Why Economists Agree Building Industry Has 'Turned Corner'

Originally published by: SmartBlogNovember 24, 2014

The following article was produced and published by the source linked to above, who is solely responsible for its content. SBC Magazine is publishing this story to raise awareness of information publicly available online and does not verify the accuracy of the author’s claims. As a consequence, SBC cannot vouch for the validity of any facts, claims or opinions made in the article.

The turning point in the building industry dawned in May 2014, when the “total employment level reached its prerecession level” and companies stopped looking in the rear-view mirror trying to outrun the Great Recession and started to think again of the future. So said Alex Carrick, North American chief economist at CMD during last week’s webinar on the state of the industry.

The webinar, hosted by CMD, formerly Reed Construction Data, and sponsored by Infotech, also included the industry’s other top economists, Ken Simonson of the Associated General Contractors of America and Kermit Baker of the American Institute of Architects who proffered their perspectives.

The construction-labor picture

The unemployment rate in the industry has fallen to 6.5% in October from 17.3% four years ago, Simonson says. However, while that rate is still coming down, the employment rate is nowhere close to 10 million employed during the peak period because lots have left industry, say Simonson and Carrick. It’s 21% off from its peak employment level in April 2006, which translates to 1.6 million fewer jobs, according to Simonson.

Employment in architecture and engineering is almost back to where it was in last peak in mid-2008. Year-over-year it’s risen by 3.9% where as the overall level was less than 2%.

Forty-three states are still 10% or more below their peak employment levels.North DakotaLouisiana and Oklahoma are the only states that hit a new peak in construction employment this year, says Simonson.

The construction-building picture

In 2006, spending on construction activity accounted for about 8.5% of the country’s gross domestic product, according to Baker. That hit a low of 5.1% in 2011 and the recovery has been “painfully slow,” rising only 0.1% to 0.2% in each subsequent year. Heavy engineering/civil starts year-to-date are up 11.5% since 2009, while nonresidential is up 7.7%, but that’s a fairly “disappointing pace,” says Baker. Growth in the petroleum, manufacturing and information technology sectors accounted for a good portion of those increases, according to Carrick.

Construction starts on multifamily structures in the first three quarters of 2014 compared with the average Q1 to Q3 of the previous five years rose by 51.6%, according to Carrick’s data. For warehouses, the increase was 50.4%. Sports arena and convention center starts expanded by 48.9% while manufacturing and retail increased 46.1% and 36.5%, respectively. However, starts on power infrastructure, prisons, courthouses and transportation terminals were down anywhere from 23% to 85%.

Gazing into the crystal balls

Carrick foresees a steady increase in construction starts for the next four years, with spending on lodging, hospitals/clinics and warehouses nearly doubling from 2013 levels. Simonson says the best prospects for the next year will likely be found in warehouses, lodging, manufacturing, oil and gas fields, pipelines, rail and data centers and he predicts a 6% to 10% annual increase in total construction spending through 2017.

Baker notes that the Architecture Billings Index has been somewhat volatile, but is still in the “midst of a strong upturn.” He says this is corroborated by the AIA’s new design contracts index, which indicates that “billings will continue to accelerate.”

And, next year looks “pretty healthy” for housing Baker says, with a consensus panel predicting a 24% increase in housing starts over this year. Simonson is not as optimistic. He thinks multifamily starts will continue its upward trend next year, but sees single family starts potentially being constrained by “tight credit, fear of lock-in and demographic shifts.”

Simonson sees three trends that are holding back growth in the industry: Governments spending less on schools and infrastructure; consumers shopping online instead of brick and mortar stores; employers reduce the amount of office space per employee.

He’s also worried that the recent increase in construction spending without a corresponding increase in jobs created will mean the industry could face a labor shortage. A survey by the AGC of America shows that more than 80% of respondents reported having difficulty filling certain positions. “Widespread shortages” are possible he said, citing the availability of fewer veterans, competition from other sectors and upcoming retirements. This could push up the employment cost index.

In addition, the average age of the workforce has increased since the recession with fewer under-35-year-olds in the field, Baker notes. This is a prime factor spurring the creation of new apprenticeship and training programs.

Another good note? Some of the projects that stalled during the downturn are showing signs of life. Nearly three-quarters of the design firms surveyed by the AIA in September said they had stalled projects, but nearly half saw some signs of them resurfacing. On average, the survey points to about 20% of those dormant projects will eventually be completed.

 

Check out this extra section in each digital issue of SBC Magazine for additional news, perspective, and advertiser content. Learn more and access 2016-2017 archives here.