% and labor costs to increase between 2.5% to 5%. He also foresees possible widespread labor shortages due to retirements and competition from other sectors. In addition, he believes the federal government will continue to cut back on the money it puts into discretionary accounts including construction, and although states are growing their tax revenues, they are not being allocated to construction.

Baker is concerned that an upturn in mortgage rates could affect mobility because homeowners currently paying a 3-plus percent mortgage rate won’t want to give that up to buy a new home with a higher mortgage rate. That said, he notes that forecasts for home building remain optimistic, even though housing starts have slowed. And, the “outlook for housing is that it’s years away from returning to normal.”