All Articles Finance The construction economy: Where we are now, and what happens next?

The construction economy: Where we are now, and what happens next?

4 min read


Three construction-focused economists discussed the state of the US construction economy in a panel presentation/webinar presented by CMD iSqFt at Greenbuild on Thursday.

Alex Carrick

Where the construction economy is now compared with where it was

“The US economy is where it’s at,” Alex Carrick told me in an interview prior to the panel discussion. He noted that the monthly foreign trade deficit, on a seasonally adjusted annual rate, has dwindled from a range of minus $600 billion to minus $800 billion to a range between minus $400 billion to minus $600 billion, a very positive sign for the GDP.

Ken Simonson

In addition, initial jobless claims at the worst part of the Great Recession were around 670,000. Now, they’re less than 300,000 and have been for two-thirds of this year, Carrick said. The last time it was this low was in the early 1970s, which bodes well for monthly job creation figures of 150,000 and above.

More specifically, construction spending is up. As of Sept. 15, 2015, construction spending jumped 14.1% from the year-ago level, according to Ken Simonson , and that considerably exceeded expectations, said Kermit Baker. And while the “construction recovery was painfully slow,” the recent gains have pushed the momentum forward, said Baker.

Baker said multifamily construction and home improvements have “effectively fully recovered” to where they where before the economic downturn, and commercial and industrial construction spending, which had been hit hard during the recession, was “almost back” and “2016 could be the year they recover.”

Employment in the sector has been on the upswing since 2011, Simonson said, while reminding us that it was still 17% below its peak.

What lies ahead for the construction economy?

Kermit Baker

Baker said that the Architecture Billings Index is “still volatile,” but the trend continues to be up, and all three agree the recovery will continue.

However, while construction spending was up, construction employment has not matched the increase, climbing only 3.8% between mid-October 2014 and mid-October 2015, Simonson said. More worryingly perhaps, it’s now “showing signs of decelerating.” But, as he pointed out, that could be a result of a shortage of workers rather than an impending downturn.

Baker suggested some short-term fixes to the shortage, including in-house and on-the-job training and increased compensation as well as beefing up efforts to bring women into the industry. AGC has been instrumental in these efforts. Baker noted that longer term, the country needs to come to grips with its immigration policies, noting that the industry had always relied on foreign-born workers.

Simonson sees spending on highway and streets enjoying “modest growth” over the next few years, in part because of the potential of a longer-term transportation bill to fund the Highway Trust Fund, as well as gas-tax increases in some GOP-led states. Carrick agreed, saying that heavy civil could reap benefits if a bill were negotiated.

Spending on institutional construction didn’t tank as badly as other sectors during the recession, Baker explained, but added that that sector has only recently started showing some positive numbers, saying it’s just in the “early stages of recovery.”

On the other hand, while multifamily building has been on a tear, spending on it is at the lowest level in four years, according to Simonson, who sees the sector slowing as he does with the residential housing market.

The past few months also raise some flags. Commercial construction spending has dropped 12% since May, and the power sector tumbled 17% in the first three quarters.

Meanwhile, the world intervenes

Potential stumbling blocks to continued growth in the US, according to what Carrick told me, are capital spending on upstream energy projects because of cheap commodities and the strength of the US dollar – and the Federal Reserve is poised for an interest rate hike.

He noted the disconnect between fiscal and economic policy and said that for the first time “everybody is concerned about austerity, but the debt is becoming greater.” The world has more than $62 billion in debt, and interest on that accrues at hundreds of thousands of dollars every few seconds.

“Everything’s strange,” Carrick told me, and during the webinar likened his feeling to that of the protagonist in Robert Heinlein’s Stranger in a Strange Land. He said people aren’t overly willing to invest in building because of uncertainty, because of a changed geopolitical climate due to the US’ reduced dependence on foreign oil, and the Great Depression philosophy of waiting to see what awfulness will befall next.

“This isn’t just a new norm,” he told the audience. “I’m not sure there is a normal anymore. So, we’ve all got to dance a little bit faster.”